By Eric J. Schindler

Setting the metes and bounds for coverage under stan-dard form commercial general liability (CGL) policies has been a cat-and-mouse game over the years — insurers and their lawyers attempting to narrow coverage and courts frustrating those efforts. For example, in 1995

the California Supreme Court adopted a “continuous injury trigger” based on the standard “occurrence” policy forms in effect at that time for claims involving continuous or progressively — deteriorat-ing property damage in coverage disputes involving environmental contamination. Montrose Chem. Corp. of Calif. v. Admiral Ins. Co., 10 Cal. 4th 645, 689 (1995).

The standard CGL policy language in 1995 provided potential cover-age as long as some property damage took place within the policy period, regardless of when the property damage began. Subsequent cases applied the continuous injury trigger in construction defect cases. See Insurance Co. of No. America v. National American Ins. Co. of Calif., 37 Cal. App. 4th 195, 204 (1995) (successive liability insurance poli-cies triggered where defective construction caused separate damage during each policy period).

But under California law, insurers are not always required to use the standard policy form. They are often free to modify the standard language or adopt their own non-standard policy. No sooner had the ink dried on Montrose, then insurers set about drafting anti-Montrose limita-tions and exclusions. See David L. Leitner, Reagan W. Simpson, and John M. Bjorkman, 4 “Law and Practice of Insurance Coverage Litigation,” Section 46:21 (2005)

In Pennsylvania General Insurance Co. v. American Safety Indemnity Co., 2010 DJDAR 10053 (June 3), a construction defect coverage case, the California 4th Appellate District rejected American Safety Indemnity Co.’s (ASIC) attempts to impose an anti-Montrose “double trigger” for coverage under its 1999 CGL policy form. The court concluded that ASIC’s anti-Montrose endorsements did not clearly and unambiguously exclude potential property damage occurring during its policy period from coverage, and reversed summary judgment in favor of ASIC.

Whitacre was a framing subcontractor on a construction project in the summer of 1999. Pennsylvania General insured Whitacre under a CGL policy from October 1998 through December 2001. ASIC insured Whitacre under a CGL policy from period December 2001 through De-cember 2002. National Union Fire Insurance Company of Pittsburgh, Pa. (National) insured Whitacre under a CGL policy from December 2002 through October 2005.

Whitacre substantially completed its work by June 2001, although it performed some punch list work after June 2001. The fi nal inspection notice for the entire project was issued in March 2002.

In a series of consolidated construction defect lawsuits commenced in April 2002, the owners alleged, among other things, that Whitacre’s work was defi cient and had caused damage to the project. Whitacre tendered its defense to Pennsylvania General, ASIC and National Union. Pennsylvania General defended under a reservation of rights. ASIC and National Union denied coverage. Pennsylvania General paid about $ 780,000 in defense costs. Pennsylvania General and an excess insurer paid an additional $ 775,000 to settle the claims against the insureds.

Pennsylvania General sued ASIC for declaratory relief and equitable contribution, asserting that ASIC’s policy provided coverage for some or all of the damages sought against Whitacre in the construction defect litigation. Both insurers moved for summary judgment. ASIC argued it was entitled to summary judgment because its policy covered only damages caused by an occurrence during the term of the policy, and its policy expressly excluded coverage for any loss that fi rst manifested before the term of its policy, citing anti-Montrose endorsements in its policy.

The trial court granted ASIC’s motion for summary judgment and denied Pennsylvania General’s motion for summary judgment because Whitacre’s work was completed before the inception of ASIC’s policy. The trial court reasoned that under ASIC’s CGL policy, the “occurrence” — the causal event resulting in property damage — and the “property damage” are two separate triggers that must both occur within ASIC’s policy period in order for there to be potential coverage. Since Whita-cre’s alleged defective framing work was completed in June 2001, there could be no covered “occurrence” during ASIC’s policy period. Pennsyl-vania General appealed.

ASIC’s policy contained two 1999 endorsements that modifi ed the standard GGL policy provisions. One endorsement replaced the standard defi nition 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.

The other endorsement, entitled “Pre-Existing Injury or Damage Exclu-sion,” stated:

This insurance does not apply to: Any “occurrence,” incident or “suit’”...which fi rst occurred prior to the inception date of this policy...; or 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.

Citing the general rule that it is the timing of the property damage, not the causal event, that triggers coverage, the court identifi ed the pivotal issue in this case as whether ASIC’s two 1999 endorsements clearly and unambiguous-ly require two separate triggers of coverage — the causal acts by Whitacre and the commencement of property damage resulting from those causal acts — to happen during the policy period before a potential for coverage exists.

Under long standing cannons of policy interpretation, a provi-sion will be considered ambiguous when it is capable of two or more constructions, both of which are reason-able. The language must be construed in the context of the policy as a whole and in the circum-stances of the case, and cannot be found to be ambigu-ous in the abstract. Coverage clauses are interpreted broadly in favor of coverage. Exclusions and limitations on coverage are interpreted narrowly. Exclu-sions must be plain, clear and con-spicu-ous. If an asserted ambiguity is not eliminated by the language and con-text of the policy, courts then construe the ambiguity against the party who caused the uncertainty to exist (i.e., the insurer) in order to protect the insured’s reasonable expectation of coverage.

The court concluded that the fi rst 1999 endorsement adding the italicized language to the defi nition of “occurrence” did not clearly and unambiguously limit coverage to those claims in which the causal acts took place during the policy period, and is at least equally susceptible to the interpretation that resulting damage is the defi ning characteristic of the occurrence.

The court noted that the second 1999 endorsement is found under the heading “Pre-Existing Injury Or Damage Exclusion,” not “Pre-Exist-ing Causal Conduct Exclusion,” concluding that this language did not clearly and unambiguously require the causal event to happen within the policy period before potential coverage could arise.

Finally, the court noted that ASIC’s interpretation of the two endorse-ments was inconsistent with the “products-completed operations hazard” provided under the ASIC policy. ASIC’s products-completed op-erations hazard provides coverage against claims for property damage

“arising out of...‘your work’ except [for] ...[w]ork that has not yet been

completed....” This type of cov-erage ordinarily is conditioned

on damage occurring during the policy period, as long as the work was completed be-fore the damage occurred, and is not conditioned on when the work was completed. See 3 Cal. Insurance Law & Practice (2010) Construction Insur-ance, Section 37.05[7] (2009 rev.); Croskey et. al., California Practice Guide: Insurance Litigation (The Rutter Group 2009) Sec-tins 7:1428-7:1432.

Instead, the court interpreted the 1999 endorsements to har-monize them with the

“products-completed operations hazard” and give effect to how a reasonable insured could read ASIC’s CGL policy provisions as modifi ed by the 1999 endorsements: the products-complet-ed operations hazard protects against claims for property damage arising out of

“your work” once

that work is completed, as long as the property damage fi rst happens during

the policy period — not prior to the policy period.

Since there were disputed issues of fact as to whether property damage fi rst occurred during ASIC’s

policy period — regardless when the causal event occurred — the court reversed summary judgment in favor of ASIC, and remanded the case to the trial court.

If ASIC had meant to require both the causal event and the resulting damage to occur during its CGL policy period to trigger potential coverage, it could

easily have said so in plain, concise prose. It didn’t. If it had, would there be a market for such a policy? Hard to say. What contractor

or subcontractor would knowingly purchase this policy close to or after substantial completion of its work on a construction project? Do lawyers think these things

through when they make these argu-ments?

So, as to ASIC’s anti-Montrose en-dorsements, the cat-and-mouse

game continues. The ball is in the CGL insurers’ court.

Setting the metes and bounds for

coverage under standard form

commercial general liability

(CGL) policies has been

a cat-and-mouse game

over the years — insurers and

their lawyers attempting

to narrow coverage

and courts frustrating

those efforts.

Eric J. Schindler is a partner at McKennon|Schindler in Laguna Beach. He represents individuals and business owners in complex insurance and business litigation. His fi rm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com. He can be reached at es@mslawllp.com.

THURSDAY, JULY 15, 2010 7San Francisco

Consumer Advocates Call for Intellectual Honesty

I have read Robert F. Tyson Jr.’s article “Con-sumers Hurt by Consumer Attorneys,” (July 9)

concerning the 1st District Court of Appeal’s decision in Yanez v. Soma Environmental Engi-neering Inc.

When he begins by saying “Worry about yourself!” it is worth keeping in mind that Mr. Tyson’s employers are corporate defendants and liability insurance companies. Clearly they heed his advice and are worried only about themselves.

When he claims that Howell v. Hamilton Meats Inc. 106 Cal.Rptr.3d 770 and Yanez “held for the fi rst time” that “corporate defen-dants and insurance companies” will now be “forced to pay the full medical bills” for the

injuries they caused...well, now he is simply not being honest with your readers.

As the Yanez decision details, its holding is the majority rule in these United States. It is also the existing rule in California. Even Justice Kathleen M. Banke, who clearly would favor a different rule, did not dissent, but concurred. She did so “reluctantly and because of the current legal landscape.” In other words, she concurred because the court’s holding simply refl ects the law as it is.

Too bad that unlike Justice Banke, Mr. Tyson couldn’t display the intellectual honesty to admit that Yanez and Howell represent the law as it is and argue for a change. Instead he chose to dissemble in furtherance of profi ts

for corporate defendants and liability insurers, and at the expense of not only the consumers who pay the rising cost of premiums for health insurance but also the doctors and hospitals who give up so much to strike deals with those same profi table insurers.

Christopher B. Dolan

President, Consumer Attorneys of California

San Francisco

Scott H.Z. Sumner

Hinton, Alfert & Sumner

Walnut Creek

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The Continuous Injury Trigger:

A Cat-and-Mouse Game