The Montrose Language Interpreted: How Many Policies Are Implicated By A Construction Defect That Later Causes a Flood?

Posted on March 17, 2011 by Shaun McParland Baldwin

The Court of Appeals of Indiana recently addressed the “Montrose“  language added to the CGL ISO form in 2001 in the context of a construction defect claim where a fractured storm drain caused significant flooding a year after the drain was damaged.  The insuring agreement requires that “bodily injury” or “property damage” be caused by an “occurrence” and that the “bodily injury” or “property damage” occur during the policy period. The Montrose language adds that the insurance applies only if, prior to the policy period, no insured knew that the “bodily injury” or “property damage” had occurred in whole or in part.   Significantly, it also states that any “bodily injury“ or “property damage” which occurs during the policy period and was not, prior to the policy period known to have occurred, includes a continuation, change or resumption of that “bodily injury” or “property damage”  after the end of the policy period.  

 In Grange Mutual Cas. Co. v. West Bend Mut. Ins. Co., No. 29D04-0706-PL-1112 (Ct. App. IN March 15, 2011), http://www.ai.org/judiciary/opinions/pdf/03151109ehf.pdf, Sullivan was the General Contractor for a school construction project. Its subcontractor, McCurdy, installed the storm drain pipes.   One of the storm pipes was fractured in 2005 while McCurdy was doing its installation work. More than a year later, the school experienced significant water damage due to flooding. It was later discovered that the flooding was due to the fractured storm drain. Sullivan’s insurer paid $146,403 for the water damage.   That insurer brought a subrogation claim against McCurdy and its two insurers:  West Bend and Grange.  West Bend had issued CGL coverage to McCurdy while the construction was ongoing , including the date in which the storm pipe was fractured.    Grange issued CGL coverage to McCurdy at the time of the flooding. Those two carriers jointly settled the subrogation claim and then litigated which insurer actually owed coverage for the loss.   Significantly, the loss that was paid included only damages from the flooding, not any damages for the cost of repairing the pipe.

Grange argued that the negligent fracturing of the storm drain pipes determines coverage and that West Bend should pay all of the damages resulting from the flood as the fracturing of the pipe took place in West Bend’s policy period.   West Bend argued that the policy implicated is the policy in effect when the claimant was actually damaged, and not when the negligence of the insured took place. 

The Court of Appeals held that the timing of the “occurrence” is irrelevant to the coverage determination.   It found that the Grange policy was triggered because significant property damage actually occurred during its policy period as a result of the flooding and there was no suggestion that McGurdy was aware of the damage to the storm drain prior to the inception of the Grange policy.  

It also found that West Bend’s policy was triggered as the storm drain pipe was damaged by McCurdy during the West Best policy period.   It noted: “West Bend’s policy provides that this initial property damage includes any continuation, change or resumption of that ‘property damage’ after the end of the policy period.”   It held that because the West Bend policy was triggered at the time McGurdy negligently fractured the drain pipe, the policy covered all damages that flowed from the original damage, including the extensive flood damage.    It concluded that the loss should be allocated between Grange and West Bend pursuant to the “other insurance” provisions in the policies, which both provide for equal shares.   

 

Comments:   The loss for which the insurers paid the Sullivan’s subrogated insurer was limited to the flood damage. No payment was made for the cost of repairing the damaged pipe – which is the only “property damage” that took place in the West Bend policy.  The damaged pipe, in many jurisdictions, would not be considered “property damage” caused by an “occurrence,” in the first instance as the property damage was limited to the insured’s own product.   See, e.g.,  Stoneridge Dev. Co. v. Essex Ins. Co., 888 N.E.2d 633 (Ill. App. 2d Dist. 2008)(cracking in the walls caused by the construction of the residence near soil which was not properly compacted by the developer’s subcontractor was not “property damage” caused by an "occurrence" as the cracks were the natural and ordinary consequences of defective workmanship). Under that rationale, it is only when “property damage” causes injury or damage to third party property (e.g, the flooding), that it is considered “property damage” caused by an occurrence.”   That would result in only Grange’s policy being implicated for the damages resulting from the flood, not West Bend’s policy.   Indiana courts, however, have taken a different position on whether defective workmanship constitutes an “occurrence.”    In Sheehan Const. Co., Inc. v. Continental Cas. Co., 935 N.E.2d 160 (Ind. 2010), the Indiana Supreme Court adopted the view that improper or faulty workmanship does constitute an accident [or "occurence"] so long as the resulting damage to the building is an event that occurs without expectation or foresight. Id. at 169.   Under that rationale, it is possible a court could view the initial property damage, albeit restricted to the pipe itself, as being caused by an “occurrence.”  That still begs the question as to whether the later flooding damage is a continuation, change or resumption of that “property damage” (i.e., the fractured pipe).    One might argue that the  flooding is a consequence of the initial “property damage.” It could be viewed as having been proximately caused by the fractured pipe. But is the flooding damage a “continuation, change or resumption” of the fractured pipe?     
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Frustration Mounts in Texas as Primary Carriers Struggle with How to Deal with Recalcitrant Co-Primary Carriers

Posted on March 16, 2008 by Chris Martin

A Federal District Court Judge from the Southern District of Texas’ Galveston Division recently granted summary judgment against an insurer seeking to enforce identical pro rata sharing provisions contained in multiple primary insurance policies.  In doing so, the court highlighted the lack of options primary carriers now face in Texas when co-primary carriers don't contribute to defense or indemnity benefits to the common insured.  In Nautilus Ins. Co. v. Pacific Employers Ins. Co., No. G-04-619 (S.D. Tex.  February 25, 2008), several insurers were called on to defend and indemnify a seismic testing company which allegedly damaged over 200 buildings in Galveston County while conducting seismic testing.  All of the insurers except Pacific Employers contributed to the settlement and Nautilus Insurance then sought to recover the amounts it overpaid to fund the settlement from Pacific by way of subrogation and enforcement of the policies respective pro rata "other insurance" sharing provisions.  The suit among the co-primary carriers resulted in summary judgment motions being filed on the issue of whether a settling co-primary carrier in Texas can sue a recalcitrant co-primary carrier for not paying it's fair share of the defense costs or the settlement.  Relying on the Texas Supreme Court’s recent decision in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 756 (Tex. 2007), the District Court held last week that because the insured had been fully indemnified, the settling insurer had no claim under Texas law against the non-settling insurer because “there is nothing to which Plaintiff can be subrogated.”  This harsh result is the inevitable consequence of the Texas Supreme Court's decision from February in Mid-Continent v. Liberty Mutual. 

Because of the proliferation of suits involving construction defects, intellectual property violations, toxic torts, premise liability and other significant torts, it is now extremely common for insured defendants to have two or more primary liability carriers whom they turn to for defense and indemnity benefits.  The unwillingness of the Texas Supreme Court to allow one carrier to sue another for reimbursement, contribution or subrogation puts Texas in an extreme minority on this issue and forces carriers in that state to become very creative when settling liability suits when one or more other primary carriers have not or will not contribute to defense or settlement costs.  Carriers in such a situation must consider formal assignments from insureds and other creative alternatives before allowing the underlying liability to be settled and dismissed.   Otherwise, they will find themselves in the same position as Nautilus having overpaid a claim they did not fully owe with no avenues for reimbursement against the carrier who refused to pay timely.  

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Fourth Circuit Upholds "True" Excess Policies In Dispute Over Priority of Coverages

Posted on January 30, 2008 by Mike Aylward

Controversy has often arisen in conflicts between primary liability insurance policies that contain “excess” other insurance wordings and “true” excess policies (i.e., umbrella or higher layer excess policies). In such cases, does one policy pay before the other or, as is often the case with conflicting “other insurance” terms, do both policies pay concurrently?

In the latest such case, the Fourth Circuit has held in a dispute between a school board’s umbrella liability insurer and the primary insurer of a high school principal concerning the priority of “excess” coverage for the cost of settling sexual abuse claims against school officials, the a “coincidental” excess policy (a primary policy with an “excess” other insurance clause) should pay before a “true” excess policy.

 

The Fourth Circuit ruled in Horace Mann Ins. Co. v. General Star National Ins. Co., No. 06-2156 (4th Cir. January 23, 2008) that because the General Star umbrella policy was a “true excess” policy, whereas the Horace Mann policy merely contained an “other insurance” clause purporting to make it excess of all other available insurance, a West Virginia district court erred in holding that Horace Mann had no obligation to contribute to the settlement.

Whereas the District Court had found that the two “excess” clauses were not in conflict since the General Star policy stated that it was excess to all other insurance “other than insurance that is in excess of the insurance afforded by this policy,” the Fourth Circuit ruled that these principles did not apply in a conflict between a primary policy and a true excess policy. Despite the fact that Horace Mann had developed this particular policy for school principals who typically would be entitled to coverage under other policies, the court rejected Horace Mann’s contention that this was, in fact, an excess policy holding that it was clearly designed to be a primary liability policy that might operate as excess insurance depending on the circumstances. While the excess other insurance clause in the Horace Mann policy might reduce the insurer’s exposure in most cases, the court held that it did not transform the policy into a true excess policy.

Writing in dissent, Judge Niemeyer argued that the district court had correctly undertaken a common sense reading of the respective wordings to reconcile their effect and that the Horace Mann policy therefore was excess of the General Star umbrella policy. The dissent also argued that this interpretation was consistent with the intent of the parties in structuring this insurance program for principals and educators.

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