Liability Insurer’s Montrose Endorsements Construed in Favor of Policyholders: Court of Appeal Rejects Insurer’s “Dual Trigger” Approach

On June 28, 2010, the Court of Appeal of the State of California, Fourth Appellate District, certified its June 3, 2010, opinion in Pennsylvania General Ins. Co. v. American Safety Indem. Co. (No. D054522) for publication. Pennsylvania General is a significant victory for policyholders, particularly homebuilders, contractors and others facing liability for continuing-injury claims. It narrowly construes two “Montrose” endorsements used by many insurers that, American Safety (“ASIC”) argued, impose a “dual trigger:” (1) property damage during the policy period (2) caused by an occurrence during the policy period. The Court of Appeal rejected ASIC’s interpretation of the endorsements and the “dual trigger” burden that ASIC’s interpretation created.

ASIC’s first endorsement amended the policy’s definition of “occurrence” by adding language (1) requiring that the “occurrence” happen during the policy and (2) deeming “property damage” that commenced before the policy to have happened prior to, not during, the policy:

“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.” (emphasis added)

ASIC’s second endorsement, entitled “PRE-EXISTING INJURY OR DAMAGE EXCLUSION,” contained the following language:

This insurance does not apply to: . . . [a]ny “occurrence, incident or “suit” . . . which first 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.

ASIC argued, and the trial court held, that the two endorsements, read together, create a second coverage trigger. The trial court held that not only must the “property damage” happen during the policy (as the standard CGL policy requires), the “occurrence” (in the court’s words, “the act causing the injury/damage”) must also “happen during the term of the insurance.”

The Court of Appeal disagreed with the trial court’s interpretation of the endorsements. It held that the two endorsements “employed the term ‘occurrence’ to refer to the damage, not to the causal acts that produced the damage” and, thus, “the trigger of coverage [is] not when the insured completed its work, but was instead based on when the damages caused by the negligent causal acts of the insured first commenced.”

This result makes sense. The “dual trigger” approach that ASIC tried to take virtually guts the policy’s completed-operations coverage. If the policy were to be triggered, as ASIC argued it was, only when work performed during the policy period results in property damage during the same policy period, the policy would never be triggered for damage that occurred more than 365 days after the insured completed its work – and, depending on when during the policy period the insured finished its work, the “completed operations tail” would be much shorter – as little as one day, for example, if the insured finished its work 364 days into the policy period.

In addition, had the Court of Appeal allowed the trial court’s “dual trigger” approach to stand, policyholders would have faced uninsured gaps in coverage for continuing injury claims and disputes with excess insurers who would not be inclined to drop down when the primary policy had not been triggered, let alone exhausted.

The Court of Appeal’s holding upholds what it says is the insurer’s apparent intent when it added these endorsements: i.e., eliminating the exposure created by Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995), for continuing injury or damage that commences before the policy period.