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1 Presenting a live 90-minute webinar with interactive Q&A Triggering Liability for Continuous First-Party Property Loss Spanning Multiple Policy Periods Determining the Appropriate Trigger to Maximize Coverage or Minimize Liability WEDNESDAY, JUNE 13, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Rina Carmel, Senior Counsel, Musick Peeler, Los Angeles Tred R. Eyerly, Atty, Damon Key Leong Kupchak Hastert, Honolulu, Hawaii The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Triggering Liability for Continuous First-Party Property Loss Spanning Multiple Policy Periods June 13, 2012 Rina Carmel Tred R. Eyerly Musick, Peeler & Garrett LLP Damon Key Leong Kupchak Hastert Los Angeles, California Honolulu, Hawai i (213) (808) r.carmel@mpglaw.com te@hawaiilawyer.com blog: insurancelawhawaii.com The opinions expressed herein are those of the speakers and do not necessarily reflect the opinions of their firms or clients.

6 OVERVIEW 6

7 MANY PROPERTY CLAIMS Direct physical loss and realization of same happen simultaneously, such as Fire Lightning Explosion Hail Coverage analyzed under property policy in effect at that time. 7

8 CLAIMS THAT MAY IMPLICATE TRIGGER ISSUES Progressive loss a/k/a continuous loss = Direct physical loss occurs over more than one policy period. 8

9 CLAIMS THAT MAY IMPLICATE TRIGGER ISSUES Common Causes of Loss often causes that manifest slowly, over time, such as Slow leaks Soil subsidence Construction defects Foundation issues, such as settling Cracking, spalling Substantial structural impairment / Imminent collapse 9

10 CLAIMS THAT MAY IMPLICATE Additional Factors: TRIGGER ISSUES Latent loss undiscovered while it is occurring, or Insured ignores signs of damage, or Insured knows of loss but decides not to repair / not to report loss. Failure to repair "wear and tear" exclusion may bar coverage. Other factors like weather can make damage worse as it goes unrepaired. 10

11 THE COVERAGE ISSUE Which policy may cover progressive loss that goes undiscovered? Policy in effect when damage began? Policy in effect when damage manifested? Allocate among all policies in effect over the course of progressive loss? 11

12 TRIGGER THEORIES Property: Liability: Manifestation Manifestation Injury-in-fact Injury-in-fact Exposure Continuous 12

13 Property: Manifestation TRIGGER THEORIES When damage begins, or Discovery rule Injury-in-fact All policies on the risk while damage happened, starting with policy in effect when damage began 13

14 MANIFESTATION TRIGGER 14

15 HOW IT WORKS Policy on the risk at the time the damage manifested covers the entire loss (assuming coverage exists). Earlier and later policies are not triggered even if damage also occurred during those policy periods. 15

16 RATIONALE Promotes certainty. Insured's reasonable expectations. Satisfies fortuity requirement. Cal. Ins. Code 22, 250; see also City of Burlington v. Indemnity Ins. Co. of N. Am., 346 F.3d 70 (2d Cir. 2003) (Vermont law). Reason prior to manifestation, loss is still a contingency. 16

17 RATIONALE BUT Insurers deprived of ability to seek contribution. If triggered policy affords no coverage, insured will bear all or part of the loss. No horizontal stacking! Policy s suit limitation provision may bar recovery if insured has delayed too long. 17

18 WHEN IS MANIFESTATION? This is the key issue. Reason determines which policy is triggered. If triggered policy contains exclusions, or limits are exhausted no coverage. If triggered policy contains a limitation of suit provision, and time to sue has expired, insured cannot sue for coverage. 18

19 WHEN IS MANIFESTATION? Two main trends: When damage commences. Discovery rule, applied to "reasonable" insured. 19

20 WHEN DAMAGE COMMENCES Cher-D, 2009 WL (E.D. Pa. 2009) Rule: Progressive loss: Damage commences on date of first loss. Series of discrete events progressive loss. Date of first loss is not date of loss for later losses. 20

21 WHEN DAMAGE COMMENCES Cher-D Timeline: 3/2004-3/2005: Innkeeper's policy. 3/2005 and on: Plaintiff uninsured. 10/2004: Electrical fire, caused by faulty wiring. Completely extinguished. 10/2004 and on: - Inn operations ceased during investigation. - Vandals occupied building. 5/2005: Second fire, caused by vandals. 21

22 WHEN DAMAGE COMMENCES Policy provision: Cher-D "We cover loss or damage commencing: "a. During the policy period shown in the Declarations." Holding: This means if loss began during policy period, that policy covers all loss, even loss that happens after policy expires. 22

23 WHEN DAMAGE COMMENCES Cher-D Dicta: If first fire had continued to smolder, it would be a progressive loss, and policy in effect on date of first fire would be triggered. Reason date of first fire would be when the loss commenced. 23

24 WHEN DAMAGE COMMENCES Scottsdale v. Sally Group, 2012 WL (S.D. Tex. 2012) Rule: Damage commences when loss occurs to covered property. Damage does not commence when a condition exists, before that condition causes loss. 24

25 WHEN DAMAGE COMMENCES Scottsdale v. Sally Group Facts show "that the improper humidity began prior to the Policy's inception." No impact on trigger. Facts do not show "that the loss to the property due to that improper humidity began before the Policy incepted." Loss could have begun during policy period policy potentially triggered. 25

26 Rule: DISCOVERY RULE Manifestation = "that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered. Prudential-LMI v. Superior Court, 51 Cal.3d 674 (1990); Jackson v. State Farm, 835 P.2d 786 (Nev. 1992). 26

27 DISCOVERY RULE Usually a question of fact. Prudential-LMI. Summary judgment proper where evidence shows no damage was discovered before the policy expired. Jackson. 27

28 DISCOVERY RULE Jackson Timeline: : Policies with no exclusions : Exclusions barred coverage. 1977: Insured bought home. Seller advised repairs were made to correct settling. Unknown Date: Insured noticed cracks in walls = manifestation. 1987: Insured retained engineer, who found subsidence structural damage. 28

29 DISCOVERY RULE Prudential-LMI : Four consecutive insurers : Prudential policy with 1-year limitation of suit provision : Four consecutive insurers : Four consecutive insurers : Insured built apartment building. 1982: Carpeting installed; no cracking found. 1985: Flooring installed; extensive crack in foundation and floor slab. 29

30 INVESTIGATING MANIFESTATION Request Documents Maintenance records and invoices Inspection reports Records of insured s agents, such as building manager HOA minutes 30

31 INVESTIGATING MANIFESTATION EUO When did you first observe X? When did anyone first tell you about X? When you had the carpets replaced, did you look at the floor slab underneath? If yes: Did you see a crack? How long was it? Where was it? If no: Did the carpet vendor say anything to you? What? 31

32 INVESTIGATING MANIFESTATION Sworn Proof of Loss Asks insured to verify, under oath: Time and Origin: A [state type] loss occurred at o'clock.m., on [month] [date],

33 INVESTIGATING MANIFESTATION Consultants Building Claims: Structural engineers General contractors Soil engineers Geologists Slow Leak Mold Claims: Plumbers Industrial Hygienists 33

34 INVESTIGATING MANIFESTATION Discovery in Coverage Action "If YOU are only claiming damages to the INTERIOR WALLS "state when YOU first became aware of WATER DAMAGE to those walls." "state when YOU first became aware of MOLD DAMAGE to those walls." Laeroc Waikiki Parkside, LLC v. Westchester Fire Ins. Co., 2008 WL, at *8 (D. Haw. Aug. 22, 2008). 34

35 DEFENSES Delayed Notification by Insured "Insured's unreasonableness in delaying notification of the loss until a particular point in time" is an affirmative defense for insurer in a coverage action. Insurer bears burden of proof. This is different than late notice. Prudential-LMI. 35

36 DEFENSES Limitation of Suit Provision "No suit or action on this policy for the recovery of any claim shall be sustainable unless commenced within twelve (12) months next after the happening of the loss unless a longer period of time is provided by applicable statute." "Legal action" must be "brought within 2 years after the date on which the direct physical loss or damage occurred." 36

37 DEFENSES Limitation of Suit Provision Enforceable in coverage action based on progressive loss. California. Prudential-LMI. Hawai'i. Laeroc Waikiki. Indiana. United Tech. Auto. Sys., Inc. v. Affiliated FM Ins. Co., 725 N.E.2d 871 (Ind. Ct. App. 2000) (pollution claim). 37

38 INJURY-IN-FACT TRIGGER 38

39 HOW IT WORKS Coverage triggered by occurrence of injuryin-fact during the policy period. Injury occurs whether detectable or not. Injury during the policy period can be proven in retrospect. Thus, multiple policies can be triggered, beginning with policy in effect when damage began. 39

40 RATIONALE Justice; rights of parties to the contract. First-party property policy liability "claims made" policy. Language covering loss "commencing during the policy period" is ambiguous. Interpreted so commencement is the earliest date damage occurred. 40

41 RATIONALE BUT Encourages insureds to delay reporting claims larger losses, higher repair expenses. Undermines fortuity requirement. 41

42 Kief v. Farmland Mutual, 534 N.W.2d 28 (N.D. 1995) Timeline: : Farmland policies : Old Republic policies. 1985: Insured built storage grain bin and on: Bin damaged. Damage magnified each time bin was used. 1992: Damage brought to insured s attention. 42

43 Kief policies agreed to "cover loss or damage commencing during policy period." Court held "commencement" does not require Damage be known to someone, or Discovery or manifestation for coverage to be triggered. Language is ambiguous date damage began. 43

44 Ruling: Kief "[A] real but undiscovered loss or damage, proved in retrospect to have commenced during the policy period, triggers coverage, irrespective of the time the loss or damage became manifest." 44

45 Ellis Court Apts. v. State Farm, 117 Wash. App. 807 (2003) Insured = 58-unit apartment building. Water intrusion to building was apparently undiscovered for several years. Led to decay, which led to substantial structural impairment of the building. 45

46 Ellis Court Timeline: : State Farm policies and on: Greenwich policies. 1993: Stucco repair. Structural engineer said building integrity was intact, and useful life of building restored. Spring 2000: Building consultant advised insured there was substantial impairment from water intrusion. May 2000: Insured made claim to State Farm. 46

47 Ellis Court State Farm policies covered "loss commencing during policy period." Court followed Kief "commence" is ambiguous, and thus refers to when damage first began, not to when it was discovered. 47

48 Seaman v. State Farm, 2007 WL (W.D. Wash. June 28, 2007) Similar facts to Ellis Court Apts. Policy covered "accidental direct physical loss to buildings at the premises." Loss accrues to policyholder as soon as physical damage occurs. 48

49 KAAPA Ethanol v. Affiliated FM, 2008 WL (D. Neb. July 29, 2008), R&R adopted and rejected in part, 2008 WL (D. Neb. Oct. 30, 2008) Facts: Ethanol tanks settled into ground further than expected, causing damage. Policy did not define "occurrence." Court relied on limitation of suit provision (legal action must be initiated within 2 years after the date "on which the direct physical loss first commenced or occurred") implies that "occurrence" happens when loss begins, not manifestation. 49

50 KAAPA Ethanol Federal court predicts Nebraska would follow Kief and Ellis Court injury-in-fact trigger. 50

51 C. Brewer v. Industrial Indem., No , Hawai'i Ct. App. (appeal pending) Facts: : Property policy issued. March 2006: 100-year-old earthen dam bursts, causing extensive property damage downstream. Dam had allegedly been continuously, progressively deteriorating, and was not properly maintained since early 1980s. 51

52 One issue on appeal: C. Brewer If damage occurred to the earthen dam during insurer s policy period, but not discovered until many years later, must insurer indemnify for Property damage to dam? Property loss downstream? 52

53 C. Brewer If injury-in-fact trigger applies Policy covers damage to earthen dam as long as injury occurred during policy period. Policy does not cover property loss suffered by others downstream. 53

54 CONTRIBUTION Offset Insurer (sued in coverage action) received a judgment credit from other insurer for amount other insurer had paid. Ellis Court. 54

55 CONTRIBUTION Allocation Methods As a practical matter, insurers often agree to Time on risk, or Equal shares. Reasons: Easy to calculate. Saves cost of having consultants determine how much damage occurred and when. 55