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?