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

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

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

“We received a claim from a homeowner whom we have not insured for five and a half years. The homeowner discovered a water leak in his crawl space recently. He had not been in this section of the crawl space for at least 10 years (when a well was installed). The main 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, but would eventually evaporate into the air. The claim is in this section of the crawl space where floor joists and sub-floor have rotted.”

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

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

What We Think

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

In the adjuster's view, all the damage did not occur during the policy period. Therefore, the loss must be covered by the policy in force at the time the progressive damage began, and any subsequent policies issued to that insured on that premises. Our subscriber believes that the burden of proving causation and timing must fall on the current insurer, and not on previous ones. Our user wants to know just who has to prove what happened when.

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

In its decision, the court took note of some points worth bearing in mind. For instance: “In first party cases applying the rule finding coverage only on actual occurrence of injury, no damage or injury of any kind has taken place until manifestation; the cause instead lies dormant until it later causes appreciable injury.” The court also agreed that applying the terminology that has grown up around liability (third-party) coverage in the context of first-party situations “implies that the considerations are identical and obscures the real differences between the two types of problems.”

The Prudential-LMI court agreed with a holding by an earlier court involving damage at the famous Del Coronado Hotel and a dispute with the Home Insurance Co. “As between two first-party insurers, one of which is on the risk on the date of first manifestation of property damage, and the other on the risk after the date of the first manifestation of damage, the first insurer must pay the entire claim,” the Del Coronado court had found.

One of the rationales given by courts is that the manifestation rule in first-party cases “promotes certainty in the insurance industry [who isn't for that?] and allows insurers to gauge premiums with greater accuracy. Presumably, this should reduce costs for consumers because insurers will be able to set aside proper reserves for well defined coverages and avoid increasing such reserves to cover potential financial losses caused by uncertainty in the definition of coverage.”

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

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

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

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

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