Recently, an Ohio FC&S reader wondered, more specificallyworried, whether liability-based theories involving progressivedamage could be applied in first-party property loss situations.That is not quite the way that the subscriber put his question, butthat is what he was getting at.

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What does that mean? Progressive losses are when damage toinsured property occurs continuously over a period of time,stretching into two or more insurance policy periods. In theliability arena, various coverage trigger theories have developed,such as the manifestation theory (when the damage first becomes orshould become evident) and the triple-trigger theory (each singleevent leading to the ultimate damage is another manifestation ofdamage, triggering all policies that may have been issued to theinsured during the period leading to the ultimate damage). Thesetheories developed out of asbestos litigation and other cases inwhich bodily injury could be argued to have occurred at various(and multiple) times in the causation chain.

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What about first-party property loss situations, such asthe one posed by our Ohio subscriber?

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“We received a claim from a homeowner whom we have not insuredfor five and a half years. The homeowner discovered a water leak inhis crawl space recently. He had not been in this section of thecrawl space for at least 10 years (when a well was installed). Themain line from the well to the pump had developed a small hole,causing water to leak and puddle on the plastic ground cover.Because of the plastic, the water did not soak into the ground, butwould eventually evaporate into the air. The claim is in thissection of the crawl space where floor joists and sub-floor haverotted.”

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The current carrier has insured the property for 17 months andhas accepted coverage, according to the subscriber. “However, theyare pro-rating it for the 17 months that they were on the account.They have told the homeowner that this was a situation thatoccurred over time and that they are not responsible for 100percent of the damages. They also have instructed the agent to putall previous carriers (two) on notice.

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“We feel that the burden of proof is on the current carrier toprove when the leak started, not us. The current carrier did nothire an engineer. What do you think?”

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What We Think

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Although we see where the adjuster for the current insurer isgetting his theory, we think that this is a dog that won't hunt. Itseems that the adjuster is relying on the current HO-3's policyperiod provision, but not digging deeply enough into the issue thatis raised here. (But that's what we're here for, right?) Theprovision says, “This policy applies only to loss which occursduring the policy period.”

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In the adjuster's view, all the damage did not occur during thepolicy period. Therefore, the loss must be covered by the policy inforce at the time the progressive damage began, and any subsequentpolicies issued to that insured on that premises. Our subscriberbelieves that the burden of proving causation and timing must fallon the current insurer, and not on previous ones. Our user wants toknow just who has to prove what happened when.

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It seems that, in most jurisdictions, it does not matter. As amatter of public policy and case precedent, the insurer that is onthe loss at the time the loss is discovered and the claim is madeis responsible for payment to its insured. The leading first-partycase on the issue of progressive property damage is the 1990 case,Prudential-LMI Commercial Insurance vs. Superior Court of San DiegoCounty (Lundberg), in which the California Supreme Court adopted asingle trigger of coverage: the insurer who is on the risk at thetime that manifestation of the loss occurs — defined as the pointat which appreciable damage occurs and is or should be known to theinsured, such that a reasonable insured would be aware of a duty tonotify the insurer of a loss — is solely responsible for theloss.

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In its decision, the court took note of some points worthbearing in mind. For instance: “In first party cases applying therule finding coverage only on actual occurrence of injury, nodamage or injury of any kind has taken place until manifestation;the cause instead lies dormant until it later causes appreciableinjury.” The court also agreed that applying the terminology thathas grown up around liability (third-party) coverage in the contextof first-party situations “implies that the considerations areidentical and obscures the real differences between the two typesof problems.”

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The Prudential-LMI court agreed with a holding by an earliercourt involving damage at the famous Del Coronado Hotel and adispute with the Home Insurance Co. “As between two first-partyinsurers, one of which is on the risk on the date of firstmanifestation of property damage, and the other on the risk afterthe date of the first manifestation of damage, the first insurermust pay the entire claim,” the Del Coronado court had found.

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One of the rationales given by courts is that the manifestationrule in first-party cases “promotes certainty in the insuranceindustry [who isn't for that?] and allows insurers to gaugepremiums with greater accuracy. Presumably, this should reducecosts for consumers because insurers will be able to set asideproper reserves for well defined coverages and avoid increasingsuch reserves to cover potential financial losses caused byuncertainty in the definition of coverage.”

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In a final comment that should give our Ohio subscriber somerespite, the court said, “We conclude that in first-partyprogressive property loss cases, when the loss occurs over severalpolicy periods and is not discovered until several years after itcommences, the manifestation rule applies. … Prior to themanifestation of damage, the loss is still a contingency under thepolicy and the insured has not suffered a compensable loss.”

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As a matter of practicality (and for E&O purposes), theformer insured can be informed that no coverage exists under hisformer policy and that he will have to deal entirely with hispresent insurer (and agent). However, a claim file should beestablished to put the insurance company on notice of a potentiallitigable issue (should it ever go so far). Even when you arepretty sure to win, you had better cover your bases.

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Bruce Hillman is editorial director, Professional PublishingDivision, of the National Underwriter Co.

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The FC&S Claim Queue is prepared and written by theeditorial staff of The Fire, Casualty and Surety (FC&S)Bulletins, the most widely used encyclopedic reference servicedevoted to insurance policy interpretation and coverage topics.FC&S is published by The National Underwriter Company.

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