August 10, 1995 - Holding that the timing of an accident, event or conditions causing bodily
injury or property damage is largely immaterial in triggering insurance
coverage, the California Supreme Court has ruled in Montrose Chemical Corp.
v. Admiral Insurance Co., 95 Daily Journal D.A.R. 8733, to establish an
insurable risk all that is required is "some" contingency.
Where the existence and extent of prospective damage remains uncertain
and there is as yet no "legal obligation to pay", explained the
Montrose Court, there is an insurable risk for which coverage may be sought
under a third-party policy. As a result, California's "loss-in-progress"
rule may no longer be invoked to challenge or eliminate an insurer's duty
to defend potential liability claims, whether they are ultimately successful
or not.
According to the Court, insurance is a "contract whereby someone undertakes
to indemnify another against loss, damage or liability arising from a contingent
or unknown event". California Insurance Code Section 250 provides
that "any contingent or unknown event, whether past or future, which
may damnify a person having an insurable interest, or create a liability
against him, may be insured against". When a loss is "known or
apparent" before a policy is issued, there is no coverage. This is
the loss-in-progress rule.
Montrose Chemical had manufactured the pesticide dichloro-diphenyl-tichlorethane
(DDT) from 1947 to 1982. In 1972, following the federal ban on domestic
use of DDT, Montrose nevertheless continued production of the pesticide
for export.
Beginning in 1960 and through 1986, Admiral Insurance, along with seven
other carriers, intermittently insured Montrose with comprehensive general
liability (CGL) policies. Then, in 1983 and 1986, Montrose was sued by
the federal government and the state of California for continuous and successive
manifestations of environmental damages from its disposal of toxic and
hazardous wastes. Additionally, Montrose was joined as an indispensable
party defendant to three other private suits.
Through pretrial motions, Admiral sought to defend the suits against Montrose
by using California's "loss-in-progress" rule, contending that
the causal connections and/or events that would trigger coverage under
the policy's terms had occurred prior to the date any policies it had issued
were in effect.
The trial court agreed, stating that under the prevailing "manifestation
of loss" rule, insurance coverage is triggered when any damage is
first discovered, and liability becomes the sole responsibility of the
individual insurers providing coverage at the time. This ruling benefited
Admiral since it was not the insurer at the time damage was discovered.
On appeal, the California Court of Appeal reversed the lower court, finding
that despite the initial discovery of damages, the CGL policy's language
nonetheless provided coverage for damages or injury occurring during the
policy periods, as long as progressively (successively) manifesting damages
resulted, at least potentially, from the property's repeated (sequential)
exposure to injurious causal conditions.
When the case was presented to the California Supreme Court, Admiral argued
that the Court of Appeal had mistaken its policy's coverage for that of
a policy against contingent damages.
Under the loss-in-progress rule, Admiral reasoned, its policy's language
insured against only those damages triggered by formerly contingent causes,
and not the still contingent, unforeseeable extent of damages. Thus, where
a continuing process of injury or damage has been revealed, the operate
date when damages were first discovered defined whether or not an insurer
owed a duty to defend its client.
The Court, however, disagreed and stressed that Admiral's insurance contract
was designed to afford third-party liability protection for its client
as against any "sums which the insured shall become legally obligated
to pay as damages" because of bodily injury or property damage (caused
by its client) that then successively manifests while the policy is still
in effect.
In the context of third-party liability coverage, where there is uncertainty
about the "imposition of liability" and/or where the amount of
liability to be paid is yet to be established, concluded the Court, there
remains a potentially insurable risk.
By distinguishing the scope of contingency inherent in all third-party
insurance contracts, the Court's holding permits the application of progressive
and continuous damage concepts not only to cases involving successive manifestations
of environmental contamination, but also to parallel instances of continuous
manifestations of damage in construction defect cases.
In construction defect situations, each component, whether actual buildings,
the plumbing and drainage systems or subsystems servicing them, are integral
parts of a larger whole. Common interest developments are a complex of
mechanically integrated systems.
Since most injuries resulting from sub-standard materials or workmanship
are latent, by the time the damage is discovered, each subcontractor's
contribution is so commingled with other's work it is impossible to predict
who is responsible or to apportion blame. This situation is further compounded
by the sheer number of construction specialists that erect the final product.
As the Court recognized, proper analysis of the damage contingencies that
may be sustained by third parties not in privity with the insured and its
insurer must be based on a prospective outlook, not determined from hindsight.
In addition to the concurrent (commingled) causation typical of construction
defect cases, Montrose serves to further reinforce the current state of
California law that deems each building or infrastructural component a
severable interest and already carrying a building completion date for
when the statute of limitations commences.
Since the Court has found that the mere inevitability of prospective damages
can no longer transform a contingent loss into one prohibited by the loss-in-progress
rule, homeowner associations will be pleased that the finger-pointing and
scapegoating, which usually occurs in negotiations among the numerous contractors
and subcontractors, will give way to a much more enhanced process of global
settlement among the various insurers whose policies are triggered by the
damage.
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