The Next Big Thing: "Montrose" Clauses and CD Disputes
In the wake of the California Supreme Court's Montrose opinion, ISO promulgated various new clauses purporting to cut off coverage for continuing losses. Thus, current CGL forms contain language in the insuring agreement precluding coverage for losses that are already known to the insured. Additionally, some policies now endorsements excluding coverage for the continuation of property damage that first occurred prior to the policy.
Despite the significance of these "Montrose" clauses for construction defect litigation, there has been little or no case law construing their scope and effect until recently.
Shaun Baldwin posted last month concerning a new Indiana opinion that construed a “Montrose” clause in a CGL policy to extend an insurer’s coverage beyond the policy’s expiration. In Grange Mut. Cas. Co. v. West Bend Mut. Ins. Co., No. 29A02-1008-PL 965 (Ind. App. March 15, 2011), the Indiana Court of Appeals had ruled that the insurer whose policy was in effect when the insurer had installed the storm drain pipes must also covered damaged caused by later leakage due to language in its policy extending coverage to “any continuation, change or resumption of that property damage after the end of the policy period.”
Whereas Grange Mutual analyzed the effect of such provisions in extending coverage, a new Fifth Circuit opinion considered the extent to which “Montrose” clauses might serve as a tool for later insurers to bar coverage for known losses. In Maryland Cas. Co. v. Acceptance Indemnity Ins. Co., No. 10-50283 (5th Cir. April 25, 2011), the U.S. Court of Appeals for the Fifth Circuit ruled that a later CGL carrier could not raise “Montrose” wordings as a bar to claims for equitable subrogation brought by the insurer that was on the risk when water intrusion problems first commenced.
Olympic Pools had been hired by a homeowner in 2002 to build a “negative edge” swimming pool in his backyard in Texas. The pool underwent several repairs over the next few years as four leaks and a large crack developed. In April 2003, just after the pool had been completed and filled with water for the first time, there was a leak under the northeast flower bad planter that the insured repaired. Two years later, however, a second and third leak occurred in the pump equipment area and another under the pool shell near the main drain. The leak under the pool shell caused the pool level to drop two feet in a day, eventually draining the pool within two days. After the pool had drained, the plaintiff’s property manager noticed a long crack running the length of the negative edge wall across the basin. A different company was hired to fix the leak under the shell and to chisel, epoxy and re-plaster the cracked area. The fourth leak occurred in late 2005, after which the customer hired an engineer to analyze the pool structure and filed suit against Olympic Pools.
Olympic Pools tendered the defense of the suit to Maryland Casualty and Acceptance Indemnity that had respectively insured it between 2002 and 2006. Maryland agreed to accept the defense of the case under its 2002-2003 policy but Acceptance, which had been on the risk from August 2003 until 2006, disclaimed any obligation to defend, citing the anti-Montrose wordings in its policy. After Maryland Casualty paid $590,000 to settle the lawsuit, it sued Acceptance under theories of contribution, contractual subrogation and equitable subrogation.
In the ensuing coverage litigation, a federal district court in Texas ruled that Acceptance did have a duty to defend and must therefore reimburse Maryland Casualty for a pro rata share of the costs of defense. While holding that there is no right of equitable contribution among successive insurers in light of the Texas Supreme Court’s opinion in Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 236 S.W.3d 765 (Tex. 2007), the court allowed the surviving subrogation claim to proceed to trial, where a jury concluded that 75% of the insured’s damages were attributable to property damage that first occurred during one of Acceptance’s policy periods.
On appeal, the U.S. Court of Appeals for the Fifth Circuit agreed with the District Court that Mid-Continent did not preclude an insurer’s right of subrogation against another carrier, even where the insured itself had been fully indemnified. Further, the Court of Appeals declined to hold that there was insufficient evidence to support the jury’s verdict on when property damage “first occurred.” The Fifth Circuit found that in this case the swimming pool problems for which the insured had been sued had resulted from two different causes, the second of which had resulted during Acceptance’s policy period. Accordingly, even if the underlying cause of the problem had resulted from negligent work by the insured contractor during Maryland Casualty’s policy, the Fifth Circuit held that the property damage occurring during Acceptance’s policy was covered since it had resulted from a different cause than that which had occurred during Maryland’s policy.
These cases illustrate a trend that we are likely to see more of in the future, where damages are dissected into separate “occurrences” so as to trigger additional policies and avoid issues with respect to common law “known loss” as well as “Montrose” language of the sort discussed here.
