A general liability policy’s “anti- Montrose ” endorsements did not eliminate an insurer’s duty to defend an insured subcontractor in a construction defect case involving “continuous and progressively-deteriorating” property damage. ( Pennsylvania General Ins. Co. v. American Safety Indemnity Co. (2010) 185 Cal.App.4th 1515)
Facts
D.A. Whitacre Construction, Inc. (Whitacre) was a framing subcontractor. Whitacre purchased general liability policies through Pennsylvania General Insurance Company (Pennsylvania General) for the period of October 1998 through December 2001. During the time the Pennsylvania General policies were in force, Whitacre both started and completed framing work on a residential construction project. After the last Pennsylvania General policy expired, and after Whitacre completed its framing work on the project, Whitacre purchased a general liability policy through American Safety Indemnity Company (ASIC) for the period of December 2001 through December 2002.
In subsequent construction defect litigation involving Whitacre, various parties alleged that Whitacre’s framing work on the project was deficient and had caused continuous property damage to the project. However, it was unclear when that property damage had first started.
Whitacre tendered its defense to both Pennsylvania General and ASIC. Pennsylvania General agreed to defend Whitacre under a reservation of rights and ultimately paid all the defense and settlement costs on behalf of Whitacre. ASIC declined Whitacre’s tender on the ground that the ASIC policy contained “anti- Montrose ” endorsements under which coverage was triggered only if both the “occurrence” (i.e., the causal act) and the “property damage” (i.e., the result) happened “during the policy period.” ASIC asserted that since the “occurrence” (i.e., Whitacre’s negligent work) took place before inception of the ASIC policy, the ASIC policy was not potentially triggered.
After the underlying construction defect litigation was settled, Pennsylvania General filed a lawsuit against ASIC seeking equitable contribution from ASIC for a portion of the defense and indemnity costs that Pennsylvania General had paid on behalf of Whitacre. The trial court entered summary judgment in favor of ASIC, concluding that ASIC’s policy excluded coverage for the claims asserted against Whitacre in the construction defect litigation because Whitacre’s work was completed before the inception of ASIC’s policy. Pennsylvania General appealed.
Holding
The Court of Appeal reversed, holding that ASIC’s policy did potentially cover Whitacre’s alleged liability in the underlying construction defect litigation, and that ASIC therefore was obligated to pay a portion of the costs of defending and indemnifying Whitacre in the construction defect litigation.
The appellate court acknowledged that the ASIC policy contained two endorsements that were apparently intended to circumvent the “continuous injury” trigger of coverage set forth in Montrose Chemical Corp v. Admiral Ins Co. (1995) 10 Cal.4th 645. The first endorsement amended the ASIC policy’s definition of “occurrence” by adding the following italicized language: “‘Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance . ‘Property damage’ … which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during, the term of this insurance .” (Italics added.) The second endorsement, entitled “Pre-Existing Injury or Damage Exclusion,” stated: “This insurance does not apply to: … any ‘occurrence’, incident or ‘suit’ … (a) which first occurred prior to the inception date of this policy …; or (b) which is, or is alleged to be, in the process of occurring as of the inception date of this policy … even if the ‘occurrence’ continues during this policy period.”
ASIC argued that in light of these endorsements, coverage under the ASIC policy was triggered only if both the “occurrence” (i.e., the causal act) and the “property damage” (i.e., the result) happened “during the policy period.” The appellate court disagreed, stating that the ASIC policy’s endorsements do “not clearly and unambiguously limit coverage” to claims in which both the causal act and the property damage occur during the policy period. According to the appellate court, the ASIC policy limited coverage to property damage that first occurred during the policy period, but there was a factual dispute as to when the property damage in the underlying construction defect litigation first occurred. As such, ASIC had a duty to participate with Pennsylvania General in defending Whitacre in the underlying construction defect litigation.
Comment
The ASIC policy endorsements were obviously designed to circumvent the “continuous injury” trigger rule set forth in the Montrose decision . However, as the appellate court correctly noted, under the ASIC endorsements, “the appropriate focus is on when the damages caused by the negligent causal acts of the insured first commenced, … not on when the insured completed its work.” Because it was unclear when property damage first began, the trial court erred in granting summary judgment in ASIC’s favor. The claims against Whitacre in the underlying construction defect litigation were potentially covered under both the Pennsylvania General and ASIC policies.