J. Kent Holland
Owners of sixty stucco homes brought claims against the builder, Wooddale Builders Inc., alleging that defective construction or faulty workmanship resulted in water-infiltration and mold-growth. The claims were first filed beginning in 2000. The homes were built from 1990 through 1996. Wooddale tendered the claims to each of the insurance carriers that provided commercial general liability (CGL) policies to Wooddale from November 13, 1990 through November 13, 2002. Five different carriers had policies covering part of this twelve year period. Each of the carriers declined to make payment for repairs. Wooddale then filed suit against Maryland Casualty whose policy covered 1997 through 2000. Maryland Casualty in turn filed third party complaints against the other four carriers.
Affidavits from experts stated that the damage resulted from repeated water-intrusion events, occurring over an extended period of time, with continual, progressive, and indivisible damage occurring to the homes. An affidavit by an environmental health consultant stated that “all that one can say with a degree of reasonable scientific certainty is that the mold damage to any given building began during or after construction and that it continued or will continue until such time as the mold colonies are deprived of one or more of the conditions required for continued growth: food, water and warmth.”
The carriers agreed that liability should be allocated among them on a pro-rata-by-time-on-the-risk basis, and that the starting point for the allocation of damages is the closing date on the purchase of each individual home. They could not, however, reach agreement on the ending point for allocation of damages. They also disagreed over the allocation of defense costs and investigative costs. In issuing summary judgment in favor of the builder against the carriers, the district court decided that the ending date for allocation purposes was the date Wooddale received notice of a pending claim. In addition, the court allocated the costs of defending Wooddale and investigating the homeowners’ on an equal basis between all the carriers.
On appeal, the appellate court explained that the law of Minnesota which applies to the parties in this case follows the “actual injury” or “injury-in-fact” theory to determine which policies have been triggered by an occurrence causing damages for which an insured is liable. Only those policies in effect when damages occurred would be triggered. The court quotes from a Minnesota Supreme Court decision, N. States Power Co. v. Fidelity & Casualty Companies of New York, as follows: “The essence of the actual injury trigger theory is that each insurer is held liable for only those damages which occurred during its policy period.”
Citing that decision, the court goes on to say that “Because the discharge of environmental pollutants is continuous and repetitive and cannot be traced to one discrete, identifiable event, ‘the unidentifiable individual instances [merge] into one continuing occurrence,’ and there is one occurrence during each triggered policy period.”
The court states that applying the N. States Power reasoning, if contamination occurred over a period of ten years, one-tenth of the damage would be allocated to the insurer that was on the risk for one year. Likewise, three tenths of the damage would be allocated to the period of time a three-year policy was in force, and so on.
In the current case, the district court allocated the damages proportionate to the number of years each carrier was on the risk, “relative to the number of years between the date of closing and the date that Wooddale received notice of a pending claim.” The district court did not assign liability for damages resulting from ongoing decay to the homes between the date of claim notification and the date of remediation. It isn’t clear whether that means that no insurer would be liable for post-notification damages or whether every insurer should share equally even if a separate insurer provided Wooddale coverage during that final period of time.
The carriers argued in the appeal that the “known-loss” rule or the “loss-in-progress” rule compelled the district court’s conclusion that the ending date of purposes of allocation was the date that Wooddale received notice of a homeowner’s intent to file a claim. In rejecting that argument, the appellate court concluded that Wooddale did not seek indemnification for homeowner claims from insurers that had issued policies after the homeowner claims had been tendered to Wooddale. Therefore, the court found that Wooddale did not purchase the triggered policies with knowledge of an actual loss. The known-loss defense was therefore not applicable.
Maryland Casualty argued, however, that an extension of the known-loss rule supports the district court’s decision. Specifically, it argued that continuing insurance coverage beyond the date the insured is placed on notice of a loss is at odds with the basic principle that insurance is purchased to cover risk of loss, not an exiting loss. Once the homeowner placed Wooddale on notice of a claim, Maryland Casualty says there was no longer any risk of loss. Western National similarly argued that any damage occurring after the builder had notice is not accidental, and, therefore, did not result from an occurrence. It would be fundamentally unfair, argued Western National, to hold an insurer liable for additional property damage on account of conditions known to the insured.
In disagreeing with the above-described arguments by the carriers, the appellate court stated that when a homeowner placed Wooddale on notice of a claim, the risk of loss remained the same because the occurrence was still continuing. The appropriate ending date, when allocating liability among consecutive insurers according to the pro-rata-by-time-on-the-risk method, is, therefore, the date of remediation. The court, therefore, reversed the district court decision in this respect.
On the issue of defense costs allocation, the court also reversed the district court. It held that defense costs should be apportioned according to the same methodology as indemnity costs. To do otherwise and allocate defense costs equally based on the number of insurers would, said the court, lead to inequitable results. Wooddale Builders Inc. v. Maryland Casualty Company d/b/a Zurich North America, ( Minn. A04-1442).
About the author: Kent Holland is a construction lawyer in Tysons Corner, Virginia, and is a risk management consultant for environmental and design professional liability insurance and contracts. He is also publisher of ConstructionRisk.com Report. He may be reached at Kent@ConstructionRisk.com. This article is published in ConstructionRisk.com Report, Vol. 8, No. 5.