Making Progress on Progressive Damage Claims

The manifestation theory, for example, says that coverage is triggered when the damage first becomes or should become evident. Under 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 liability theories generally developed out of asbestos litigation and other cases where bodily injury could be argued to have occurred at various (and multiple) times in the causation chain.

But what about in first-party property loss situations like the one posed to us by our Ohio subscriber, below?

"We recently received a claim from a homeowner we have not insured for five-and-one-half years. The homeowner discovered a water leak in his crawl space last month (January 2003). 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," the subscriber wrote, adding however, that the carrier is pro-rating coverage for the 17 months it was on the account. According to our subscriber, carrier representatives "have told the homeowner that this was a situation that occurred over time" and that the carrier is "not responsible for 100 percent of the damages. They have also instructed the agent to put all previous carriers (two) on notice."

In closing, "We feel the burden of proof is on the current carrier to prove when the leak started.What do you think?" the subscriber wrote, noting parenthetically that the current carrier did not hire an engineer.

Well, what we think is that we see where the adjuster for the current insurer is getting his or her theory, but think this is a dog that wont hunt.

It seems that the adjuster is relying on the current HO-3s policy period provision, but not digging deep enough into the issue that is raised here. (But thats what were here for, right?) The provision says: "This policy applies only to loss which occurs during the policy period."

In the adjusters 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 subscriber wants to know just who has to prove what happened when.

It seems that in most jurisdictions, nobody has to prove nothin in this case.

As a matter of public policy and case precedent, the insurer that is on the loss at the time the loss is discovered and 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 of Prudential-LMI Commercial Insurance vs. Superior Court of San Diego County (Lundberg). Here, the California Supreme Court adopted a single "trigger" of coverage, finding that the insurer that is on the risk at the time that manifestation of the loss occurs is the one that is solely responsible for the loss. The court defined manifestation of loss as that point in time when appreciable damage occurs and is (or should be) known to the insured, such that a reasonable insured would be aware of his or her duty to notify the insurer of a loss.

In its decision, the court took note of some points worth bearing in mind.

"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 wrote, citing language of an earlier decision.

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."

This court agreed with a holding by an earlier court involving damage at the famous Del Coronado Hotel and a dispute with The Home Insurance Company that, "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."

One of the rationales given by courts is that the manifestation rule in first-party cases "promotes certainty in the insurance industry [who isnt 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 and the insurance company put on notice of a potential litigable issue (should it ever go so far). Even when youre pretty sure to win, youd better cover your bases.

Bruce Hillman, JD, is Editorial Director of Risk and Insurance Markets for the Professional Publishing Group of The National Underwriter Company, in Erlanger, Ky. Questions and comment are invited at fcs@nuco.com.

Reproduced from National Underwriter Edition, February 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.