Latent Construction Defects Liability
CGL Coverage: Latent Defects and Continuous, Progressive or Recurring Damages (Allocation of Liability)
Greg Johnson
September 27, 2010
Which CGL policy (or policies) will apply in a property damage claim involving continuing, progressive or recurring damages? Whether the underlying claim is one of environmental liability, asbestos, construction defect or products liability, claims involving damages which extend over multiple policy periods present unique and complex coverage issues for policyholders, insurers and courts. Such claims raise a variety of issues, such as: what “trigger theory” should a court apply to determine which policies may apply; are the damages excluded by various provisions in the policies or any common law doctrine that is read into the policies; how should a court determine the number of “occurrences” under the policies; what method of allocation, if any, between successive insurers is most appropriate; how should a court deal with self-insured retainers or deductibles; and how should a court deal with periods, if any, during which the policyholder was self-insured? The stakes in such claims are often high.
The vast majority of jurisdictions have adopted one of four trigger theories to allocate liability in claims involving successively liable insurers. Have the allocation rules changed? Yes, sort of. Insurers and policyholders need to familiarize themselves with the allocation rules in Insurance Service Office’s (“ISO”) Known Injury or Damage (“KID”) provisions, which have recently begun to take center stage in claims involving ongoing, progressive and recurring damages. Case law interpreting these provisions is just starting to develop. The Minnesota Court of Appeals will be addressing KID provisions in a construction defect-insurance coverage appeal the author is handling.
The standard CGL policy provides coverage for “property damage” (or “bodily injury”) that “occurs during the policy period,” meaning the insurer has agreed to indemnify the insured for any damages (or injuries) that occur during the policy period (subject to the other terms, conditions and exclusions of the policy). However, historically the standard CGL policy has not contained any provisions which attempt to allocate liability between current, past and future liability policies. See, generally, Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006) (leading construction defect case in Minnesota involving successively liable insurers). The policies’ “other insurance” clauses and common law “closeness to the risk” rules – which serve to allocate liability in claims involving concurrent coverage (i.e., liability policies issued to the same insured during the same policy period) — do not apply to claims involving successive or consecutive coverage (i.e., liability policies issued to the same insured over different policy periods). See, e.g., Northern States Power Co. v. Fidelity & Cas. Co., 523 N.W.2d 657 (Minn. 1994) (noting the distinction between concurrent and successive policies and holding that “other insurance” provisions and “closeness to the risk” analysis do not apply to allocate liability in claims involving damage occurring over multiple policy periods).
As a result, courts developed common law rules of apportionment and tend to follow one of four “trigger” theories to allocate liability among policies “on the risk:” (1) the “exposure” rule, whereby only those policies in effect when the claimant or property was exposed to hazardous materials are triggered; (2) the “manifestation” rule, whereby only those policies in effect when the injury or damage was discovered are triggered; (3) the “continuous trigger” where the policies in effect at the time of exposure, the time of manifestation, and all the time in between are triggered; and (4) the “actual injury” or “injury-in-fact” trigger, whereby only those policies in effect when damage occurred are triggered.
These common law apportionment rules have, however, been modified to some extent by contractual “Known Injury or Damage” provisions. In response to an onslaught of latent defect claims involving continuing, progressive and recurring property damage, the Insurance Services Office (ISO) created so-called “Montrose endorsements” (after the California case that led to its development, Montrose Chemical Corp. v. Admiral Ins. Co., 42 Cal. Rptr.2d 324, 913 P.2d 878 (1995), as modified on denial of reh’g (Aug. 31, 1995)) which attempt to allocate liability among current, past and future CGL policies for liability claims involving continuous, progressive or recurring injuries or damages. In September 1999, the Insurance Services Office (“ISO”) offered an endorsement adding “Known Injury or Damage” provisions to the insuring agreement of the standard CGL policy. (See CG 00 57 09/99.) Later, the language used in the endorsement was incorporated into the CGL policy’s insuring agreement. (See CG 00 01 10/01; CG 00 01 12/04; and CG 00 01 12/07.) The Known Injury or Damage provisions added paragraphs 3(b), (c) and (d) to the CGL insuring agreement, and provide as follows:
b. This insurance applies to “bodily injury” or “property damage” only if:
(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory;” and
(2) The “bodily injury” or “property damage” occurs during the policy period; and
(3) Prior to the policy period, no insured listed under Paragraph 1. of Section II–Who is An Insured and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.
c. Bodily injury” or “property damage” which occurs during the policy period and was not, prior to the policy period, known to have occurred by any insured listed under Paragraph 1. of Section II—Who is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim, includes any continuation, change or resumption of that “bodily injury” or “property damage” after the end of the policy period.
d. “Bodily injury” or “property damage” will be deemed to have been known to have occurred at the earliest time when any insured listed under Paragraph 1. of Section II–Who is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim:
(1) Reports all, or any part, of the “bodily injury” or “property damage” to us or any other insurer;
(2) Receives a written or verbal demand or claim for damages because of the “bodily injury” or “property damage”; or
(3) Becomes aware by any other means that “bodily injury” or “property damage” has occurred or has begun to occur.
The overriding purpose of the Known Injury or Damage (“KID”) provisions is to allocate liability among current, past and future CGL policies in liability claims involving continuous, progressive or recurring injuries or damages. As between the policy in effect when the insured first discovered injury or damage and subsequent policies, the KID provisions assign liability to the policy in effect when the insured first became aware that bodily injury or property damage had begun. To accomplish this result, ISO first expanded the stated scope of policy coverage under the CGL policy. Unlike standard CGL policy provisions, policies incorporating KID provisions do not limit coverage to “bodily injury” and “property damage” that “occurs during the policy period.” While “bodily injury” or “property damage” must occur during the policy period in order to trigger the policy (“This insurance applies to ‘bodily injury’ or ‘property damage’ only if: . . . (2) the ‘bodily injury’ or ‘property damage’ occurs during the policy period”), the KID provisions expand the stated scope of the policy to also include “bodily injury” and “property damage” which occurs after the policy period. Subparagraph 3(c) states in relevant part: “’Bodily injury’ or ‘property damage’ which occurs during the policy period . . . includes any continuation, change or resumption of that ‘bodily injury’ or ‘property damage’ after the end of the policy period.” For example, assume that an insured contractor negligently designed/installed a sprinkler system in a residential apartment complex. One of the pipes breaks due to the insured’s defective design/installation, resulting in water damage to the building. The insured contractor is notified of the pipe break, visits the complex and repairs the broken pipe, but does not correct its defective design/installation. Under the KID provisions, the policy in effect at the time of the initial pipe break would be responsible for both (a) the property damage relating to the initial break; and (2) any future property damage caused by the same defective design/installation, even if those damages took place after the expiration of the policy. Stated another way, a CGL policy which is triggered because a continuous injury or damage becomes known during the policy period is also responsible for any continuation, change or resumption of that bodily injury or property damage even if the bodily injury or property damage takes place after the expiration of the policy period.
Next, ISO included provisions providing that any policy issued after the insured first had knowledge that bodily injury or property damage had occurred, in whole or in part, would not apply. Paragraph b(3) provides that if the insured (or its authorized employee) knew that bodily injury or property damage had occurred, in whole or in part, prior to the policy period, that policy as well as any subsequent policies will not afford coverage. See, e.g., Travelers Cas. and Surety Co. v. Dormitory Authority State of N.Y., __ F.Supp.2d __, 2010 WL 3001729 (S.D.N.Y. 2010) (“[b]ecause [the insured] became aware prior to the beginning of the policy period that damage to the flooring system had occurred or begun to occur, [the insured] cannot seek coverage for the flooring failure under the terms of the policy”); Trinity Universal Ins. Co. of Kansas v. Northland Ins. Co., 2008 WL 4386760, 4-6 (W. D. Wash. 2008) (CGL policy containing “Known Injury or Damage” endorsement did not afford coverage to stucco subcontractor for water damages occurring after the policy inception date as “the record provides ample evidence that Jefferson had notice of the water damage allegedly caused (at least in part) by its stucco work” prior to the inception of policy); Harleysville Mut. Ins. Co. v. Dapper, LLC., 2010 WL 2925779 (M.D. Ala. 2010) (“the property damage at issue manifested itself prior to the policies’ inception” and therefore the known-loss endorsement applies to bar coverage); Keenan Hopkins Schmidt and Stowell Contractors, Inc. v. Continental Cas. Co., 653 F.Supp.2d 1255 (M.D. Fla. 2009) (known-loss provision relieved insurance company from liability for amounts arising out of property damage known by the insured prior to the inception of the policy); Quanta Indem. Co. Davis Homes, LLC, 606 F.Supp.2d 941 (S.D.Ind.2009) (known claim exclusion was enforceable because the insured had knowledge of at least some of the damage prior to the inception of the policy period). Cf Essex Ins. Co. v. H & H Land Dev. Corp., 525 F.Supp.2d 1344 (M.D.Ga.2007) (known loss provision did not apply to bar coverage; insured knew of property damage to neighboring property but not property damage to two other properties). In contrast to common law known loss/loss in progress doctrine (which focuses on the insured’s subjective belief as to whether it believed, at the time the policy was issued, that damages will continue in the future), the relevant inquiry under KID provisions is simply whether the insured knew that some damage arising from the same cause had occurred prior to the policy period. Travelers Cas. and Surety Co. v. Dormitory Authority State of N.Y., WL 3001729 (S.D.N.Y. 2010) (“[i]t follows from the foregoing policy provisions that, if an insured party became aware by ‘any . . . means’ that ‘property damage’ had ‘occurred or ha[d] begun to occur’ prior to the inception of the ‘policy period,’ then that insured may not seek coverage . . .”).
Thus, the KID provisions assign liability to the policy in effect when the insured first became aware that injury or damage had occurred and eliminate coverage under any policy issued thereafter. In the sprinkler system hypothetical previously mentioned, the insurer on the risk at the time the insured learned of the first pipe break would be responsible for any property damage that resulted from the same defective design/installation, even though occurring after the expiration of the policy. The policy or policies issued after the insured was notified of the initial pipe break would not apply. To this extent, the KID provisions allow the insurers to decide amongst themselves which CGL insurer will be liable. Some CGL insurers provided written notice of the change to their policyholders. One such notice provided:
CLARIFICATIONS IN COVERAGE GA 101 10 01 Commercial General Liability Coverage Form
The Insuring Agreement for Bodily Injury and Property Damage, and separately for Personal Injury and Advertising Injury is modified . . . It further address[es] the applicability of the Commercial General Liability Coverage Form in situations involving continuation, change or resumption of the same “bodily injury” or “property damage” during or after the [policy period]. In most states, this revision to the Insuring Agreement represents neither a broadening nor a restriction in coverage from the original intent. However, in certain states, this revision may represent a decrease in coverage. This revision may result in the shifting of coverage, under certain circumstances, between current policies and past or future policies.
It is important to recognize that the KID provisions do not purport to eliminate coverage under CGL policies which were issued prior to the insured’s discovery of injury or damage. Depending on the trigger theory used by the applicable jurisdiction, such prior policies may also be triggered and be required to respond to the claim. As noted above, courts have tended to use one of four theories to apportion liability among insurers in cases involving ongoing damages: (1) the “exposure” rule, whereby only those policies in effect when the claimant or property was exposed to hazardous materials are triggered; (2) the “manifestation” rule, whereby only those policies in effect when the injury or damage was discovered are triggered; (3) the “continuous trigger” where the policies in effect at the time of exposure, the time of manifestation, and all the time in between are triggered; and (4) the “actual injury” or “injury-in-fact” trigger, whereby only those policies in effect when damage occurred are triggered. Minnesota, for example, uses the actual injury trigger theory. Under this theory, an injury can occur even though not “diagnosable,” “compensable,” or manifest during the policy period as long as it can be determined, even retroactively, that some injury did occur during the policy period. In re Silicone, 667 N.W.2d at 415; NSP, 523 N.W.2d at 663 (citing Am. Home Prods. Corp. v. Liberty Mut. Ins. Co., 748 F.2d 760, 765‑66 (2d Cir.1984)). Thus, under Minnesota law, policies issued prior to the insured’s discovery of any injury or damage can be triggered and can also apply to claims involving ongoing injuries or damages. Presumably, the insured would be entitled to seek coverage under such policies as well as the policy in force at the time the insured first became aware of injury or damage. The KID provisions only eliminate coverage under subsequent policies — policies issued after the insured first became aware that bodily injury or property damage had begun, in whole or in part.
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