Presenting a live 90-minute webinar with interactive Q&A Triggering Liability for Continuous First-Party Property Loss Spanning Multiple Policy Periods Determining the Appropriate Trigger to Maximize Coverage or Minimize Liability WEDNESDAY, JUNE 13, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Rina Carmel, Senior Counsel, Musick Peeler , Los Angeles Tred R. Eyerly, Atty, Damon Key Leong Kupchak Hastert , Honolulu, Hawaii The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Triggering Liability for Continuous First-Party Property Loss Spanning Multiple Policy Periods June 13, 2012 Rina Carmel Tred R. Eyerly Musick, Peeler & Garrett LLP Damon Key Leong Kupchak Hastert Honolulu, Hawai’i Los Angeles, California (213) 629-7600 (808) 526-3625 www.musickpeeler.com www.hawaiilawyer.com r.carmel@mpglaw.com te@hawaiilawyer.com blog: insurancelawhawaii.com The opinions expressed herein are those of the speakers and do not necessarily reflect the opinions of their firms or clients.
OVERVIEW 6
MANY PROPERTY CLAIMS Direct physical loss and realization of same happen simultaneously, such as – – Fire – Explosion – Lightning – Hail Coverage analyzed under property policy in effect at that time. 7
CLAIMS THAT MAY IMPLICATE TRIGGER ISSUES Progressive loss a/k/a continuous loss = Direct physical loss occurs over more than one policy period. 8
CLAIMS THAT MAY IMPLICATE TRIGGER ISSUES Common Causes of Loss – often causes that manifest slowly, over time, such as – Slow leaks Soil subsidence Construction defects Foundation issues, such as settling Cracking, spalling Substantial structural impairment / Imminent collapse 9
CLAIMS THAT MAY IMPLICATE TRIGGER ISSUES Additional Factors: Latent loss undiscovered while it is occurring, or Insured ignores signs of damage, or Insured knows of loss but decides not to repair / not to report loss. – Failure to repair "wear and tear" exclusion may bar coverage. Other factors – like weather – can make damage worse as it goes unrepaired. 10
THE COVERAGE ISSUE Which policy may cover progressive loss that goes undiscovered? Policy in effect when damage began? Policy in effect when damage manifested? Allocate among all policies in effect over the course of progressive loss? 11
TRIGGER THEORIES Property: Liability: – Manifestation – Manifestation – Injury-in-fact – Injury-in-fact – Exposure – Continuous 12
TRIGGER THEORIES Property: – Manifestation • When damage begins, or • Discovery rule – Injury-in-fact • All policies on the risk while damage happened, starting with policy in effect when damage began 13
MANIFESTATION TRIGGER 14
HOW IT WORKS Policy on the risk at the time the damage manifested covers the entire loss (assuming coverage exists). Earlier and later policies are not triggered – even if damage also occurred during those policy periods. 15
RATIONALE Promotes certainty. Insured's reasonable expectations. Satisfies fortuity requirement. Cal. Ins. Code §§ 22, 250; see also City of Burlington v. Indemnity Ins. Co. of N. Am ., 346 F.3d 70 (2d Cir. 2003) (Vermont law). – Reason – prior to manifestation, loss is still a contingency. 16
RATIONALE BUT – Insurers deprived of ability to seek contribution. If triggered policy affords no coverage, insured will bear all or part of the loss. No horizontal stacking! Policy’s suit limitation provision may bar recovery if insured has delayed too long. 17
WHEN IS MANIFESTATION? This is the key issue. Reason – determines which policy is triggered. – If triggered policy contains exclusions, or limits are exhausted no coverage. – If triggered policy contains a limitation of suit provision, and time to sue has expired, insured cannot sue for coverage. 18
WHEN IS MANIFESTATION? Two main trends: When damage commences. Discovery rule, applied to "reasonable" insured. 19
WHEN DAMAGE COMMENCES Cher-D , 2009 WL 943530 (E.D. Pa. 2009) Rule: Progressive loss: Damage commences on date of first loss. Series of discrete events ≠ progressive loss. Date of first loss is not date of loss for later losses. 20
WHEN DAMAGE COMMENCES Cher-D Timeline: 3/2004-3/2005: 10/2004: Innkeeper's policy. Electrical fire, caused by faulty wiring. Completely extinguished. 10/2004 and on: - Inn operations ceased during investigation. - Vandals occupied building. 3/2005 and on: 5/2005: Plaintiff uninsured. Second fire, caused by vandals. 21
WHEN DAMAGE COMMENCES Cher-D Policy provision: "We cover loss or damage commencing: "a. During the policy period shown in the Declarations." Holding: This means if loss began during policy period, that policy covers all loss, even loss that happens after policy expires. 22
WHEN DAMAGE COMMENCES Cher-D Dicta: If first fire had continued to smolder, it would be a progressive loss, and policy in effect on date of first fire would be triggered. – Reason – date of first fire would be when the loss commenced. 23
WHEN DAMAGE COMMENCES Scottsdale v. Sally Group , 2012 WL 1144577 (S.D. Tex. 2012) Rule: Damage commences when loss occurs to covered property. Damage does not commence when a condition exists, before that condition causes loss. 24
WHEN DAMAGE COMMENCES Scottsdale v. Sally Group Facts show "that the improper humidity began prior to the Policy's inception." No impact on trigger. Facts do not show "that the loss to the property due to that improper humidity began before the Policy incepted." Loss could have begun during policy period policy potentially triggered. 25
DISCOVERY RULE Rule: Manifestation = "that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered .“ Prudential-LMI v. Superior Court , 51 Cal.3d 674 (1990); Jackson v. State Farm , 835 P.2d 786 (Nev. 1992). 26
DISCOVERY RULE Usually a question of fact. Prudential-LMI . Summary judgment proper where evidence shows no damage was discovered before the policy expired. Jackson . 27
DISCOVERY RULE Jackson Timeline: 1977-1978: 1977: Policies with no Insured bought home. Seller advised exclusions. repairs were made to correct settling. Unknown Date: Insured noticed cracks in walls = manifestation. 1986-1987: 1987: Exclusions barred Insured retained engineer, who found subsidence structural damage. coverage. 28
DISCOVERY RULE Prudential-LMI 1971-1986: 1970-1971: Four consecutive insurers. Insured built apartment building. 1977-1980: Prudential policy with 1-year limitation of suit provision 1971-1986: 1982: Four consecutive insurers. Carpeting installed; no cracking found. 1971-1986: 1985: Four consecutive insurers. Flooring installed; extensive crack in foundation and floor slab. 29
INVESTIGATING MANIFESTATION Request Documents Maintenance records and invoices Inspection reports Records of insured’s agents, such as building manager HOA minutes 30
INVESTIGATING MANIFESTATION EUO When did you first observe X? When did anyone first tell you about X? When you had the carpets replaced, did you look at the floor slab underneath? – If yes: Did you see a crack? How long was it? Where was it? – If no: Did the carpet vendor say anything to you? What? 31
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