Insurance Coverage for Construction Defect Claims Causing Continuous Damages: How, What, When, and Why
On June 28, 2010, the California Court of Appeal published Pennsylvania General Insurance Company vs. American Safety Indemnity Company (2010), Cal. App. 4th, a case involving the following recurring coverage issue in construction defect litigation that vexes primary and excess insurers alike: what, if any, obligation does an insurer owe to its policyholder where: (1) the commencement date of the damages is not certain, (2) the damages caused by the defective workmanship are continuous, and (3) the damages span the successive annual policies of one or more carriers? The short answer is it depends on the language of the insurance policy. But the Pennsylvania General case tells us more than that; it is a primer on the basic coverage issues arising from continuous damage claims.
While no new ground will be plowed for seasoned insurance coverage lawyers, it is hoped that some seeds of understanding will be planted for construction lawyers and other construction industry professionals. One aspect of the case is most interesting because the policy language at issue was a direct effort by the insurer to draft language that would avoid coverage in these kinds of continuous damage cases and thereby circumvent the holding in the seminal California Supreme Court case, Montrose Chemical Company v. Admiral Insurance Company.
1.Summary of Underlying Construction Defect Case
Whitacre Construction was insured under a commercial general liability policy issued by Pennsylvania General Insurance Company for the period October 1998 through December 2001. During this time, Whitacre entered into a subcontract to perform framing and rough carpentry work on a project. At the conclusion of Pennsylvania General's policy period, and after Whitacre's work on the project was completed, American Safety Indemnity Company issued a CGL policy to Whitacre for the period December 2001 through December 2002.
In the underlying construction defect litigation, various parties alleged that Whitacre’s work was improperly done and had created various problems with the project. Whitacre tendered its defense to both Pennsylvania General and American Safety Indemnity. Pennsylvania General accepted Whitacre’s tender of the defense under a reservation of rights and ultimately paid the defense and settlement costs for Whitacre. American Safety declined Whitacre’s tender, asserting there was no possibility of coverage under its policy since the work was completed prior to the inception date of its policy, and did not participate in defending or indemnifying its insured.
After the settlement of the construction defect case against Whitacre, Pennsylvania General filed suit against American Safety seeking equitable contribution from American Safety for a portion of the defense and indemnity costs paid by Pennsylvania General. The trial court, ruling on cross-motions for summary judgment, concluded American Safety had no responsibility to pay any portion of the defense or indemnity costs because there was no potential coverage under American Safety's policy for the claims asserted against Whitacre and entered summary judgment for American Safety. Pennsylvania General filed an appeal.
2. General Coverage Issues
A. First Party Claims vs. Third Party Claims
How coverage is triggered in an insurance policy depends on whether the policy is a first party property insurance policy, such as a homeowners policy, or a third party liability policy, such as the CGL policy at issue in the Pennsylvania General case. A first party homeowners policy provides coverage for a homeowner in case of a fire, theft, or some other covered peril like earthquake, water, or wind. A third party liability policy, on the other hand, provides coverage for the liability of the insured to a third party, such as a building owner who sues for defective workmanship.
Just as the risks being insured are different in first party and third party policies, so too is the coverage analysis for each policy."[T]he right to coverage in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause and duty. This liability analysis differs substantially from the coverage analysis in the property insurance context, which draws on the relationship between perils that are either covered or excluded in the contract. In liability insurance, by insuring for personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks." Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal. 3d 395,407.
Another difference in first party homeowner policies and third party CGL policies centers on the notice of loss requirements. Standard homeowner policies have time limitations within which damages must be discovered, notice to the insurer must be given, and a lawsuit must be filed. CGL policies do not have time limitations on coverage based on the date of discovery of the loss. Instead, CGL policies cover damages caused by an “occurrence” which is typically defined as an accident or continuous exposure to conditions that result in bodily injury or property damage during the policy period. Likewise, there is no limitation period for filing suit in a CGL policy. It is the damaged party who makes the claim against the insured and, if coverage is established, the insurer is required to indemnify the insured up to the limits of the CGL policy.
As has been noted, for CGL policies the focus is on whether there has been an “occurrence” during the policy period. But what if, as was alleged in the Pennsylvania General case, the inception date of the occurrence can not be determined and the damages are continuous, spanning more than one policy and implicating the policies of more than one carrier? That question was answered fifteen years ago in Montrose Chemical Corp. v. Admiral Ins. Co.(1995) 10 Cal.4th 645, 655-58.
B. The Montrose Case
Montrose Chemical Company manufactured the pesticide known as DTD from 1947 until 1982.
In 1983 it became embroiled in the infamous Stringfellow cases where the State of California and the U.S. government sued Montrose for the clean up cost at several disposal sites where the company had dumped its chemicals.The governments alleged there was progressively deteriorating property damage caused by chemicals being released into, or migrating through, soil, groundwater, and surface water. Montrose tendered the claims to its insurance carriers (warning: the following is a gratuitous editorial comment), seeking the defense and indemnity for which it had paid handsome premiums for many years.
Between 1960 and 1986, seven different insurers, ending with Admiral Insurance, issued CGL policies to Montrose. Admiral’s four CGL policies covered the periods from 1982 to 1986, and contained the standard language requiring Admiral to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of ... bodily injury, or ... property damage to which this insurance applies, caused by an occurrence...." "Occurrence" is defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."
Montrose filed a declaratory relief action against the various carriers to establish the rights and duties of the parties under the policies of insurance. Admiral moved for summary judgment on the issue of its duty to defend, arguing that there was no potential for coverage under its policies given the effective dates of its policies and the fact that the dumping of the waste predated its policies. The trial court granted the motion for summary judgment, finding there was no potential for coverage, and thus Admiral had no duty to defend the lawsuits.
Montrose appealed the ruling and the Court of Appeal reversed the order granting summary judgment. Admiral’s petition to the California Supreme Court was granted, but the decision of the Court of Appeal was affirmed, with the Supreme Court explaining:
[W]e conclude that the standard CGL policy language, such as was incorporated into Admiral's policies in issue in this case, provides coverage for bodily injury and property damage that occurs during the policy period. In the case of successive policies,bodily injury and property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods. Stated in the insurance industry's parlance, we conclude the "continuous injury" trigger of coverage should be adopted for third party liability insurance cases involving continuous or progressively deteriorating losses. In this case, because the potential of coverage arose under Admiral's policies, so too did its duty to defend Montrose in the underlying lawsuits.
The “continuous injury trigger” rule in Montrose has been applied to construction defect claims over the years. In the Pennsylvania General case, it was alleged that the insured’s framing and rough carpentry work caused damages that continued beyond Pennsylvania General’s policy period, and into the policy period of American Safety. Interestingly, the Court noted that when American Safety denied the claim, it was relying upon its policy language that “was designed to 'circumvent the continuous injury trigger of the coverage rule laid down' in [Montrose]."
3. Interpretation of American General’s Insurance Policy
The Court analyzed the American General policy based upon three important principles of insurance law: (1) “[w]hen construing an insurance policy, [a court ] must resolve ambiguities in coverage clauses most broadly in favor of coverage”; (2) “[a] policy provision is ambiguous when it is capable of two of more constructions, both of which are reasonable”; and (3) when the language of the policy is not clear it should be construed in a manner the “satisfies the hypothetical insured's objectively reasonable expectations.”
The Court summarized the relevant policy provisions as follows:
ASIC's CGL policy provided it would indemnify Whitacre for any amount Whitacre became obligated to pay as " 'property damage' to which this insurance applies," and specified that "[t]his insurance applies to . . . 'property damage' only if: [¶] (1) The . . . 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory'; and [¶] (2) The . . . 'property damage' occurs during the policy period." (CGL, Section I, Coverage A, ¶ 1(a) & (b).) ASIC's CGL policy provided a "per occurrence" {Slip Opn. Page 11} limit of $1 million, and provided a "Products/Completed Operations" aggregate limit of $1 million
ASIC's CGL policy also contained two 1999 endorsements that modified the standard policy provisions. The standard definition of "occurrence" contained in the 1997 version of the CGL policy was replaced by ASIC's 1999 endorsement that refined the definition of "occurrence" by adding the following italicized language: " 'Occurrence' means an accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance. 'Property damage' . . . which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during, the term of this insurance." (Italics added.)
At the same time, ASIC added another 1999 endorsement, entitled "PRE-EXISTING INJURY OR DAMAGE EXCLUSION," which stated: "This insurance does not apply to: [¶] 1. Any 'occurrence', incident or 'suit' . . . [¶] [(a)] which first occurred prior to the inception date of this policy . . .; or [¶] [(b)] which is, or is alleged to be, in the process of occurring as of the inception date of this policy . . . even if the 'occurrence' continues during this policy period.
The Court of Appeal summarized the trial court’s reasoning in granting American Safety’s motion for summary judgment as follows:
ASIC's policy excluded coverage for the claims asserted against Whitacre in the construction defect litigation because Whitacre's work was completed before the inception of ASIC's policy. The trial court reasoned that under ASIC's CGL policy: "The terms 'occurrence' and 'property damage' are distinctly defined and are not synonymous. In evaluating the trigger of coverage in the policies, there are two separate triggers, 'occurrence' and 'property damage' which are not the same, in light of the fact that 'property damage'' is caused by an 'occurrence.' [Citations.] An occurrence is a causal event. [Citation.] [¶] . . . [ASIC's] policy requires that . . . the occurrence [both] . . . 'happen during the term of the insurance' . . . and cause property damage during the policy period. It also excludes a prior 'occurrence' . . . .In the context of the underlying action, the Court finds that the 'occurrence' (the act causing the injury/damage), here the defective framing work performed by Whitacre, could arise no later than the time Whitacre's framing work on the project was completed. The undisputed evidence establishes that Whitacre's work was completed by June of 2001. . . . Therefore, the evidence establishes that the 'occurrence' commenced during [Pennsylvania General's] policy period, which was prior to the inception of [ASIC's] policy.
The Court did not agree with the analysis of the trial court. In analyzing the policy, the Court stated the proper construction of “occurrence,” as defined by the policy, requires a focus on “when the damages caused by the negligent causal acts of the insured first commenced, and is not on when the insured completed its work.” Since summary judgments are appropriate only if there are no triable issues of fact, the Court noted “the facts were disputed on when those damages first commenced and the trial court's entry of summary judgment in favor of ASIC was based solely on its conclusion that there was no potential for coverage because Whitacre's causal acts happened before the inception of ASIC's policy. We conclude, however, the policy was reasonably susceptible to the interpretation that the trigger of coverage was not when the insured completed its work, but was instead based on when the damages caused by the negligent causal acts of the insured first commenced.”
The Court reversed the judgment and awarded Pennsylvania General its costs on appeal. Presumably, the case will be remanded to the trial court for a trial on the disputed fact of when the damages caused by Whitacre’s negligent construction first commenced. Even if the trier of fact concludes the damages commenced prior to American Safety’s policy period, under Montrose, the findings will not be complete, and American General will not be off the hook, unless there is also a finding that there is no continuous or progressively deteriorating losses that fall within its policy periods.
Alternatively, the parties may elect to resolve the dispute through mediation rather than risking an unacceptable outcome by a judge or a jury. That’s an option I can support.
Editor's Note: This article originally appeared in Mealy's Litigation Report: Consruction Defect Insurance, Vol.7, #7, August 2010.
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