For centuries, the question whether an event even occurs before you know about it has perplexed philosophers. And judges. The U.S. Court of Appeals for the Eleventh Circuit last week came to a common-sense conclusion.
When developers or contractors are sued for defective construction, there's often confusion over which insurance policy provides coverage. Commercial General Liability (CGL) policies cover property damage that "occurs" during the policy period, but this begs the key question – when is the damage deemed to "occur"? Is it when the work was done? Or when the property was damaged? Or when the damage was discovered?
The California Supreme Court decided this issue 20 years ago in its landmark decision Montrose Chemical Corp. v. Admiral Ins. Co. The Court looked to the plain language of the insurance policy and held that CGL policies are triggered if the property suffered any injury or damage during the policy period. So where defective construction causes cracking in concrete foundations, for example, a CGL insurer should cover the claim if cracking occurred during its policy period.
Last week, the Eleventh Circuit revisited these issues to decide the trigger of coverage under Florida law. In its April 7 decision in Carithers v. Mid-Continent Casualty Company, the court found that the insurer had a duty to defend and indemnify a homebuilder against a lawsuit by homeowners alleging defective workmanship.
The case arose out of facts typical of construction defect claims. The homebuilder, Cronk Duch Miller & Associates, had built a home in 2005 for Hugh and Katherine Carithers. The Carithers sued the builder several years later, alleging that shoddy work by the subcontractors had resulted in a faulty electrical system, damage to tile and exterior bricks, and a leaky balcony that caused wood rot in the garage. According to the homeowners, the damage could not have been discovered until 2010.
The builder sought coverage under four CGL policies it purchased from Mid-Continent for the period from March 2005 through October 2008. Mid-Continent denied coverage on the grounds that the damage was discovered after its policies expired. Left without insurance, the builder settled with the homeowners and assigned to them its right to collect the settlement amount from Mid-Continent.
The homeowners' subsequent coverage lawsuit against Mid-Continent hinged on the issue of trigger of coverage. The homeowners asserted an "injury-in-fact" trigger, whereby property damage is deemed to "occur" when the injury or damage takes place. They argued that the damage took place in 2005 and fell within the Mid‑Continent policy period. But Mid-Continent argued for a "manifestation" trigger, under which the damage is deemed to occur when it is discovered or manifests itself. Since the damage was not discovered until 2010—two years after its policies expired—Mid-Continent argued that it had no coverage obligations.
The Eleventh Circuit rejected the insurer's argument and ruled that the "injury-in-fact" trigger applied to the standard CGL policy language used in Mid-Continent's policies. The Eleventh Circuit relied on the express language of the insurance policy—just as the California Supreme Court did in Montrose. Under the plain terms of the policy, Mid-Continent promised to cover claims if the property damage "occurs during the policy period." "Property damage" was defined as "physical injury to tangible property." The policy also defined "occurrence" to mean "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
Putting these terms together, the Eleventh Circuit stated a simple rule: "Property damage occurs when the damage happens, not when the damage is discovered or discoverable." Since the damage to the Carithers' home had occurred in 2005, while the first Mid-Continent Casualty policy was still in effect, the court held that the insurer had a duty to defend and indemnify its policyholder.
In reaching this decision, the court accepted the trial court's finding that the damage happened in 2005. But it's not always easy in construction defect cases to determine exactly when damage has taken place. And complications arise when ongoing property damage remains latent and is not discovered for several years.
That was the situation facing the California Supreme Court in Montrose, which involved property damaged by the disposal of toxic chemicals over 35 years. The California Court applied the same policy language noted above—in particular the provision that defined an "occurrence" to mean "continuous or repeated exposure" to the same harmful condition. The Court concluded that this language could mean only one thing: in cases where there is progressive deterioration of property over several years, the damage has occurred continuously—and therefore coverage is triggered under each and every insurance policy in effect during that period.
Over the last 20 years, the "continuous trigger" rule announced in Montrose has expanded the amount of insurance coverage available in California to pay for "long-tail" injury claims against developers, contractors, and a host of other businesses. It remains to be seen whether courts in Florida will give policyholders in that state the benefit of a similar rule.
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