In the case of St. Paul Fire & Marine Insurance Company, v. Novus International, Inc., decided December 28, 2011, the Court addressed the question of whether a cargo policy’s accumulation clause applied to its warehouse extension provisions.

The accumulation wording the court considered was as follows:

Should there be an accumulation of the interests insured hereunder beyond the limit(s) of liability expressed elsewhere in this policy by reason of any interruption of transit or circumstances beyond the control of The Insured’s corporate risk manager or equivalent, or by reason of any casualty, or at a transshipping point, or on a connecting conveyance. This Insurer shall, provided notice of such accumulation is given to This Insurer as soon as practicable after it becomes known to The Insured’s corporate risk manager or equivalent, hold covered such excess interest and shall be liable for the full amount at risk, but in no event shall This Insurer’s liability exceed twice the limit of liability set forth in Sub–Clause 13.1

The court considered the following language in the warehouse coverage endorsement:

The policy to which this endorsement is attached is extended to cover goods and/or merchandise and/or property (i) of The Insured or (ii) held by it in trust or on commission or on consignment or sold but not delivered or removed or on joint account with or belonging to others for which The Insured may be liable in the event of loss pending shipment, transshipment, reshipment or otherwise, while stored at the locations identified herein, subject to a $25,000 deductible per loss for bulk liquid storage locations, and the following terms and valuation . . . This Insurer shall not be liable for more than $2,000,000 at any one location at any one time, except as specified below.

Because the insured was having problems at some of its warehouses and was not meeting it sales targets, some of the insured’s employees made the decision to consolidate inventory. This was done without the knowledge of the insured’s “corporate risk manager.” The inventory at the warehouse of interest had increased to the extent that when a flood occurred, over $5,000,000 in damage was allegedly sustained.

The insured argued that the accumulation clause applied to the warehouse coverage, and that it was entitled to more than the $2 million limit embodied in the warehouse coverage endorsement. The court, applying New York law, agreed:

. . . [A]s written, the Warehouse Endorsement and the Ocean Cargo Policy must be read together as a unified policy. . . . The first line of the Warehouse Endorsement is bold italicized text which states “Attached to and forming part of Policy No.: OC09000930” (emphasis in original). The wording of the Endorsement also refers to the Ocean Cargo Policy in language that can only be read as attaching the two policies to one another. (e.g. “The policy to which this endorsement is attached is extended …”; “… Strikes, Riots and Civil Commotions Endorsement contained elsewhere in this policy”; “The deductible found elsewhere in this policy …”; “… shall be valued as per Policy Clause No. 10 [clause within the Ocean Cargo Policy]”.) Reading the Warehouse Endorsement as an extension to the Ocean Cargo Policy is additionally consistent with the plain language of the Ocean Cargo Policy itself. The Ocean Cargo Policy’s “Attachment” clause references that there are storage locations insured under the Policy: “This policy is continuous and covers . . . on all goods and/or merchandise and/or property in storage at locations insured under this policy . . .” (emphasis added). Since specific insured locations are mentioned nowhere in the Policy other than in the Warehouse Endorsement, the Ocean Cargo Policy’s own terms support a reading of the policy and its endorsement as a single document.

The Judge found that the endorsement was applicable to warehouse coverage in a location with a specified limit, if the excess accumulation was caused by an interruption in transit, a casualty, or a cause beyond the control of the insured’s risk manager. The Judge did address the question of whether the loss fell within the causes of loss specified in the accumulation clause and found that it did not. There was concededly no interruption in transit nor a casualty. Here is what she said about the third alternative, loss beyond the control of the insured’s corporate risk manager:

In order for Novus’ PDM Warehouse Claim to be covered under the Policy, the accumulation of product must be due to an “interruption of transit,” or a “circumstance beyond the control” of Novus’ “corporate risk manager or equivalent”, or “by reason of any casualty.”

. . . [Novus] argues that the accumulation of product due to: (1) product being moved to the PDM Warehouse from poorly performing warehouses; and (2) Novus’ failure to meet sales forecasts should be considered “circumstances beyond the control” of its corporate risk manager, John Wade. . . . Novus further argues that, “[a]s Mr. Wade had no control over the factors that caused the accumulation of goods at the PDM Warehouse, the accumulation was by reason of circumstances beyond his control.

. . . Novus’ interpretation conflates circumstances in which Wade did not exercise control with those that were “beyond his control.” The fact that Novus operational employees failed to properly notify Wade of the accumulation, and that Wade himself did not pursue other avenues for obtaining this information, does not transform Novus’ intentional accumulation of product into a fortuitous circumstance that the parties intended would be covered by the Policy. . . .

Fortunately for the insurer, the Judge made a clear distinction between what the risk manager couldn’t control and what he simply didn’t control. Having decided that this was a case of “didn’t” rather than “couldn’t,” the Judge held that the accumulation clause did not provide a basis for a recovery in excess of the scheduled $2,000,000 limit, and granted the insurer summary judgment. Query whether the result would have been different if, instead of referring to circumstances “beyond the control,” the policy referred to an accumulation “without the knowledge,” of the Corporate Risk Manager.

Underwriters generally understand the accumulation clause to have potential application to fortuitous circumstances that arise during covered transit. These would include an interruption in transit beyond the control of the insured, or a casualty on a conveyance or at a transshipment point. As always, care must be exercised in reviewing forms to make certain that wording corresponds with underwriting intent. Here the change of traditional wording from “circumstances beyond the control of the insured” to “circumstances beyond the control of The Insured’s corporate risk manager,” and making those “circumstances” a separate trigger of the operation of the accumulation clause, had the unintended consequence of making the accumulation clause applicable to warehouse coverage.

St. Paul Fire & Marine Insurance Company, v. Novus International, Inc., 2011 WL 6937593 (S.D.N.Y.). The full text of the case may be found here.