CONSTRUCTION LAW Allocation of Risk Among Multiple Progressive Damage Insurers Construction By R. Michael Ethridge Defect Cases and Katherine W. Sullivan The landscape Deciding whether a construction defect claim is covered surrounding these issues by a contractor’s commercial general liability (CGL) pol- is constantly changing icy is always a sticky proposition. Among the most vexing and never boring. problems for coverage and defense counsel alike, in a case involving a progressive injury, is which Hypothetical Scenario insurance policy is implicated. Unlike the A general contractor builds a multimil- typical personal injury case that would lion dollar oceanfront home in 2005. At implicate only one CGL policy because the time of construction the general con- the injury would “occur” during one pol- tractor is insured under a standard CGL icy period, a progressive damage construc- policy, ISO Form CG 00 01 10 01. The anni- tion defect case creates a unique situation, versary date of the policy is January 1. Con- and depending on the state, multiple pol- struction began on June 1, 2005, and was icies can be triggered. Courts around the completed on April 1, 2006, with the certif- country have struggled with how to allo- icate of occupancy issued on May 1, 2006. cate damages among multiple insurers in Because of the collapse of the real estate these progressive damage cases. market, the general contractor goes out of This article will briefly attempt to business on December 31, 2008. address the different approaches that the In 2007, the homeowners notice water states have used to determine coverage coming into their home around windows triggers in construction cases as well as and doors and also begin to experience a the methods used by the states to allocate serious problem with mold growth on the risks among multiple insurers. The follow- interior walls. They contact the general ing hypothetical scenario will serve as the contractor who investigates and attempts framework for discussing some of the com- to perform certain repairs. The general plications that can arise when attempting contractor’s attempted repairs are not suc- to allocate damages in a progressive dam- cessful, and in October 2007, the home- age construction defect case. owners hire a lawyer who immediately ■ R. Michael Ethridge is a partner and Katherine W. Sullivan is an associate of Carlock Copeland & Stair in the firm’s Charleston, South Carolina, office. They are both regular contributors to the firm’s insurance -cov erage blog at http://www.insurancecoveragecorner.com/. Mr. Ethridge represents insurance companies, general contractors, construction design professionals, small business owners and others in insurance cov- erage and civil litigation. Ms. Sullivan focuses on general civil litigation, including construction, insurance coverage and bad faith, personal injury defense, and professional liability defense. 52 ■ For The Defense ■ June 2012 © 2012 DRI. All rights reserved. hires an engineering consultant to investi- the homeowners’ loss? “Trigger of cover- hypothetical “facts” may also trigger cover- gate the source of the water intrusion and age” is a term of art used to describe what age under each of the subsequent policies if to develop a repair plan delineating the must happen during the policy period for the water continued to intrude around the repair scope. The engineer’s report, dated the potential of coverage to arise. See Mon- windows and doors causing water dam- December 1st, 2007, identifies numerous trose Chem. Corp. v. Admiral Ins. Co., 10 age in each subsequent year. However, construction deficiencies and building Cal. 4th 645, 655, n.2, 913 P.2d 878, 880, the known loss provision in the 2008 pol- code violations. The consultant concludes n.2 (Cal. 1995). In a typical general liability icy could preclude coverage from that pol- that these deficiencies are causing signifi- scenario, the trigger of coverage is a specific icy since the contractor became aware of cant water intrusion around windows and point in time when the personal injury or the problems in 2007. Therefore, under doors and mold growth on the interior property damage occurred. However, in the injury- in- fact theory, the “facts” would walls. The lawyer hires another consultant construction defect cases when damages likely trigger CGL policy two covering 2006 to provide an estimate for the repairs. The are progressive in nature, such as with and CGL policy three covering 2007. estimated cost of repairs is $1.75 million, water intrusion, it is more difficult to deter- given the extensive nature of the damages mine when coverage is triggered. Continuous Trigger Theory and construction deficiencies. The home- In a progressive damage construction Under this theory, the time of the under- owners file a lawsuit in February 2009. defect case, the states mainly use one of lying injury- causing event would trigger Litigation ensues, and the wheels of jus- three primary methods to determine the coverage for each policy in effect at that tice turn slowly. Frustrated with the way trigger of coverage. The majority of the time, and coverage would continue until that the case is proceeding, the judge spe- states apply either the injury- in- fact trigger the damage is complete. So in the hypo- cially sets a trial date of April 1, 2012, and theory or the continuous trigger theory. A thetical scenario above, the “facts” would orders the parties to complete mediation by limited number of states use the manifes- likely trigger coverage from the date that February 1, 2012. tation trigger theory to determine which the certificate of occupancy was issued, On January 15, 2012, the parties convene policies may be triggered by a progressive May 1, 2006, until the date that the damage the court- ordered mediation. The general damage case. is complete. Similarly, the known loss pro- contractor is present, as are representa- vision in the policy would likely preclude tives from the various insurance carriers Injury-in-Fact Theory coverage for all policies after the contrac- that have provided coverage to the general Under the injury- in- fact theory, cover- tor became aware of the problems in 2007. contractor during the period of continuous age is triggered when property damage Therefore, under the continuous trigger damage. All of the insurers are present and occurs during the policy period. For cov- theory, the hypothetical facts likely would accompanied by coverage counsel as well. erage to arise under a particular policy, trigger CGL policy two covering 2006 and The general contractor is insured as follows property damage must occur during the CGL policy three covering 2007. for the relevant period: policy period. Because the injury- in- fact • CGL policy one, covering 2005, $250,000 theory typically is interpreted to trigger Manifestation Theory limits each insurance policy when property dam- Under the manifestation theory, cover- • CGL policy two, covering 2006, $250,000 age occurs during the policy period, in age is triggered when property damage limits progressive damage construction defect is discovered or should have reasonably • CGL policy three, covering 2007, 500,000 cases, the application of the injury- in- fact been discovered. Coverage will be limited limits with a 2294 endorsement rule can be remarkably similar to the con- to the policy that covers the period when • CGL policy four, covering 2008, $500,000 tinuous trigger rule, discussed below. For the damage is discovered. This theory is limits example, water damage resulting from applied to construction defect claims in a • Uninsured in 2009 construction defects often continues to limited number of states such as Florida, • Uninsured in 2010 occur every year until someone repairs the Louisiana, and New Jersey. See, e.g., Mid- • Uninsured in 2011 defects. In such a case, each policy would Continent Cas. Co. v. Siena Home Corp., While a standard CGL policy gener- be triggered on the date of the first property 2011 WL 2784200 (M.D. Fla. July 8, 2011); ally does not cover construction deficien- damage and continue through a settlement Rando v. Top Notch Props., L.L.C., 879 So. cies, many states have concluded that water or judgment or until someone repairs the 2d 821 (La. Ct. App. 2004); Winding Hills intrusion that causes property damage is property damage-causing condition. Condo. Ass’n, Inc. v. N. Am. Specialty Ins. an accident that potentially would impli- In the hypothetical scenario outlined Co., 332 N.J. Super. 85, 752 A.2d 837 (N.J. cate coverage. For purposes of this factual above, the “facts” could trigger coverage Super. Ct. App. Div. 2000). scenario, assume water intrusion can qual- as early as 2006, on the date of substantial In the hypothetical scenario above, cov- ify as an occurrence. completion, should the plaintiffs success- erage would have likely been triggered fully demonstrate that the construction under the manifestation theory for the Trigger of Coverage defects led to some level of water intrusion 2007 policy, CGL policy three, when the For purposes of the coverage analysis in upon completion of the work, even if the homeowners noticed water intrusion our hypothetical scenario, the threshold homeowners did not know about it until around the windows and doors and began question is which policies are triggered for 2007. Under the injury- in- fact theory, the to experience mold growth, unless the For The Defense ■ June 2012 ■ 53 CONSTRUCTION LAW insurer introduced evidence showing that have used these provisions with varying CGL coverage throughout the entire pro- the homeowners should have discovered success, and how courts will apply them gressive damage period. the problems sooner. For example, a Flor- often depends on the specific facts in a case. The seminal case endorsing the joint- ida court recently determined that cover- Id. at 440. and- several approach is the asbestos- age is triggered under the manifestation A large majority of the states apply either related case, Keene Corp.