Coverage Analysis
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TRIGGER OF COVERAGE

Like most states, California looks to the date that the time of an "occurrence is the time the injury or damage actually resulted, not the time the accident occurred or the wrongful act was committed.  Remmer v. Glens Falls Ind. Co., 140 Cal. App.2d 84, 88 (1956).

Ending years of speculation, the California Supreme Court ruled on July 3, 1995 that a "continuous trigger" must be applied for liability claims involving a continuous injury.  In Montrose Chemical Corporation v. Admiral Ins. Co., 10 Cal. 4th 645, 913 P.2d 878 (1995), the court affirmed the Court of Appeals' determination that all policies in effect from the date of first dumping through the date that the insured's liabilities are adjudicated have a duty to defend.  The court rejected the contention of certain insurers that a "manifestation" trigger was appropriate.  The court also rejected the application of a "known loss" or "loss in progress" defense, holding that there was still an insurable "occurrence" for purposes of Section 22 of the California Insurance Code, even though the insured had already received demand letters from the U.S. EPA seeking to impose liability, until such time as the fact and amount of the insured's liability became final.  In adopting a "continuous trigger", the court made clear that successive years of coverage may be triggered by the continuation of existing sources of pollution and that new discharges of pollutants are not required in each policy year in order to trigger coverage.  The court took note of the fact that either "continuous or progressively deteriorating" conditions during each policy year were sufficient to trigger the policies' obligations.  

The Supreme Court distinguished its earlier ruling in Prudential-LMI Commercial Ins. v. Superior Court, 51 Cal.3d 674, 274 Cal. Rptr. 387, 798 P.2d 1230 (1990), in which it adopted a "manifestation" trigger for first party  property claims, limiting coverage to the policy years in which "appreciable" damages occurs which was known or reasonably discoverable by the insured.  In keeping with the Court of Appeals' earlier holding in Home Ins. Co. v. Landmark Ins. Co., 253 Cal. Rptr. 277 (Cal. App. 4th Dist. 1988), the Supreme Court released all insurers coming on the risk after "manifestation." 

The Court of Appeal has since applied Montrose II to a neighbor's suit for encroachment on his property even where the encroachment pre-dated the policy.  The First District ruled in Borg v. Transamerica Ins. Co., A068633 (Cal. App. July 16, 1996) that all that was required was that property damage exist or continue during the policy; it did not have to be worse or different in kind from the injuries that had already occurred.

In the wake of Montrose, several insurers have adopted “continuing damage” endorsements that preclude coverage for losses that commence prior to the policy period.  Such an endorsement was upheld by a San Diego trial court in Golden Eagle Insurance Company v. AIG Claim Services, San Diego, No. 728213 (Cal. Super. February 14, 2000).

Although damage to a portion of a housing development constructed by the insured had manifested prior to the insurer's policy period, subsequent damage to different parts of the housing development did not relate back to this original "occurrence" and triggered coverage in later years when the property damage actually occurred.  INA v. National American Ins. Co. of California, 37 Cal. App. 4th 195, 43 Cal. Rptr.2d 518 (4th Dist. 1995).  

Prior to Montrose, a number of California courts had adopted "manifestation" triggers for construction defect cases. See Chemstar, Inc. v. Liberty Mut. Ins. Co., 797 F.Supp. 1541 (C.D. Cal. 1992), aff'd, 41 F.3d 429 (9th Cir. 1994)(unsightly plaster blisters); Houston General Ins. Co. v. AG Production Co., 840 F.Supp. 138 (E.D. Cal. 1993); Ohio Cas. Ins. Co. v. Hartford Acc. & Ind. Co., 38 Cal. App. 4th 1142, 40 Cal Rptr.2d 27 (1995)(water damage to building).  See also Pines of La Jolla Homeowners Association, Inc., 5 Cal. App. 4th 714, 7 Cal. Rptr.2d 53 (4th Dist. 1992)(defective construction of a building). The viability of such rulings is now in doubt.  Indeed, on October 5, 1995, the California Supreme Court ordered that Ohio Casualty be depublished in view of its ruling in Montrose II.  More recently, the Second District substituted a "continuous trigger" for its 1993 "manifestation" ruling in County Sanitation District v. Harbor Ins. Co., 17 Cal. App. 4th, 22 Cal. Rptr.2d 90 (2d Dist. 1993), on rehearing  B05008 (Cal. App. January 27, 1996)(landslide). 

Notwithstanding Montrose II, the Ninth Circuit ruled in Golden Eagle Ins. Co. v. The Travelers Co., 95 F.3d 807 (9th Cir. 1996) that a "manifestation insurer" had no right of contribution against the carrier that had preceded it on the risk where the underlying construction defect case failed to allege that property damage had been discovered during the earlier policy period.  The court held that property damage "manifests itself" or becomes reasonably apparent to the property owners, citing to its 1994 ruling in Chemstar.     

On October 19, 1995, the Supreme Court remanded several cases that had been accepted for appeal while it was considering Montrose, including Armstrong and Palos Verdes.  In Armstrong the First District had adopted a "continuous trigger" for asbestos bodily injury claims from the date of first exposure to insured's product through date of death or claim, whichever is first.  Following remand, the First District issued a further ruling on April 30, 1996.  In Armstrong World Industries, Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App.4th 1, 52 Cal. Rptr.2d 690 (1st Dist. 1996) the court again ruled that asbestos bodily injury claims would be subject to a "continuous trigger" from date of first exposure through death.  However, the court ruled that although the installation of asbestos products was a trigger for "property damage" claims, a continuous trigger might not be appropriate for later years because the releases of asbestos fibers inside buildings were sporadic or episodic.  Accordingly, the court affirmed Judge Brown's "actual injury" approach, permitting coverage in any later year where fibers were released or reentrained.

Consistent with Armstrong, California courts have generally ruled that the incorporation of defective materials that causes damage to third-party property constitutes “property damage” under California law.  Shade Foods, Inc. v. Innovative Products Sales & Marketing, 78 Cal. App.4th 847, 865 (2000).  In the absence of potential injury, however, the introduction of a defective product into another product does not necessarily result in property damage.  Seagate Technology, Inc. v. St. Paul Fire & Marine Insurance Company, 11 F. Supp.2d 1150, 1154 (1998), and Gardner Construction Company v. Assurance Company of America, 2000 U.S. Dist. LEXIS 16364 (N.D. Cal. November 6, 2000).

In contrast to Seagate Technology, a federal district court has ruled that breach of contract claims based on the plaintiff’s inability to use optical scanners because of the insured’s defectively constructed semi-conductor units were a claim for “property damage” resulting from an “occurrence.”  Judge Ware ruled in Anthem Electronics v. Pacific Employers Ins. Co., 2001 U.S. Dist. LEXIS 332 (N.D. Cal. January 10, 2001) that even though the insured’s products had not physically damaged the scanners, coverage was triggered for “loss of use” of the property.

Efforts to extend Armstrong to other claims involving building defects were rejected by the Ninth Circuit in an unpublished ruling.  In H/C Co. v. Zurich-American Ins. Co., 108 F.3d 337 (9th Cir. 1997)(unpublished), the court held that a law suit against a policyholder for alleged structural and non-structural building fell with an exclusion for claims within the "completed operations" hazard.  The court refused to find that property damage had occurred contemporaneously with the building's construction, rejecting the insured's effort to liken the design defect to a "potentially dangerous product" such as asbestos.     Likewise, the Ninth Circuit has ruled that a subcontractor’s use of insufficiently large nails to install drywall, creating a defective condition within the house, did not amount to “property damage,” rejecting the Seventh Circuit’s Eljer “incorporation” theory of coverage.  New Hampshire Insurance Company v. Vieira, 930 F.2d 696, 700 (9th Cir. 1991).

A U.S. District Court ruled in Seagate Technology, Inc.  v.  St.  Paul Fire & Marine Ins.  Co., 11 F.Supp.2d 1150 (N.D. Cal. 1998) that allegations that the insured had supplied defective disk drives that were incorporated into the plaintiff’s products were not covered as there was no allegation of “physical injury.”  The district court rejected the insured’s contention that coverage was mandated by the Court of Appeals ruling in Armstrong.  Judge Johnson declared that the circumstances were different from those at issue in Armstrong as, unlike claims involving an inherently dangerous product such as asbestos, the plaintiff’s suit was merely based upon allegations of the defective design and manufacture of a product.  The risk of replacing or repairing a defective product is a commercial risk which is not passed on to a liability insurer.  Accordingly, notwithstanding Armstrong, the court declared that the physical incorporation of a defective product into another does not trigger coverage or result in property damage until it results in physical harm to the whole. 

Prior to issuing its ruling in Montrose II, the Supreme Court had also earlier taken jurisdiction over Zurich Ins. Co. v. Transamerica Ins. Co., 24 Cal. Rptr.2d 913 (Cal. App. 1994), review granted, 889 P.2d 539 (Cal. 1995), in which the Fourth District held that a trial court had erred in applying a "manifestation" trigger and the loss in progress doctrine to a construction damage case.   The court ruled that "manifestation" had no application to liability claims.  Further, the court ruled that a loss might still be contingent, even if certain aspects of it had manifested, until such time as the actual damage became known to the insured.  Accordingly, in a case where the insured's negligent grading of a 116 unit condominium development resulted in subsidence problems to certain units and suits against the insured as early as 1976, the Court of Appeal nonetheless held that the insured was entitled to coverage under successive policies for further claims and manifestations of property damage in subsequent years. 

The Supreme Court also vacated the Second District's ruling in Stonewall Ins. Co. v. City of Palos Verdes, 6 Cal. App.4th 802, 7 Cal. App.4th 309 (1992), appeal dismissed, No. S027391 (Cal. October 15, 1995) where the Court of Appeal had ruled that if multiple policies are triggered, an insured may designate the particular policy that it wishes to apply to the loss as in Keene.  In 1996, the Second District reversed that aspect of its ruling, holding that a "joint and several" analysis was no longer permissible in view of Montrose II.

The Supreme Court also ruled in Montrose II that the  "loss in progress" rule enunciated in Prudential-LMI does not apply to third party liability claims, an issue on which California courts had been in disagreement.  In Globe Indemnity Co. v. Topa Ins. Co., 983 F.2d 1076 (9th Cir. 1993)(Table), the Circuit Court ruled that the fact that a construction loss had already resulted in discernible property damage in the first policy period would not bar the insured's claim for that portion of the loss that had continued during the second policy year.  However, the Circuit Court nonetheless barred the first insurer's contribution claim on the basis that the insurance industry understood that progressive property damage claims would only be covered in initial year.  However, the California Court of Appeal subsequently ruled in Golden Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal. App.4th 1372, 25 Cal. Rptr.2d 242 (1993)) that a insurer could not avoid coverage for liability claims filed by mobile home tenants, even though their complaints first surfaced before the subject policy was issued, where the problems persisted during the policy period.  The Second District ruled that the later insurer was obligated to pay a pro rata share of the resulting settlement in proportion to the total policy limits at issue.

In the wake of Montrose, many insurers have adopted “continuing damage” endorsements that preclude coverage for losses that commence prior to the policy period.  Such an endorsement was upheld by a San Diego trial court in Golden Eagle Insurance Company v. AIG Claim Services, San Diego, No. 728213 (Cal. Super. February 14, 2000).

In a series of recent cases, the Court of Appeal has ruled that an insured may not claim coverage for "pre-acquisition liabilities" under policies issued to the insured prior to the date of acquisition.  FMC Corp. v. Plaistead & Companies, 72 Cal. Rptr.2d 467, 480 (1998), review denied, No. S045520 (Cal. May 27, 1998);  Armstrong World Industries, Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App.4th 1, 52 Cal. Rptr.2d 690 (1st Dist. 1996)(asbestos) and Cooper Companies v. Transcontinental Co., 31 Cal. App.4th 1094, 37 Cal. Rptr.2d 508 (1995)(breast implants)("hereafter acquired" language only extends to entities acquired during policy period).  Whether the successor entity may claim coverage under the earlier entity's line of policies may depend on whether the insured merged with the tortfeasor entity or only purchased its assets.  See Quemetco, Inc. v. Pacific Automobile Ins. Co., 24 Cal. App.4th 494, 29 Cal. Rptr.2d 627 (1994), review denied (Cal. 1994) and General Acc. Ins. Co. of America v. Superior Court, 55 Cal. App.4th 1444, 64 Cal. Rptr.2d 781 (1997)(an insured's coverage rights are not transferred by "operation of law" to an entity that subsequently purchases its assets).   In General Accident, the First District ruled that the fact that a claimant has been adjudged to be a successor in liability for the asbestos liabilities of its corporate predecessor does not entitle it by operation of law to obtain coverage under liability insurance policies issued to the corporate predecessor.

On the other hand, in In Henkel Corporation v. Lloyds of London, No. B134742 (Cal. App. April 30, 2001), the Court of Appeal ruled that a successor corporation was entitled to obtain coverage for liabilities arising out of chemical products that its predecessor had sold to Lockhead that had resulted in claims involving alleged exposures to toxic chemical products by Lockhead employees.  Although Henkel succeeded to the liabilities and assets of its predecessor, the agreement did not expressly assign rights under the predecessor’s insurance policies.  Nevertheless, the California Court of Appeals ruled on April 30, 2001 that, under such circumstances, the insurance rights should be transferred “by operation of law” as the insurer would otherwise obtain an unfair windfall. 

California courts have also reached conflicting conclusions on the issue of “after-acquired liabilities.”  In several cases, the Court of Appeals has refused to permit coverage for such claims.  In the first such case, the court ruled 2-1 in A.C. Label v. Superior Court, 48 Cal. App.4th 1188, 56 Cal. Rptr.2d 207 (1996), review denied (Cal. October 16, 1996) that a liability policy that was in effect before the insured purchased the polluted property in question could not be triggered, even though the pollution may have occurred during the period that the policy was in effect.  See also Safety-Kleen Enviro Systems Co.  v.  Continental Casualty Corp., San Francisco No.  952681 (Cal.  Super.  October 15, 1998)(insured could not obtain coverage under policies issued prior to its involvement at waste sites). 

More recently, the Ninth Circuit has taken a different view, ruling that the state appellate court ignored settled principles of contract interpretaton by inferring the requirement of a factual nexus between the insured and the damaged property.  K.F. Dairies, Inc. v.Fireman’s Fund Ins. Co., 224 F.3d 922 (9th Cir. 2000).  Notwithstanding K.F. Dairies, the First Appellate District has declared in Tosco Corp. v. General Ins. Co. of America, No. A022765 (Cal. App. December 28, 2000) that a polluter is not entitled to liability coverage for claims involving sites with respect to liabilities arising from property that the insured did not own during the policy period.  

In Armstrong, the Court of Appeal also ruled on April 30, 1996 that coverage was not triggered by bodily injuries resulting from a plaintiff's exposure to other insured's asbestos products. As with the foregoing analysis, the court ruled that the injury during the policy period must have been "because of" the insured's conduct in order to trigger coverage.  Accordingly, only conduct during or prior to the subject policy may result in coverage.  If an insurer is able to show that all of the claimed injuries resulted from conduct of the insured after its policy expired, it may overcome the presumption that the "continuous trigger" would otherwise require its participation.

A liability insurer had no duty to afford coverage for bodily injury claims asserted by homeowners who moved onto polluted property after the insurer’s policy expired.  Alcan Aluminum Corp. v. Prudential Property & Cas. Co., 1999 U.S. App. LEXIS 6012 (9th Cir. March 31, 1999)(unpublished).

California courts have distinguished between the event that determines the number of "occurrences" and the "occurrence" of bodily injury or property damage.  In Whittaker Corp. v. Allianz Underwriters, 11 Cal. App. 4th 1236, 14 Cal. Rptr.2d 659 (2d Dist. 1992), the California Court of Appeal found that although the insured's decision to change its product formulation was the "cause" of the resulting harm for the purpose of determining the number of available policy limits, it was not the "trigger of coverage" since injury did not result until after the expiration of the defendants' policies. 

The California Court of Appeal has ruled that property owners had no basis for claiming first party coverage for the reduced sales price of their property because of its location in a landslide area since there was no "manifestation" of physical damage to the insured property until after they sold it, thereby extinguishing any insurable interest.  Hoffman v. State Farm Fire & Cas. Co., 16 Cal. App.4th 184, 19 Cal. Rptr.2d 809 (1993).

Where policies contain non-cumulation or “prior insurance” clauses, a state trial court has declared that “where there is a continuing injury which triggers policies in more than one policy period...the policyholder is limited to the limits of whichever policy triggered he happens to choose.”  Tosco Corp.  v.  Hartford Accident & Indemnity Co., San Francisco No.  952681 (Cal.  Super.  March 1, 1999).

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