Check that policy (and endorsement) wording carefully

Pennsylvania General Insurance Co. v. American Safety Indemnity Co., 185 Cal. App. 4th 1515 (2010)

In 1995, the California Supreme Court held in Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995) *(“Montrose II”) that in cases of continuing damage, all liability policies from the time the damage started occurring until the time that the insured’s liability for that damage was determined were potentially implicated.  From a defense perspective, that meant that all liability policies from the time the damage potentially started to occur had to defend the insured, since the duty to defend is broader than the duty to indemnify, and a policy must defend if there is any possibility that the claim is covered, even if it is subsequently shown not to be.

The insurance industry had fought hard against the concept of the “continuous trigger” of coverage, and although Montrose II was a pollution clean-up case, insurers recognized that construction defect cases would also be impacted by the Court’s holding on continuous damage.  For example, insurers wanted to restrict a case of defective window flashing or a leaky roof to just one occurrence, and policies issued subsequent to the defective work, or at most subsequent to the first leak, should not be triggered.  Insureds, on the other hand, wanted to benefit from the availability of its subsequent policies’ limits.

The insurance industry quickly launched what became known as “Montrose endorsements.”  These endorsements attempted to limit insurers’ liability to those policies in force at the time any continuing damage first started to occur or was discovered.  Other insurers incorporated such concepts into the insuring clause itself.  However, while generally speaking most endorsements are drafted by an insurance rating organization (the biggest being ISO), many insurers wrote their own Montrose endorsements or modified insuring clause provisions.  The effect of this was that there was no standard language used, and one carrier’s endorsement could have different wording to that used by other carriers. 

In Pennsylvania General Insurance Co. v. American Safety Indemnity Co., 185 Cal. App. 4th 1515 (2010), American Safety argued that its version of the Montrose endorsement had two triggers—a causal event or “occurrence” trigger and a “property damage” trigger, both of which needed to occur within the policy period.  The effect of this could be devastating for a contractor – if all his policies had this wording and if the damage didn’t occur until after the end of the policy period, he would have no coverage at all since the defective workmanship and the damage would occur in separate policy periods.

Recognizing that California courts had generally interpreted the trigger to be based on the timing of property damage rather than the timing of the insured’s conduct, the Court held that the American Safety wording did not clearly and unambiguously depart from this rule.  The Court, while recognizing American Safety’s intention to circumvent the continuous trigger of coverage rule laid down in Montrose II, ruled that the language and clause construction in its endorsement was defective.  American Safety’s endorsement purported to limit when covered property happened, but did so in the same paragraph of the endorsement that changed the definition of “occurrence.”  The end result was ambiguous.  American Safety at 1526-27.

The court noted that, while the first sentence of the modified “occurrence” definition did not specifically incorporate the word “property damage,” the second stated that property damage starting prior to the policy period would not be deemed to occur during the policy period.  This implied that as in CGL policies generally, it was the property damage, not the causal act, which must first occur during the policy period.  Id. at 1527.

The court also noted that the title of the endorsement at issue was “Pre-Existing Injury or Damage Exclusion,” not “Pre-existing Causal Conduct Exclusion.”  The use of such terminology undercut the insurer’s claim that the endorsement was directed at the timing of the insured’s conduct as well as the timing of the damage.

American Safety did not succeed in its effort to impose two separate triggers.  However, this case should sound warning bells for all insureds who face continuing injury type exposures (not just contractors).  Had American Safety succeeded in its quest to require both causal act and first damage (and thus, all damage) to occur in the same policy period, the insured would have been left with massive coverage gaps.  Given the non-standard nature of these endorsements, other carriers may not be guilty of the same sloppy drafting employed by American Safety.  Insureds with these types of exposure should check their policies – old, current, and new – for the wording of the insuring clause itself and any Montrose endorsements.  As shown by the Pennsylvania General case, the devil of the insuring clause and endorsement can be in the details, and analysis by a coverage expert may find ways around what may look to be an onerous policy requirement or exclusion.  Additionally, help from a risk management consultant or insurance counsel at the time of negotiating for the policy can be useful in ensuring that appropriate coverage is obtained.