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Triggering Liability for Continuous First-Party Property Loss Spanning Multiple Policy Periods

Determining the Appropriate Trigger to Maximize Coverage or Minimize Liability

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WEDNESDAY, JUNE 13, 2012

Presenting a live 90-minute webinar with interactive Q&A

Rina Carmel, Senior Counsel, Musick Peeler, Los Angeles Tred R. Eyerly, Atty, Damon Key Leong Kupchak Hastert, Honolulu, Hawaii

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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 Los Angeles, California Honolulu, Hawai’i (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

7

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.

8

CLAIMS THAT MAY IMPLICATE TRIGGER ISSUES

Progressive loss a/k/a continuous loss = Direct physical loss occurs over more than one policy period.

9

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

10

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.

11

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?

12

TRIGGER THEORIES

Property: Liability: –Manifestation – Manifestation –Injury-in-fact – Injury-in-fact – Exposure – Continuous

13

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

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

• ccurred 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:

21

3/2004-3/2005: Innkeeper's policy. 10/2004: Electrical fire, caused by faulty

• wiring. Completely extinguished.

10/2004 and on:

• Inn operations ceased during

investigation.

• Vandals occupied building.

3/2005 and on: Plaintiff uninsured. 5/2005: Second fire, caused by vandals.

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:

28

1977-1978: Policies with no exclusions. 1977: Insured bought home. Seller advised repairs were made to correct settling. Unknown Date: Insured noticed cracks in walls = manifestation. 1986-1987: Exclusions barred coverage. 1987: Insured retained engineer, who found subsidence  structural damage.

DISCOVERY RULE Prudential-LMI

29

1971-1986: Four consecutive insurers. 1970-1971: Insured built apartment building. 1977-1980: Prudential policy with 1-year limitation of suit provision 1971-1986: Four consecutive insurers. 1982: Carpeting installed; no cracking found. 1971-1986: Four consecutive insurers. 1985: Flooring installed; extensive crack in foundation and floor slab.

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

INVESTIGATING MANIFESTATION Sworn Proof of Loss

Asks insured to verify, under oath:

Time and Origin: A _____ [state type] loss occurred at ___ o'clock __.m.,

• n _____ [month] ___ [date], 20__.

32

INVESTIGATING MANIFESTATION Consultants

• Building Claims:

– Structural engineers – General contractors – Soil engineers – Geologists

• Slow Leak  Mold Claims:

– Plumbers – Industrial Hygienists

33

INVESTIGATING MANIFESTATION Discovery in Coverage Action

• "If YOU are only claiming damages to the

INTERIOR WALLS … –"state when YOU first became aware of WATER DAMAGE to those walls." –"state when YOU first became aware of MOLD DAMAGE to those walls."

Laeroc Waikiki Parkside, LLC v. Westchester Fire Ins. Co., 2008 WL , at *8 (D. Haw. Aug. 22, 2008).

34

DEFENSES Delayed Notification by Insured

"Insured's unreasonableness in delaying notification of the loss until a particular point in time" is an affirmative defense for insurer in a coverage action. –Insurer bears burden of proof. –This is different than late notice.

Prudential-LMI.

35

DEFENSES Limitation of Suit Provision

• "No suit or action on this policy for the recovery of

any claim shall be sustainable … unless commenced within twelve (12) months next after the happening of the loss unless a longer period of time is provided by applicable statute."

• "Legal action" must be "brought within 2 years

after the date on which the direct physical loss or damage occurred."

36

DEFENSES Limitation of Suit Provision

Enforceable in coverage action based

• n progressive loss.

–California. Prudential-LMI. –Hawai'i. Laeroc Waikiki. –Indiana. United Tech. Auto. Sys., Inc. v. Affiliated

FM Ins. Co., 725 N.E.2d 871 (Ind. Ct. App. 2000) (pollution claim).

37

INJURY-IN-FACT TRIGGER

38

HOW IT WORKS

• Coverage triggered by occurrence of injury-

in-fact during the policy period.

• Injury occurs whether detectable or not.
• Injury during the policy period can be

proven in retrospect.  Thus, multiple policies can be triggered, beginning with policy in effect when damage began.

39

RATIONALE

• Justice; rights of parties to the contract.
• First-party property policy ≠ liability

"claims made" policy.

• Language covering loss "commencing

during the policy period" is ambiguous.  Interpreted so commencement is the earliest date damage occurred.

40

RATIONALE

BUT –

• Encourages insureds to delay

reporting claims  larger losses, higher repair expenses.

• Undermines fortuity requirement.

41

Kief v. Farmland Mutual, 534 N.W.2d 28 (N.D. 1995)

Timeline:

42

1984-1991: Farmland policies. 1985: Insured built storage grain bin. 1988 and on: Bin damaged. Damage magnified each time bin was used. 1991-1992: Old Republic policies. 1992: Damage brought to insured’s attention.

Kief

• 1984-1991 policies agreed to "cover loss or

damage … commencing during policy period."

• Court held "commencement" does not require –

– Damage be known to someone, or – Discovery or manifestation for coverage to be triggered.

• Language is ambiguous  date damage began.

43

Kief

• Ruling:

"[A] real but undiscovered loss or damage, proved in retrospect to have commenced during the policy period, triggers coverage, irrespective of the time the loss or damage became manifest."

44

Ellis Court Apts. v. State Farm, 117 Wash. App. 807 (2003)

• Insured = 58-unit apartment building.
• Water intrusion to building was

apparently undiscovered for several years.

• Led to decay, which led to

substantial structural impairment of the building.

45

Ellis Court

Timeline:

46

1993-1999: State Farm policies. 1993: Stucco repair. Structural engineer said building integrity was intact, and useful life of building restored. 1999 and on: Greenwich policies. Spring 2000: Building consultant advised insured there was substantial impairment from water intrusion. May 2000: Insured made claim to State Farm.

Ellis Court

• State Farm policies covered "loss

commencing during policy period."

• Court followed Kief  "commence"

is ambiguous, and thus refers to when damage first began, not to when it was discovered.

47

Seaman v. State Farm,

2007 WL 1875903 (W.D. Wash. June 28, 2007)

• Similar facts to Ellis Court Apts.
• Policy covered "accidental direct

physical loss to buildings at the premises."  Loss accrues to policyholder as soon as physical damage

• ccurs.

48

KAAPA Ethanol v. Affiliated FM, 2008 WL 2986277 (D. Neb. July 29, 2008), R&R adopted and rejected in part, 2008 WL 2986277 (D. Neb. Oct. 30, 2008)

• Facts: Ethanol tanks settled into ground further

than expected, causing damage.

• Policy did not define "occurrence." Court relied
• n limitation of suit provision (legal action must

be initiated within 2 years after the date "on which the direct physical loss first commenced

• r occurred")  implies that "occurrence"

happens when loss begins, not manifestation.

49

KAAPA Ethanol

Federal court predicts Nebraska would follow Kief and Ellis Court  injury-in-fact trigger.

50

• C. Brewer v. Industrial Indem.,
• No. 28958, Hawai'i Ct. App. (appeal pending)

Facts:

• 1987-1988: Property policy issued.
• March 2006: 100-year-old earthen dam bursts,

causing extensive property damage downstream.

• Dam had allegedly been continuously,

progressively deteriorating, and was not properly maintained since early 1980s.

51

• C. Brewer

One issue on appeal:

• If damage occurred to the earthen dam

during insurer’s policy period, but not discovered until many years later, must insurer indemnify for – –Property damage to dam? –Property loss downstream?

52

• C. Brewer

If injury-in-fact trigger applies – –Policy covers damage to earthen dam as long as injury occurred during policy period. –Policy does not cover property loss suffered by others downstream.

53

CONTRIBUTION Offset

Insurer (sued in coverage action) received a judgment credit from

• ther insurer for amount other insurer

had paid.

Ellis Court.

54

CONTRIBUTION Allocation Methods

As a practical matter, insurers often agree to –Time on risk, or –Equal shares. Reasons: – Easy to calculate. – Saves cost of having consultants determine how much damage

• ccurred and when.

55