As an example of the difference between the ISO form and the AAIS wording, consider a situation where an employee of a framing sub-contractor, while unloading lumber for storage in his or her employer's storage yard notes defects in or damage to the lumber that will used for later framing jobs. This employee, furthermore, fails to bring this matter to the employer's attention and the framing contractor renews or purchases a new CGL policy before using that lumber on a job. If that damaged or defective lumber turns out to be the cause of damage to the construction project, it could be argued not to be covered if the employee, under an ISO coverage form, was authorized to give or receive notice of an occurrence or claim by the named insured. A supervisor's authorization, therefore, would be insufficient under the ISO form, but not under the AAIS coverage form. If it could be argued, under the AAIS endorsement, that resultant damage caused by or attributable to use of that lumber was a continuation, resumption or change in the defect in or damage to the lumber, known prior to the policy inception date it, too, would not be covered.

Another difference between the AAIS and ISO versions of the Montrose provision is that ISO's version encompasses injury or damage that occurs in whole or in part prior to the policy inception date. The exclusion, therefore, could be broadly applied to any injury or damage occurring even partially before the policy's inception date, as in the above scenario.

In a case involving known progressive property damage, a previous CGL policy would cover damage that occurs during its policy period, even if other similar or related damage occurred in part during a previous policy period. Under the current ISO wording noted in the exhibit, no such coverage would be available. The AAIS version does not make reference to “in whole or in part”, although in a practical sense, this may prove to be a distinction without a difference in many cases. Both versions clarify when injury or damage will be deemed to have occurred, stating in a general sense that knowledge of injury or damage will be deemed to have occurred at the earliest of the following: (a) receipt by any insured (ISO) or designated insured (AAIS) of a demand for damages; (b) an insured (ISO) or designated insured (AAIS) reporting injury or damage to any insured; or (c) awareness by an insured (ISO) [not additional insureds] or designated insureds (AAIS) of anything indicating that injury or damage may have occurred or is occurring.

The fact that both the AAIS and ISO provisions refer to “awareness” of what may have occurred or is occurring, means there may be a likelihood of litigation, because insureds will be forced to prove they were not “aware” of such circumstances as opposed to merely proving the non-existence of actual damages. Under either provision, all resultant damage caused by injury or damage known to have existed prior to the policy inception date is not covered. Consider, for example, a situation where property damage known prior to a policy period causes subsequent bodily injury. Coverage for the bodily injury could conceivably be denied under the Montrose wording, where the property damage was the proximate cause of the bodily injury. The bodily injury can and likely will be argued by some insurers to be a continuation, change or resumption of the initial property damage. As worded, these provisions are simply unclear on issues such as these and are likely to continue to generate litigation.

Both standard versions of the Montrose provisions state that injury or damage occurring during the policy period that is not a continuation, resumption or change in injury or damage known to an insured prior to the policy inception date, will include injury or damage that continues, resumes or changes after the policy ends. (See Exhibit 1, paragraph 2.b., and Exhibit 2, paragraph 1.c.) Some view this wording as merely a reiteration of case law in some jurisdictions to the effect that the policy or insurer on the risk at the time progressive injury or damage begins must cover all ensuing damage. That perspective, however, is suspect, given the wording highlighted and the track record of insurers demonstrating extensive litigation over coverage terms that have a potential to exclude coverage in a variety of fact patterns. Also, not all jurisdictions are known to adhere to the approach in the same manner as California following the Montrose decision.

The wording emphasized above, when read in context, states that injury or damage that is covered because it was not known prior to the policy inception, includes all continuing, changing and resuming damages. In other words, all continuous damage, regardless of how many other subsequent policy periods are involved, can be argued to be covered only under the policy in which the injury or damage first began. This is, in essence, a prior insurance condition and represents the ultimate goal of insurers, that is, to limit coverage to the policy period in which injury or damage began. This also can be likened to a products liability batch clause where all injury or damage arising from a certain batch of products is subject to coverage under the policy when the first injury or damage from that particular batch occurred.

The result of all this essentially transforms occurrence-based coverage to a claims-made trigger. Prior to Montrose, insurers were largely unable to address this issue, because of the occurrence trigger and the resistance of insurance departments nationwide to go along with what is essentially the elimination of occurrence-based coverage. With the advent of the Montrose case, however, this change has been slowly and subtly implemented without fanfare. While the application of coverage in the manner discussed is not yet a full-court push, experience indicates that this may eventually be the approach of at least some insurers using the wording in the exhibits.

As some insurers have found out, however, it is not easy to find a court that is receptive to upholding the Montrose-type provision in CGL policies. A case in point is Desert Mountain Properties Limited Partnership v. Liberty Mutual Fire Insurance Company, 250 P.3d 196 (Ariz. 2011). Soil settlement caused cracks and other damage to 50 new homes. The developer paid an average of $200,000 per home to have the soil issues corrected and the damage repaired. It then sought reimbursement from its insurer. (This is an interesting case in light of the number of different defenses raised by the insurer, which ended up paying anyway.)

One of the defenses raised by the insurer was the “known loss” clause (also referred as the “prior loss” provision), which was raised because the developer was said to have known of significant settlement-related problems before it purchased the liability policies. This particular provision, which appears similar to the one of ISO policies, stated: This insurance applies . . . only if: . . . [p]rior to the policy period, no insured . . . and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the . . . “property damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “property damage” occurred, then any continuation, change or resumption of such . . . “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

The insurer, in this case, argued that the developer knew of soil-related problems from homeowner complaints and geotechnical reports received prior to the effective dates of the policies. It argued this knowledge triggered the known loss clause, even if at the time, the company did not know of the widespread nature of the problem. The insurer based this argument on the portion of the known loss clause applying to knowledge of property damage “in whole or in part that continu[es], change[s], or resum[es]” during or after the policy period. (Emphasis added).

The appeals court responded that its review of the record persuaded it that sufficient evidence existed from which the jurors could find that the developer lacked knowledge of the relevant property damage before the policies began. The developer's vice president of development at the time testified concerning homeowner complaints received prior to the initial policy period. He testified that he knew there was an issue, but it was sent to the general contractor and the engineers who reviewed them and made recommendations, which were executed. The customer service issue was then handled, he said, and the owners signed off on the issue. He also testified that there was no reason to think that there was a widespread settlement issue. So, because there was sufficient evidence to support the jury's conclusion that the developer did not have knowledge of property damage caused by faulty soil compaction prior to the insurer's policies, it was held that the trial court did not err in denying the insurer's judgment as a matter of law on the issue of known loss.

The policies also provided that: property damage that occurs during the policy period and was not known prior to the policy period includes any continuation, change or resumption of that . . . property damage after the end of the policy period. With regard to this provision, the trial court instructed the jury that the liability policies provided insurance coverage for property damage that continued , changed or resumed beyond the end of the policy period, if that damage occurred during the policy periods. The insurer, however, argued that given the policies' known loss clause, the court's instruction was misleading and confusing because it was contrary to the policy language precluding coverage for known losses that continue or change over time. The appeals court disagreed.

Non-Standard Versions and Issues

While many insurers are using the Montrose provisions of the AAIS and ISO, a number of insurers utilize their own versions, which sometimes contain unusual verbiage. For example, the operative wording of one such endorsement states that coverage applies only to bodily injury and property that: ” . . . first manifests during the policy period. This insurance does not apply to any bodily injury or property damage that is continuous or progressively deteriorating and that first manifests prior to the effective date of this policy or after the expiration of this policy, even if such injury or damage continues or deteriorates during the time of this policy”.

One could assume that this wording would have a similar effect as the Montrose provisions of AAIS and ISO. A closer look, however, reveals that there may be more problems here than one might expect. In fact, this wording represents, in a sense, the kind of provisions that were first introduced by insurers of the excess and surplus lines market on policies of construction contractors following the Montrose decision. The above language states that coverage will apply only if the damage first manifests during the policy period. What it does not say, however, is which designated insureds or insureds authorized to give notice must be aware that the damage has manifested before the exclusion is applicable.

In essence, insurers may argue that even though no one was aware that damage had begun (manifested), coverage will be excluded, if it can be shown that it did, in fact, manifest (discovered or not) prior to the policy period. How the courts will view such attempts is anyone's guess. Given the uncertainty as to who must be aware of the fact that property damage manifested prior to the policy period using wording referenced above, the insurer of that wording may face problems. While there appears to be little in the way of case law interpreting Montrose-type provisions over the past 14 years, insurers will be wise to ensure the proper facts before litigating the application of the foregoing non-standard wording. Two cases illustrate this point. In both, facts allowing application of the Montrose-type wording were not clearly evident.

The first case is Essex Insurance Company v. H&H Land Development Corporation, 525 F. Supp.2d 1344 (2007). In 2004, two owners of property adjacent to a subdivision caused an increase in surface water runoff, causing damage. Letters indicated that complaints had been made to the city by another adjacent landowner who, in turn, discussed them with the developer as early as 2000. The claim submitted to the insurer, however, involved only the allegations made by the two owners of the property. When the developer tendered the claim to its insurer (policy inception date of 2004), the insurer denied coverage based on the Montrose wording in the policy, which did not provide coverage, if prior to the policy period, any insured knew that property damage had occurred.

The court declined to apply the exclusion because it did not believe the insurer had met its burden of proving that prior to the policy period at issue, the developer was aware of complaints made by the specific claimants (two property owners). (What begged a question here was why the developer did not also tender the claim to the insurer of the policy that was in effect at the time of the construction or subsequent policies.)

In another case, Transportation Insurance Company v. The Regency Roofing Companies, Inc. 2007 WL 2904156 (S.D. Fla.), the court refused to apply a Montrose-type exclusion to a situation involving mold just because the insured was aware that there had been water intrusion prior to the effective date of the policy utilizing the Montrose-type wording.

Not all cases are ruled against insurers.

A case where a court held that no coverage applied because of a Montrose-type provision is Williams Consolidated I, LTD/BSI Holdings, Inc., dba Williams Insulation Company of Houston, Inc. v TIG Insurance Company, 230 S.W.3d 895 (Tex. App.—Houston [14th Dist.] 2007). The named insured obtained a CGL policy for the period August 1, 1999 to May 1, 2001. In June 2002, suit was filed by homeowners against the named insured asserting claims related to its performance of work as a subcontractor on the 1991 construction of their home. The homeowners also filed suit against the builder alleging that, during the construction of their home, the vapor barrier was wrongly installed on the interior face of the exterior wood-framed wall. They claimed that this improper installation caused moisture to condense on and within the cavity, leading to the growth of mold and mildew.

The named insured sought defense and indemnification relative to these claims but they were denied based on the policy's Prior Incident(s) and Prior Construction Defects Exclusion (hereinafter the Exclusion), which read as follows: No insurance coverage is provided under this policy to defend or indemnify any insured for bodily injury, property damage, personal injury or advertising injury which has first occurred or begun prior to the effective date of this policy, regardless of whether repeated or continued exposure to conditions which were a cause of such bodily injury, property damage, personal injury or advertising injury occurs during the period of this policy and cause additional, progressive or further bodily injury, property damage, personal injury or advertising injury all of which is excluded from coverage. This exclusion shall apply whether or not the insured's legal obligation to pay damages has been established as of the inception date of this policy. (Note that there was nothing subtle about this policy's Prior Incident(s) and Prior Construction Defects Exclusion. It was an exclusion, but limited to construction defects, unlike other Montrose-type provisions that apply to injury or damage brought about by any acts or omissions.)

As this exclusion was explained by the court, no coverage applied for physical injury to tangible property or bodily injury, if the physical injury or bodily injury first occurred or began before August 1, 1999—the effective date of the CGL policy. The insurer asserted, however, that there was no coverage if any process leading to the ultimate damage claim began before the policy's effective date. The insurer, however, cited no cases supporting this interpretation of the above cited provisions and therefore proved to be unconvincing from the court's perspective. Contrary to the insurer's assertion, the court explained, the exclusion was not based on the beginning of the process leading to the ultimate injury or damage but, rather, on the beginning of the actual injury or damage.

(The named insured maintained that the exclusion did not apply to the alleged property damage or bodily injury in question unless, before the policy's effective date, the named insured became aware of the property damage or bodily injury. The named insured, like the insurer, also did not cite any authority for that interpretation. The named insured did cite some cases dealing with definition of occurrence and a line of cases in which courts have adopted the manifestation rule, but none of these were determined to be on point.)

From the court's perspective, the CGL policy excluded coverage for injury or damage that first began before the policy's effective date of August 1, 1999. To hold that the exclusion did not apply to injury or damage that begun but did not manifest itself or become apparent, the court explained, would have been contrary to the plain meaning of the exclusion. The court went on to say that if the alleged property damage or bodily injury did not occur or begin before the effective date of the policy, but the alleged process leading to the ultimate injury or damage began before that date, coverage would not have been excluded.

Before leaving this subject having to do largely with primary policies, it may be worthwhile to identify the items that should be taken into consideration when a policy includes a Montrose-type provision. What should be sought out is whether the endorsement or policy provisions do the following: apply to defense or indemnity or both; apply to claims or suits or both; apply solely to bodily injury and property damage or also to personal and advertising injury; apply to all insureds or certain designated insureds.

Other Alternatives To Aggregating Damages

The Montrose provisions are one way of an attack on the traditional application of occurrence-based coverage. The second prong, which came earlier than the Montrose provisions, comes by way of what is often referred to in short as prior insurance clauses, also known as “pyramiding”, “telescoping”, or “deemer” clauses. These provisions, as a matter of interest, appeared to have originated with umbrella liability policies. It was with the Lloyds umbrella form (June 1960 edition), in fact, that these provisions first appeared. Entitled “Prior Insurance and Non-Cumulation of Liability”, it read: It is agreed that if any loss covered hereunder is also covered in whole or in part under any other excess policy issued to the Assured prior to the inception date hereof, the limit of liability hereon as stated in Item 2 of the Declarations shall be reduced by any amounts due to the Assured on account of such loss under such prior insurance. Subject to the foregoing paragraph and to all the other terms and conditions of this policy, in the event that personal injury or property damage arising out of an occurrence covered hereunder is continuing at the time of termination of this policy, Underwriters will continue to protect the Assured for liability in respect of such personal injury or property damage without payment of additional premium.

Interestingly, the wording of the latter part of the provision corresponds in some ways with the application of coverage under the wording of some Montrose provisions; that is to say, progressive injury or damage continuing in subsequent policy periods will revert back to the policy period in which the occurrence generating such injury or damage began. Subsequent policies with this same wording will not cover the injury or damage to the extent it is covered in whole or in part by the prior policy, pursuant to the provision's initial sentence. It is stated in that sentence that the limits of liability available to pay for a loss are reduced by any amounts paid under any prior policy. To the extent the prior policy pays such a loss, therefore, the limits of any subsequent policy becomes available. This, of course, presumes that the subsequent policy contains a similar provision.

Considering that much of America 's insurance heritage has as its foundation English precedent, it is not surprising that the above quoted Lloyds prior insurance provision began appearing in domestic umbrella policies. Some insurers adopted the above wording verbatim, while others only adopted the first sentence. Many umbrella policy revisions beginning in 1985 did not incorporate these provisions, whereas others continued to include them either because they were not revised or because the insurer simply had no understanding of the provision and chose to leave it alone and not enforce it.

Until recently, it was relatively uncommon to find a prior insurance provision in commercial general liability forms. Because of its inclusion in umbrella policies, a few insurers added similar provisions to their primary policies, though this was the exception to the rule. In 1961, the prior insurance condition was introduced for consideration as a policy provision for standard liability policies. The proposed wording, however, was rejected for at least two reasons: first, there was some doubt as to its enforceability, in relation to the coverage trigger, particularly where successive policies were issued by different insurers; second, insurers were concerned that where such provisions applied only to policies issued by the same insurer, insureds would change insurers frequently to avoid the provision's application. Because prior insurance provisions are not standard policy wording, they were largely ignored by most insurers until the mid-90s. Currently, however, a number of primary insurers issuing CGL coverage are in the process of re-introducing the prior insurance condition. In many cases, these provisions are being used in tandem with the Montrose provisions.

The Courts' Perspective

Prior insurance clauses, unlike Montrose provisions, have had some judicial scrutiny over the years. With the exception of California , many of the cases addressing this issue, particularly the more recent ones, are unpublished lower court decisions involving insureds unprepared, unwilling or unable to take the issue of prior insurance provisions up on appeal. In cases where umbrella insurers are forced to pay because of a prior insurance clause in a primary policy, the umbrella insurer is reluctant to pursue an appeal lest it result in a ruling that would impair the umbrella insurer's future ability to enforce its own prior insurance wording.

Even the limited precedent available has failed to address many of the relevant coverage issues, such as the loss of bargained for coverage. The current judicial trend appears to uphold prior insurance conditions where they are applied in situations involving only one occurrence. Where there are multiple occurrences, litigation persists where insurers seek to show that the facts of a case constitute a single occurrence. For example, consider the case of Pittsburgh Corning Corporation v. The Travelers Indemnity Company, 1988 WL 100787 (E.D. Pa.), where a provision similar to a prior insurance clause or condition (labeled a telescope clause) was at issue. The telescope clause was located with the policy territory provision and read as follows: [I]f any occurrence happens during the policy period of this policy which results in personal injury . . . and personal injury resulting from the same occurrence has also happened during the policy period . . . prior to the policy period of this policy, that policy which is in force at the time the first claim is made against the insured . . . shall constitute the only policy of the company which shall apply . . . .

The insurer argued that the purpose of this clause was to limit coverage for a continuous occurrence to the occurrence limit of a single policy. Because of that, the insurer argued that a cause test should have been applied to show that all claims were the result of the manufacture and sale of asbestos by the insured. The court, however, held that there could easily be multiple occurrences, given that thousands of claimants were alleging exposure on hundreds of job sites, under a variety of conditions and over a period of six years. As a result, the telescope clause was held to be inapplicable, given that its application was clearly limited to situations involving only one occurrence.

Not all prior insurance wording is clearly limited to situations involving one occurrence. As a result, there will undoubtedly be litigation over these provisions as well. The court in the case of Endicott Johnson Corporation v. Liberty Mutual Insurance Company, 928 F. Supp. 176 (N.D. N.Y. 1996) also upheld the application of a prior insurance condition, following determination that there was only one occurrence. In doing so, the court found that the provision at issue, which read as follows, was not ambiguous: If the same occurrence gives rise to . . . property damage that occurs partly before and partly within the policy period, then each occurrence limit and applicable aggregate limit . . . of this policy shall be reduced by the amount of each payment made by the company with respect to such occurrence under a previous policy or policies of which this policy is a replacement.

In the California case of FMC v. Plaisted and Companies, 72 Cal.Rptr.2d 467 (Cal. App., 6 Dist., 1998), the issue of anti-stacking (prior insurance provision), among many others, was raised by an insurer in a case involving progressive property damage caused by a pollutant. The FMC court noted that the lower court in the case of Armstrong World Industries v. Aetna Casualty & Surety Company, 52 Cal. Rptr.2d 690 (Cal. App., 1 Dist., 1996), ruled that “only one policy's limits can apply to each claim” and that the “policyholder may select the policy under which it is to be indemnified”. The FMC court noted also that the Armstrong ruling was consistent with the holding in Keene Corp. v. Insurance Company of North America, 667 F.2d 1034 (D.C. Cir. 1981) and that on appeal, “the policyholders have not challenged that ruling”.

The FMC court defined the “stacking of policy limits” to mean that: . . when more than one policy is triggered by an occurrence, each policy can be called upon to respond to the claim up to the full limits of the policy. Under the concept of stacking . . . the limits of every policy triggered by an occurrence are added together to determine the amount of coverage available for the particular claim. Thus, for example, if an insured could establish that each of four consecutive $10 million policies were triggered by a particular claim, the insured could recover $40 million for a single occurrence, rather than the $10 million available under any single policy.

The FMC court went on to state that such stacking “has been criticized as affording the insured substantially more coverage for liability attributable to any particular single occurrence than the insured bargained or paid for”.

That finding, however, was not consistent with the trigger of coverage (injury or damage during the policy period, regardless of when the occurrence took place), the evolution of relevant policy wording, and the previous inability of insurers to find a way to address this issue. In fact, it seems that in this instance, the FMC court was willing to rewrite the policy rather than require the insurer to adhere to the trigger of coverage. Why was the insured accused of stacking limits because it sought to enforce the coverage trigger? All of this seems inconsistent with the pronouncement of the California Supreme Court in the case of Aerojet-General Corp. v. Transport Indemnity Company, 70 Cal. Rptr.2d 118 (1997) to the effect that the insurance policies before the court “. . . provide what they provide”, and that in agreeing to the policies, the parties “established what was a fair and just interest. We may not rewrite what they themselves wrote . . . .”

Insurers have been reluctant to take this problem head on in the past, in a large part for competitive reasons. Spelling out that progressive injury or damage is limited to a single per occurrence limit exposes insurers adopting that stance to competition from insurers that do not. It also means that the distinctions between claims-made and occurrence coverage are less- pronounced and that traditional notions on pricing and marketing of occurrence-based coverage could be imperiled. Instead of modifying the trigger of coverage to openly address the issue, insurers typically have opted to ignore the problem until recently. Now, however, a more subtle approach in the form of Montrose and prior insurance provisions is being undertaken as opposed to the more practical approach of marketing a policy with a modified trigger.

Conclusion

It was not long after the introduction of liability coverage on an occurrence basis that the problem over progressive losses and the trigger theories were born, along with a great deal of litigation. While this problem might have been inevitable, it was still necessary that liability insurance be written on an occurrence basis, since it was deemed to be essential for many industries where injury or damage not often materialized suddenly.

It is somewhat ironic that the seminal Montrose case dealt with issues over pollution, yet what emanated from that case was policy wording affecting primarily the construction industry. Today, of course, pollution is largely excluded, unless buyback coverage is obtained. So if the Montrose-type wording has any impact, it will likely be with other risks with some continuous injury exposure, such as construction, but certainly not restricted to it. As insurers find more effective ways to exclude or deny coverage, such as by maintaining that defective work is not an occurrence or not property damage, the Montrose-type wording will not be as significant as once thought, as least insofar as the construction industry is concerned.

Some primary insurers nonetheless have not only incorporated the Montrose-type wording in their policies, but also have added the “non-cum” provision that has long been used by some insurers offering umbrella policies. The two provisions sometimes can work as a double whammy. Much depends on the facts of the case. How popular this approach may be will hinge on competition. Of course, umbrella policies are not as broad as they use to be. In fact, many are narrower than the liability coverage that underlies them.

As time goes on, it will be interesting to see how many cases are tried on the Montrose-type provisions, along with issues that also involve the combination of the Montrose-type provisions and non-cumulative clauses.