ALLOCATION OF DAMAGES AMONG CARRIERS
IN CONSTRUCTION DEFECT CLAIMS
James L. Bruner, Esq.
Bruner Powell Robbins Wall & Mullins, LLC
Columbia, SC
I.
An Allocation Example
A GC built a 7-story condominium building in North Myrtle Beach. The pertinent
facts concerning construction and the contractor’s insurance are:
CGL/Excess Policy Anniversary Date:
CGL Policy Form:
Construction Began:
Construction completed:
CO Issued:
January 1
ISO CG 00 01 07 98
June 1, 2000
October 31, 2001
November 30, 2001
Although the GC completed all of its work, the developer went broke and never
paid the GC its final draw and retainage. The GC goes broke and closes its doors on
December 31, 2005.
During a storm in the fall of 2003, the homeowners notice water intrusion around
windows and under the sliding glass doors on the unit balconies. They ask the GC to
investigate and it does so. It attributes the water intrusion to the storm event and
assures the homeowners that all is well. In the spring of 2004, the homeowners notice
more water intrusion. Again, they notify the GC which investigates and tells the
homeowners the water intrusion is due to lack of maintenance. The homeowners get a
lawyer who, in turn, hires a consulting engineer to “inspect” the building in the summer
of 2004. The PE’s inspection report is dated November 30, 2004 and recites numerous
construction defects, deviations from the plans and building code violations some of
which are allowing water into the building. The PE opines that the water has been
entering the building and its walls since the windows, doors and walls were completed.
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The lawyer obtains an estimate of costs to correct these deficiencies - $22,500,000.
The lawyer sends the GC a copy of the inspection report and estimate and
demands that it correct all of the deficiencies. The GC sends the demand letter to its
insurance agent who places three CGL carriers and four excess carriers on notice. No
response is sent to the demand letter.
On April 1, 2005, the homeowners file suit against the GC in Horry County Circuit
Court. The GC is defended by lawyers hired by CGL #3. CGL#3 has demanded that
CGL#1 and #2 share in the defense costs. CGL #2 has agreed but CGL#1 has
declined. The GC files third-party claims against virtually all of its subcontractors. The
case is placed on the Multi-week Trial Docket and ordered to mediation in June 2007. At
mediation, CGL#1, #2 and #3 and Excess #1 show up with coverage counsel. Here are
their respective coverage periods and limits of liability:
2000
2001
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
CGL #1
$1,000,000/
$2,000,000
CGL #2
$2,000,000
CSL
CGL #2
$2,000,000
CSL
CGL #2
$2,000,000
CSL
CGL #3
$500,000
CSL
A.
What is the “trigger period”
In Sentinel Insurance Company, Ltd. v. First Insurance Company of Hawai’i, Ltd.,
76 Hawai'i 277, 875 P.2d 894 (1994), the Supreme Court of Hawai’i explained:
Particular difficulty has been encountered when an injury process is not
a definite, discrete event-for example, where the damage continues
progressively over time spanning different insurer's policy terms. In this
situation, courts have invoked an equitable “continuous injury” trigger of
coverage. Under this theory, property damage is deemed to have
“occurred” continuously for a fixed period (the “trigger period”), and
every insurer on the risk at any time during that trigger period is jointly and
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severally liable to the extent of their policy limits, the entire loss being
equitably allocated among the insurers…The trigger period begins with
the inception of the injury and ends when the injury ceases… Before the
continuous injury trigger may be applied, the party urging its application
must make two factual showings. It must be established that: (1) some
kind of property damage occurred during the coverage period of each
policy under which recovery is sought; and (2) the property damage was
part of a continuous and indivisible process of injury. Sentinel Insurance
Company, 76 Hawai'i at 298, 875 P.2d at 915 (citations omitted).
B.
The trigger period under South Carolina’s injury-in-fact/continuous trigger
theory
The South Carolina Supreme court has adopted the modified continuous
trigger theory. “We hold coverage is triggered at the time of an injury-in-fact and
continuously thereafter to allow coverage under all policies in effect from the time
of injury-in-fact during the progressive damage.” Joe Harden Builders, Inc. v.
Aetna Cas. and Sur. Co., 326 S.C. 231, 236, 486 S.E.2d 89, 91 (1997).
Applying this principle to our example, the trigger period would begin
when the work was completed (10/31/01) and the damage began to occur and
would end with settlement at mediation (6/07). See Auto-Owners Insurance Co.,
Inc. v. Zurich US, 377 F.Supp.2d 496 (D.S.C. 2004).
II.
Principal Theories of Coverage Allocation Among Successive Insurers
A.
Per Capita
Under this theory, the risk is allocated equally among the policies triggered. This
theory was advanced by the plaintiff but rejected by the Court in Auto-Owners Insurance
Co., Inc. v. Zurich US, supra. Assuming that the loss does not exceed the primary limits
and applying the per capita approach to our example, each CGL carrier would each be
responsible for one-third of the loss.
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2000
2001
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
CGL #1
$1,000,000/
$2,000,000
CGL #2
$2,000,000
CSL
CGL #2
$2,000,000
CSL
CGL #2
$2,000,000
CSL
CGL #3
$500,000
CSL
1/3
B.
1/3
1/3
Pro Rata by Policy Period (time on the risk)
Under this theory, damages are allocated among the carriers whose policies
have been triggered according to the amount of triggered time on the risk (years,
months). The seminal case adopting this theory of allocation was Insurance Co. of
North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), clarified
657 F.2d 814 (6th Cir. 1981). This theory was adopted by the Sentinel Insurance court
and cited with approval in Joe Harden Builders and Auto-Owners v. Zurich. The Fourth
Circuit adopted this approach, citing Sentinel Insurance in Spartan Petroleum, Co. v.
Federated Mutual Ins. Co., 162 F.3d 805 (4th Cir. 1998).
Assuming that the loss does not exceed the primary limits and applying the time
on the risk method to our example, CGL #1 would be responsible for 2/50th or 4% of the
loss (10/31/01 to 12/31/01), CGL #2 would have 36/50th or 72% of the loss (12/31/01 to
12/31/04) and CGL #3 would have 12/50th or 24% of the loss.
2000
2001
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
0 months
CGL #1
$1,000,000/
$2,000,000
2 months
2/50=4%
CGL #2
$2,000,000
CSL
12 months
12/50=24%
4
CGL #2
$2,000,000
CSL
12 months
12/50=24%
CGL #2
$2,000,000
CSL
12 months
12/50=24%
CGL #3
$500,000
CSL
12 months
12/50=24%
CGL #1
CGL #2
CGL #3
C.
4%
72%
24%
Pro Rata by Policy Limits
This theory allocates the loss by proration according to the ratio of the coverage
provided by each policy for the same loss to the total coverage provided by all policies.
It is favored by some courts since it reflects the degree of risk taken and premiums
charged. However, the courts favoring this approach usually do so in cases of
concurring coverage, such as multiple liability policies affording coverage in a car wreck.
Our example involves a progressive loss. The pro rata by policy limits is not readily
adaptable to this type of loss.
Decisions adopting this approach are Nationwide Mutual Ins. Co. v. Hall, 643
So.2d 551 (Ala. 1994); Columbia Mutual Ins. Co. v. State Farm Mutual Automobile Ins.
Co., 905 P.2d 474 (Alaska 1995); Fremont Indemnity Co. v. New England Reinsurance
Co., 168 Ariz. 476, 815 P.2d 403 (1991); Allstate Ins. Co. v. Executive Car and Truck
Leasing, Inc., 494 So.2d 487 (Fla. 1986); Empire Fire and Marine Ins. Co. v. North
Pacific Ins. Co., 127 Idaho 716, 905 P.2d 1025 (1995); AID Ins. Co. v. United Fire
Casualty Co., 445 N.W.2d 767 (Iowa 1989); Allstate Ins. Co. v. Chicago Ins. Co., 676
So.2d 271 (Miss. 1996); Bill Atkin Volkswagen, Inc. v. McClafferty, 213 Mont. 99, 689
P.2d 1237 (1984); Universal Underwriters Ins. Co. v. Allstate Ins. Co., 134 N.H. 315,
592 A.2d 515 (1991); CC Housing Corp. v. Ryder Truck Rental, Inc., 106 N.M. 577, 746
P.2d 1109 (1987); The Buckeye Union Ins. Co. v. State Automobile Mutual Ins. Co., 49
Ohio St.2d 213, 361 N.E.2d 1052 (1977); State Capital Ins. Co. v. The Mutual
Assurance Society, 218 Va. 815, 241 S.E.2d 759 (1978).
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D.
Weighted Pro Rata Allocation
Other courts have adopted a variation of the policy limits approach better suited
to a progressive loss with a “long tail”. A good example is the Supreme Court of New
Jersey’s decision in Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994). In
that asbestos case, the court adopted an equitable allocation based upon a proration on
the basis of policy limits, multiplied by years of coverage. This method can be
demonstrated in our example:
2000
2001
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
N/A
CGL #1
$1,000,000/
$2,000,000
$1 M/ $7.5 M
13.33%
CGL #1
CGL #2
CGL #3
E.
CGL #2
$2,000,000
CSL
$2 M/ $7.5 M
26.66%
CGL #2
$2,000,000
CSL
$2 M/ $7.5 M
26.66%
CGL #2
$2,000,000
CSL
$2 M/ $7.5 M
26.66%
CGL #3
$500,000
CSL
$.5 M/ $7.5 M
6.66%
13.33%
80.00%
6.66%
Joint-and-Several Allocation
In contrast to the pro rata method of allocation, joint and several allocation allows
the insured to select the policy it wants to respond to the entire loss. That carrier must
then seek contribution from any other carriers. Joint and several allows the insured to
pick higher limits and no deductible policies. Carriers do not like this method because it
places the insured in control. This method was discussed and adopted in J. H. France
Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993) (asbestosis) and Keene
Corp. v. Insurance Co. of North America, 667 F.2d 1034 (D.C. Cir. 1981) and other
states as well.
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F.
Maximum Loss Allocation (or “Equal Shares Method”)
The maximum loss or equal shares method prorates the loss based upon the
maximum loss that each insurer standing alone would incur in the particular incident.
Each carrier bears the same portion of the loss up to the lowest limit, then the remaining
carriers bear the loss up to the next remaining lowest limit, and so on until the loss is
covered. Assuming the entire loss is $6 million, this method gives us the following
result in our example:
2000
2001
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
N/A
CGL #1
$1,000,000/
$2,000,000
$1,000,000
16.66%
CGL #1
CGL #2
CGL #3
CGL #2
$2,000,000
CSL
$1,500,000
25%
CGL #2
$2,000,000
CSL
$1,500,000
25%
CGL #2
$2,000,000
CSL
$1,500,000
25%
CGL #3
$500,000
CSL
$500,000
8.33%
$1,000,000 or 16.66%
$4,500,000 or 75.00%
$500,000 or 8.33%
G.
Decisions adopting this approach are American Cas. Of Reading, Pa. v.
PHICO Ins. Co., 702 A.2d 1050 (Pa. 1997)(medical malpractice), Western
Casualty and Surety Co. v. Universal Underwriters Ins. Co., 232 Kan. 606, 657
P.2d 576 (1983)(auto liability); Carriers Ins. Co. v. American Policyholders' Ins.
Co., 404 A.2d 216 (Me. 1979)(auto liability); Mission Ins. Co. v. United States
Fire Ins. Co., 401 Mass. 492, 517 N.E.2d 463 (1988)(auto liability); American
Nurses Association v. Passaic General Hospital, 98 N.J. 83, 484 A.2d 670
(1984)(malpractice); Mission Ins. Co. v. Allendale Mutual Ins. Co., 95 Wash.2d
464, 626 P.2d 505 (1981)(property loss).Allocation Among Primary and Excess
Carriers
In our example, at what point in the loss are the excess carriers required to
respond? Most excess policies contain this (or similar) language:
We will pay only the amount in excess of the sums actually payable under
the terms of the underlying insurance.
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“Underlying insurance” means the insurance afforded by the policies listed
in the Schedule of Underlying Insurance contained in the Declarations
including their renewals and replacements.
So, in our example must all of the primary limits be exhausted before the excess
carriers must respond (horizontal exhaustion)?
2000
2001
Horizontal Exhaustion
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
N/A
CGL #1
$1,000,000/
$2,000,000
$1,000,000
CGL #2
$2,000,000
CSL
$2,000,000
CGL #2
$2,000,000
CSL
$2,000,000
CGL #2
$2,000,000
CSL
$2,000,000
CGL #3
$500,000
CSL
$500,000
OR is it sufficient for one year’s primary limits to be exhausted to trigger that year’s
excess policy (vertical exhaustion)?
2000
2001
Vertical Exhaustion
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
N/A
CGL #1
$1,000,000/
$2,000,000
CGL #2
$2,000,000
CSL
CGL #2
$2,000,000
CSL
CGL #3
$500,000
CSL
CGL #2
$2,000,000
CSL
$2,000,000
Generally, jurisdictions that have adopted a pro rata form of allocation require
horizontal exhaustion because the two are consistent. See, e.g., Carter-Wallace, Inc. v.
Admiral Insurance Co., 712 A.2d 1116 (N.J. 1998) and Mayor and City Council of
Baltimore v. Utica Mutual Insurance Company, et. al., 802 A.2d 1070 (Md. 2002).
8
Likewise, juridisdictions that have adopted joint and several liability generally
require only vertical exhaustion for consistency. See, e.g., ABT Building Products v.
National Union Fire Ins. Co., 472 F.3d 99 (4th Cir. 2006).
Although no South Carolina case has dealt with allocation among excess
carriers, presumably it will follow the time on the risk method (but you never know for
sure).
H.
1.
Further Complications (It gets harder – not easier)
Uninsured Periods
Periods of time with no insurance can further complicate allocation issues if a pro
rata method is used. With joint and several allocations, the insured can avoid this
problem. Some courts have found it unfair for the insured to escape its share of the
loss when it did not buy insurance to cover the risk. See Forty-Eight Insulations, supra.
Other courts do not assess uninsured periods against the insured. J. H. France, supra.
The Fourth Circuit addressed this issue in Spartan Petroleum Co. v. Federated Mut. Ins.
Co., 162 F.3d 805 (4th Cir. 1998):
If on remand the district court concludes that the contamination did reach
the Roshto property during the period of the Federated policy, it will
become necessary to allocate the costs of the Roshto settlement. The
policy itself is silent on this issue. Although the parties have pointed us to
no South Carolina law on the subject, and we have not found any, we
follow those courts that have concluded that the injury-in-fact/continuous
trigger, such as the one adopted in Joe Harden, requires both pro rata
allocation and allocation to the insured for any periods of the progressive
damage during which it was self-insured. Id., at 812.
Eleven years later, there still appears to be no South Carolina case dealing
with this particular issue. Nonetheless, it is not unusual for carriers to insist on a
contribution from the insured to cover any uninsured periods in the trigger period.
9
In our example, the trigger period begins when the work was complete and
ends (theoretically) when the case settles at the mediation in June 2007. Here is
how the uninsured period affects a time on the risk allocation in our example:
2000
2001
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
0 months
CGL #1
$1,000,000/
$2,000,000
2 months
2/68=2.9%
CGL #2
$2,000,000
CSL
12 months
12/68=17.65%
CGL #2
$2,000,000
CSL
12 months
12/68=17.65%
CGL #2
$2,000,000
CSL
12 months
12/68=17.65%
CGL #3
$500,000
CSL
12 months
12/68=17.65%
Uninsured period = 1/01/2006 through 6/30/2007 = 18 months.
CGL #1
3%
CGL #2
53%
CGL #3
18%
The Insured 26%
Question:
Does this result mean that since the GC closed its doors on December 31,
2005 and its uninsured portion is, therefore, uncollectible that the plaintiff cannot collect
26% of its verdict or judgment?
Answer: Only the Supreme Court of South Carolina can answer this question.
However, since the carriers’ obligation is to indemnify its insured, its indemnity
obligation should be the measure of each carrier’s responsibility. With a defunct insured,
that portion of the loss may well be lost.
2.
Uninsured Claims
In our example, there will be claims for property damage that are covered by the
CGL policies and there will be claims for building code violations that will not be
covered. Settlement negotiations almost always trigger insurer’s claims of non-covered
elements of damage. Suppose the insurer denies coverage and refuses to defend
10
causing the insured to settle the claim and sue the insurer for indemnity.
In that
circumstance, some courts require the insured to establish those damages covered by
the CGL policy. Perdue Farms v. Travelers Cas. & Sur. Co., 448 F.3d 252 (4th Cir.
2006).
Other courts require another trial to determine which damages are covered if the
first trial resulted in a general verdict. See St. Paul Fire & Marine Ins. Co. v. Engelmann,
639 N.W.2d 192 (S.D. 2002) (where general verdict was given, part of the damages that
could be allocated to covered negligence theory had to be relitigated); Agency of
Natural Resources v. United States Fire Ins. Co., 796 A.2d 476 (Vt. 2001) (in pollution
claim, remanding for determination of what portion of damages applied to the insured's
property (not-covered) and what portion applied to third-party property (covered));
Bohrer v. Church Mut. Ins. Co., 965 P.2d 1258 (Colo. 1998) (remanding case to trial
court for determination of which portion of jury verdict applied to the policyholder's
counseling activities (covered) and which portion applied to the policyholder's sexual
misconduct toward his client (not covered)).
However, if a carrier denies coverage and does not defend, it can be held liable
for the entire general verdict. Peterborough Oil Co., Inc. v. Great Am. Ins. Co., 397 F.
Supp. 2d 230 (D. Mass. 2005) (insurer that failed to defend was liable for entire amount
of judgment where there was no way to allocate between covered and non-covered
claims).
Not infrequently, complaints filed against insureds allege causes of
action covered by the policy and causes of action which are not covered
by the policy. Although the duty to defend may be clear cut in such a case,
issues regarding the insurer's duty to indemnify the insured for any
judgment entered against it remain. In such a case, particularly where
common issues of fact are determinative of both the insured's liability to
11
the tortfeasor and the insurer's liability to pay any judgment, practicalities
dictate that intervention by the insurer would be appropriate. Because the
insured or its assign typically bears the burden to prove coverage for
damages, case law suggests that if the insurer knows that an allocation of
covered versus non-covered damages is required to preserve the
insured's claim for coverage and the insurer fails to inform its insured of
the need to make such an allocation, the insurer may be bound to pay a
general verdict that fails to make such an allocation. Duke v. Hoch, 468
F.2d 973, 979 (5th Cir. 1972) (Insurer's reservation of rights was
insufficient notice to insured that insured should protect its interests and
the ability to establish coverage by requesting an appropriate verdict form.
Under the circumstances, the insurer was required to prove that the
damages in the unallocated general verdict were not covered rather than
the insured proving coverage).
1Law and Prac. of Ins. Coverage Litig. § 12:22. Some courts permit these actions and
some do not. See id. at §§ 12:17 to § 12:22.
3.
Non-cumulation and Anti-stacking clauses
One of the insurance industry’s many responses to Montrose Chemical Corp. v.
Admiral Ins. Co., 10 Cal. 4th 645, 42 Cal. Rptr. 2d 324, 913 P.2d 878, 41 Env't. Rep.
Cas. (BNA) 1714 (1995), and other decisions adopting the continuous trigger rule is the
non-cumulation or anti-stacking clause. Its purpose is to prevent horizontal stacking of
limits in the event of a progressive loss. A typical clause reads:
Two or More Coverage Forms or Policies Issued By Us.
If this coverage form and any other coverage form or policy issued to you
by us or any company affiliated with us apply to the same “occurrence”,
the maximum limit of insurance under all the coverage forms or policies
shall not exceed the highest applicable limit of insurance under any one
coverage form or policy.
Another type of clause reduces the insurance available under a policy by the
amount of insurance available to the insured under a prior policy issued by that same
insurer. In either case, the result is the same – one limit of liability.
12
Some courts enforce these clauses, see, e.g. Endicott Johnson Corp. v. Liberty
Mut. Ins. Co., 928 F. Supp. 176 (N.D. N.Y. 1996); I-O Brockway Glass Container, Inc. v.
Liberty Mut. Ins. Co., 1994 WL 910935 (D.N.J. 1994); Air Products and Chemicals, Inc.
v. Hartford Acc. and Indem. Co., 1989 WL 73656 (E.D. Pa. 1989); Reliance Ins. Co. v.
Treasure Coast Travel Agency, Inc., 660 So. 2d 1136 (Fla. Dist. Ct. App. 4th Dist.
1995); State ex rel. Guste v. Aetna Cas. and Sur. Co., 429 So. 2d 106 (La. 1983)
(surety bond); Graphic Arts Mut. Ins. v. C.W. Warthen, 240 Va. 457, 397 S.E.2d 876
(1990), but others have held that limiting coverage to only one year's policy limit when
the insured has paid several years' premiums is contrary to the insured's reasonable
expectation of coverage. E.g., In re Endeco, Inc., 718 F.2d 879, Bankr. L. Rep. (CCH) P
69426 (8th Cir. 1983); Standard Acc Ins Co v. Collingdale State Bank, 85 F.2d 375, 376
(3d Cir. 1936); A.B.S. Clothing Collection, Inc. v. Home Ins. Co., 34 Cal. App. 4th 1470,
41 Cal. Rptr. 2d 166, 170–173, (1995); Penalosa Co-op. Exchange v. Farmland Mut.
Ins. Co., 14 Kan. App. 2d 321, 789 P.2d 1196, 1200 (1990); Hood ex rel. Bank of
Summerfield v. Simpson, 206 N.C. 748, 175 S.E. 193, 199 (1934).
Still other courts have found these clauses void for public policy reasons.
Spaulding Composites Co., Inc. v. Aetna Cas. and Sur. Co., 176 N.J. 25, 819 A.2d 410,
420–22 (2003); Outboard Marine Corp. v. Liberty Mut. Ins. Co., 283 Ill. App. 3d 630, 219
Ill. Dec. 62, 670 N.E.2d 740 (2d Dist. 1996).
Finally, some courts have found the clauses ambiguous and construed them
against the insurer. E.g., Federal Ins. Co. By and Through Associated Aviation
Underwriters v. Purex Industries, Inc., 972 F. Supp. 872 (D.N.J. 1997); A.B.S. Clothing
13
Collection, Inc. v. Home Ins. Co., 34 Cal. App. 4th 1470, 41 Cal. Rptr. 2d 166 (2d Dist.
1995).
The Supreme Court of South Carolina has not yet decided a case involving a
progressive loss with an anti-stacking clause in one or more of the CGL polices.
However, if it acts consistently with earlier decisions in the auto liability context, the
Court will uphold the clause.
In our example, if the settlement is $6 million and the last 2 years of CGL #2
policies and the CGL #3 policy each contains an enforceable anti-stacking clause, the
result would be:
2000
2001
2002
2003
2004
2005
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
EXCESS
CGL #1
$10,000,000
CGL #1
$10,000,000
EXCESS #1
$10,000,000
CGL #2
$10,000,000
CGL #2
$10,000,000
CGL #3
$3,000,000
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
PRIMARY
CGL #1
$1,000,000/
$2,000,000
CGL #1
$1,000,000/
$2,000,000
2 months
2/68=2.9%
CGL #2
$2,000,000
CSL
12 months
12/68=17.65%
CGL #2
$2,000,000
CSL
Uninsured
12/68=17.65%
CGL #2
$2,000,000
CSL
Uninsured
12/68=17.65%
CGL #3
$500,000
CSL
12 months
12/68=17.65%
Uninsured period = 1/01/2003 through 12/31/2004 and 1/01/2006 through
6/30/2007 = 42 months.
CGL #1
CGL #2
CGL #3
The Insured
$ 180,000 or 3%
$1,050,000 or 17.50%
$1,050,000 or 17.50%
$3,720,000 or 62%
Question:
Why aren’t the excess policies for 2003 and 2004 triggered?
Answer:
These excess policies will not be triggered until all of the underlying
available primary coverage has been exhausted. Because they typically tie their
coverage to what is covered by the underlying primary coverage, the excess policy may
bootstrap itself into a primary policy exclusion condition. Here, because we allocate pro
14
rata based upon time on the risk and we have uninsured periods, the primary coverages
for 2001, 2002 and 2005 will not be exhausted.
4.
The Montrose Provision
Since 2001, the standard ISO policy form has contained the following language:
b.
This insurance applies to “bodily injury” and “property
damage” only if:….
(3) Prior to the policy period, no insured listed under Paragraph 1.
of Section II — Who Is An Insured and no “employee” authorized
by you to give or receive notice of an “occurrence” or claim, knew
that the “bodily injury” or “property damage” had occurred, in
whole or in part. If such a listed insured or authorized “employee”
knew, prior to the policy period, that the “bodily injury” or “property
damage” occurred, then any continuation, change or resumption of
such “bodily injury” or “property damage” during or after the policy
period will be deemed to have been known prior to the policy
period.
c.
“Bodily injury” or “property damage” which occurs during the policy
period and was not, prior to the policy period, known to have
occurred by any insured listed under Paragraph 1. of Section II —
Who Is An Insured or any “employee” authorized by you to give or
receive notice of an “occurrence” or claim, includes any
continuation, change or resumption of that “bodily injury” or
“property damage” after the end of the policy period.d. “Bodily
injury” or “property damage” will be deemed to have been known to
have occurred at the earliest time when any insured listed under
Paragraph 1. of Section II — Who Is An Insured or any “employee”
authorized by you to give or receive notice of an “occurrence” or
claim:(1) Reports all, or any part, of the “bodily injury” or “property
damage” to us or any other insurer;
(2) Receives a written or verbal demand or claim for damages
because of the “bodily injury” or “property damage”; or
(3) Becomes aware by any other means that “bodily injury” or
“property damage” has occurred or has begun to occur.
In what appears to be the only case that has considered this provision, the
courtenforced it under the principles of Known Loss Rule and upheld the denial of
15
coverage. Central Mut. Ins. Co. v. Useong Intern., Ltd., 394 F. Supp. 2d 1043, 1053
(N.D. Ill. 2005).
5.
The Deemer Clause
Deemer clauses attempt to limit the effect of this expansive coverage by deeming
all such continuing property damage to have occurred in a single policy period. There
are no standardized forms for this clause but one such endorsement provides:
All property damage or bodily injury arising from, caused by or contributed
to by, or in consequence of an occurrence shall be deemed to take place
at the time of the first such damage, even though the nature and extent of
such damage or injury may change and even though the damage may be
continuous, progressive, cumulative, changing or evolving, and even
though the occurrence causing such bodily injury or property damage may
be continuous or repeated exposure to substantially the same general
harm.
At least one court addressing this clause has enforced it.
USF Ins. Co. v.
Clarendon America Ins. Co., 452 F. Supp. 2d 972 (C.D. Cal. 2006).
In the other
published case, involving a framing contractor, the court noted that the deemer clause
did not provide coverage for property damage arising prior to the inception of, but
continuing into, the Policy period. Had the facts supported it, apparently the Court would
have enforced it. Gary G. Day Constr. Co., Inc. v. Clarendon America Ins. Co., 459 F.
Supp. 2d 1039 (D. Nev. 2006).
6.
Known Prior Claims Exclusion
There is no standard Known Prior Claims Exclusion promulgated by ISO.
However, several different carriers are attaching variations of it to CGL policies in
manuscripted endorsements. One such variation provides:
The insurance company will not cover claims or suits made or brought
against the insured that the insured knew about, or that the insured could
have foreseen or discovered in a reasonable way, prior to the effective
16
date of this agreement.
This exclusion was reviewed in several cases with varying results. See Essex Ins. Co.
v. H & H Land Development Corp., 525 F. Supp. 2d 1344, 1346–47 (M.D. Ga.
2007)(material facts prevented application of clause) and St. Paul Fire and Marine Ins.
Co. v. MetPath, Inc., 38 F. Supp. 2d 1087, 1094–95 (D. Minn. 1998)(clause
ambiguous); Cf. HR Acquisition I Corp. v. Twin City Fire Ins. Co., 547 F.3d 1309 (11th
Cir. 2008) (Ala. law) (no coverage because of Prior Litigation Exclusion).
7.
The Continuous or Progressive Injury and Damage Exclusion
These exclusions also take different forms. One form is:
This insurance does not apply to any damages because of or related to
“bodily injury,” “property damage,” or “personal” and “advertising injury:”
(1) which first existed, or alleged to have first existed, prior to the
inception date of this policy; or
(2) which are, or are alleged to be, in the process of taking place
prior to the inception date of this policy, even if the actual or alleged
“bodily injury,” “property damage,” or “personal and advertising
injury” continues during this policy period; or
(3) which were caused, or are alleged to have been caused, by the
same condition which resulted in “bodily injury,” “property damage,”
or “personal and advertising injury” which first existed prior to the
inception date of this policy.
We shall have no duty to defend any insured against any loss, claim,
“suit,” or other proceeding alleging damages arising out of or related to
“bodily injury,” “property damage,” or “personal and advertising injury” to
which this endorsement applies.
This exclusion is very similar to the Montrose Provision in the body of ISO form
policies, except that it excludes all previously occurring bodily injury or property damage
as opposed to precluding coverage for those instances of injury and damage of which
the insured should have been aware before the inception of the policy.
Like the
Montrose Provision, this exclusion is one of the various intended means of limiting the
17
effect of the Continuous Trigger.
In Williams Consolidated I, Ltd./BSI Holdings, Inc. v. TIG Ins. Co., 230 S.W.3d
895, 902–03 (Tex. App. 2007), the insured was a subcontractor who installed a
defective vapor barrier. The policy contained this exclusion:
No insurance coverage is provided under this policy to defend or
indemnify any insured for “bodily injury,” “property damage,” “personal
injury,” or “advertising injury” which has first occurred or begun prior to the
effective date of this policy, regardless of whether repeated or continued
exposure to conditions which were a cause of such for [sic] “bodily injury,”
“property damage,” “personal injury” or “advertising injury” occurs during
the period of this policy and cause [sic] additional, progressive or further
“bodily injury,” “property damage,” “personal injury,” or “advertising injury”
all of which is excluded from coverage.
This exclusion shall apply whether or not the Insured's legal obligation to
pay damages has been established as of the inception date of this policy.
The court found:
[T]here is no coverage for alleged property damage or bodily injury that
first occurred or began before the effective date of the CGL Policy.
However, if the alleged property damage or bodily injury did not occur or
begin before the effective date but the alleged process leading to the
ultimate injury or damage began before that date, coverage is not
excluded for this reason.
Id. at 902.
8.
The Known Loss Rule
“As most often stated, the known loss doctrine in common law insurance
jurisprudence excludes coverage of a loss to the insured of which the insured had
actual knowledge prior to the policy's effective date or knew was substantially certain to
occur.” Stonehenge Engineering Corporation v. Employer’s Insurance of Wausau, 201
F.3d 296 (4th Cir. 2000). With no state case law on the doctrine, Stonehenge remains
18
the sole predictor of what our state appellate courts will do. To determine whether the
known loss rule applied, the Fourth Circuit observed:
Therefore, the question before us is whether the evidence, when viewed
in the light most favorable to Wausau, establishes that Stonehenge (1)
actually knew that it was legally liable for the property damage claimed by
the Owners Association at the time one or more of the Three Wausau
Policies took effect or (2) knew that such liability was substantially certain
to occur.
Id., at 302.The Fourth Circuit panel found that the insured in the case did not have that
certainty of knowledge required to apply the Known Loss Rule.
III.
Application to Construction Defect Claims in South Carolina
From an application of these principles and the few South Carolina cases on the
subject, we can conclude:
A.
South Carolina applies the injury in fact/continuous trigger (or modified
continuous trigger) theory in progressive property damage cases. See Joe
Harden Builders; Auto-Owners Insurance Co., Inc. v. Zurich; Century
Indemnity Company v. Golden Hills Builders, 348 S.C. 559, 561 S.E.2d
355 (2002).
B.
The trigger period in South Carolina starts when the damage first occurs
and ends when the damage ceases in fact (i.e., is repaired) or in law
(settlement or verdict). See Joe Harden Builders; Sentinel Insurance
Company, Ltd.; Auto-Owners Insurance Co., Inc. v. Zurich.
C.
Progressive property damage that can be specifically attributed to a
certain policy period is covered under that policy. Sentinel Insurance
Company, Ltd.
D.
Progressive property damage that cannot be specifically attributed to a
certain policy period is covered under the policy in effect at the time the
damage first occurred and triggers all subsequent policies while the
damage continues. Joe Harden Builders.
E.
The policy in effect at the time the damage first occurs (the injury in fact)
covers damage during that policy period and any continuing damage.
Century Indemnity Company, supra.
19
F.
Allocation among primary carriers in South Carolina will be based upon
their pro rated time on the risk. Sentinel Insurance Company, Ltd., supra.;
Joe Harden Builders; Auto-Owners Insurance Co., Inc. v. Zurich, supra.
G.
South Carolina will likely follow a horizontal exhaustion scheme since it
has adopted the injury in fact/continuous trigger theory. See Mayor and
City Council of Baltimore v. Utica Mutual Insurance Company, et. al., 802
A.2d 1070 (Md. 2002).
H.
South Carolina will likely enforce anti-stacking clauses. Ruppe v. AutoOwners Insurance Company, 496 S.E.2d 631 (SC 1998)( anti-stacking
clause that prohibited intra-policy stacking of liability coverage was valid);
Jackson v. State Farm Mut. Auto Ins. Co., 342 S.E.2d 603 (S.C. 1986)
(stacking may be prohibited by contract if not statutorily required
coverage).
I
South Carolina will likely enforce the Montrose clause and exclusions
designed to prevent multiple triggers of coverage. Willis v. Fidelity & Cas.
Co., 169 S.E.2d 282 (S.C. 1969) (parties are free to choose their terms
regarding voluntary coverage not governed by statute)
Nagging Questions:
1.
How do you reconcile a time on the risk allocation with Century Indemnity
Company? In Century Indemnity Company, the Supreme Court said that “[b]ecause
the policy at issue here contains substantially the same language as the policy at issue
in Joe Harden, the modified continuous trigger theory applies in the instant case. As a
result, the insurance policy provides coverage for property damage that occurred during
the policy period and for any continuing damage.” Century Indemnity Company, supra,
at 358. The application of time on the risk yields responsibility for a pro rata percentage
of the loss, not the entire loss. Isn’t making each carrier responsible for the entire loss
equivalent to “joint and several” allocation? If that is so, might we really be a “joint and
several” state?
2.
Will South Carolina impose uninsured allocation periods on the insured? In
Auto-Owners Insurance Co., Inc. v. Zurich, the trigger period began with the completion
of the home on July 26, 1996 and ended with the arbitrator’s award on April 29, 2002, a
total period of 69 months. (Somehow the parties came up with 75 months) Zurich’s
policy was in effect for 3 of those months (July 26, 1996 through October 27, 1996).
Auto-Owner’s policy was in effect for 48 of those months (October 27, 1996 through
October 27, 2000). Whether the total trigger period was 69 or 75 months, it is clear from
the opinion that these two carriers did not have coverage for the entire trigger period.
Approximately 18 months of the trigger period (October 27, 2000 to April 29, 2002) are
not allocated under a time on the risk allocation. Rather, the Court first determined that
Zurich was responsible for 3/75 of the loss and that Auto-Owners was responsible for
the rest. There was only a partial time on the risk analysis. If the Court was going to
20
follow the Spartan Petroleum case which it cited and which is binding on the Court, why
did it not allocate those 18 months to the insured?
3.
Is property damage caused by a subcontractor’s faulty workmanship
covered under the CGL or not? In Century Indemnity Company (a 2002 residential
EIFS case), the Supreme Court held that “Based on the law of this State, coverage for
the repair and/or replacement of the substrate and substructure of the home is excluded
by the faulty workmanship provision.” Supra, at 359. The Court called the “your work”
exclusion the “faulty workmanship” exclusion.
However, in Auto-Owners Ins. Co. v. Newman (a 2009 residential EIFS case),
the Supreme Court held – “Accordingly, we hold that the subcontractor's negligence
resulted in an “occurrence” falling within the CGL policy's initial grant of coverage for the
resulting “property damage” to the home's framing and exterior sheathing. .. The facts of
this case establish exactly the type of property damage the CGL policy was intended to
cover after the 1986 amendment to the “your work” exclusion.”
In each case, the alleged faulty workmanship was performed by a subcontractor.
In each case, the CGL policy reflected the 1986 amendment to the “your work”
exclusion. The only mention of Century Indemnity Company in the Newman case was
by Justice Pleicones in his dissent.
4.
What kind of allocation method was the Fourth Circuit thinking about in
Stonehenge Engineering Corporation? I have no idea and I was there.
Stonehenge v. Wausau
Allocation Gone Awry
4/1/85 –
7/1/86
Unknown
16 months
10.6%
7/1/86 –
11/1/87
Maryland Cas.
16 months
11.3%
11/1/87 –
11/1/91
Aetna
48 months
33.9%
11/1/91 –
11/1/92
Home Ins. Co.
12 months
8.5%
11/1/92 –
11/1/95
Wausau
36 months
25.4%
11/1/95 –
3/17/97
Uninsured
16.5 months
10.3%
Total Trigger Period = 144.5 months
Total Coverage Period = 112 months
Wausau’s Share = Pro rata time on risk (trigger period) x amount of judgment
Wausau’s Share = 25.4% of $750,000 = $190,500 (District Court; Judge Shedd)
4th Circuit:
$ Basis of Allocation:
Time Basis of Allocation:
$475,000, amount paid by other carriers ???
Trigger Period (144.5 months)
21
Dissent (J. Traxler):
$ Basis of Allocation?:
$750,000 confession of judgment
$625,000 settlement demand
$475,000 paid by other carriers
Time Basis of Allocation:
Trigger Period (144.5 months) or
Carrier
Maryland Casualty
Aetna
Home Ins. Co.
Wausau
Uninsured
Carrier
Maryland Casualty
Aetna
Home Ins. Co.
Wausau
Uninsured
Carrier
Maryland Casualty
Aetna
Home Ins. Co.
Wausau
Total Paid
Trigger Period
144.5 months
11.3%
33.9%
8.5%
25.4%
20.9%
Allocation of
$750,000
$ 84,750
$254,250
$ 75,000
$190,500
$156,750
Coverage Period
112 months
14.3%
42.9%
10.7%
32.14%
Allocation of
$750,000
$ 107,250
$ 321,750
$ 80,250
$241,050
Amount
Paid
$100,000
$300,000
$ 75,000
$120,650
Trigger Period
144.5 months
11.3%
33.9%
8.5%
25.4%
20.9%
Allocation of
$625,000
$ 70,625
$ 211,875
$ 53,125
$ 158,750
$ 130,625
Coverage Period
112 months
14.3%
42.9%
10.7%
32.14%
Allocation of
$625,000
$ 89,375
$ 268,125
$ 66,875
$ 200,875
Amount
Paid
$100,000
$300,000
$ 75,000
$120,650
Amount
Paid
$100,000
$300,000
$ 75,000
$120,650
$595,650
% Allocation
16.78 %
50.37 %
12.6 %
20.25 %
Cases to know:
Sentinel Insurance Company, Ltd. v. First Insurance Company of Hawai’i, Ltd., 875 P.
2d 894, 915 (Hawai’i 1994)
Joe Harden Builders, Inc. v. Aetna Cas. and Sur. Co., 486 S.E.2d 89, 91 (SC 1997)
Spartan Petroleum Co. v. Federated Mut. Ins. Co., 162 F.3d 805 (4th Cir. 1998)
Stonehenge Engineering Corporation v. Employer’s Insurance of Wausau, 201 F.3d 296
(4th Cir. 2000)
Century Indemnity Company v. Golden Hills Builders, 348 S.C. 559, 561 S.E.2d 355
(2002)
22
Auto-Owners Insurance Co., Inc. v. Zurich, US, 377 F.Supp.2d 496 (DCSC 2004)
L-J, Inc. v. Bituminous Fire and Marine Insurance Co., 366 S.C. 117, 621 S.E.2d 33
(2005)
Auto-Owners Ins. Co. v. Newman, 385 S.C. 187, 2009 WL 2851211 (2009)
23