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July 2010

Pennsylvania General Insurance Co. v. American Safety Indemnity Company. Property Damage During Policy Period Triggers Coverage Under Policy

CGL Policy Triggered Where Property Damage, Not Casual Conduct, Happens During Policy Period

(2010) _____Cal. App. 4th ____, 10 C.D.O.S. 8296

The California Court of Appeal, Fourth Appellate District, reversed a trial court's determination that the language of a commercial general liability policy precluded coverage for property damage caused by acts or omissions happening before inception of the policy.  The Court of Appeal held the policy was reasonably susceptible to the interpretation that the trigger of coverage was damage to property during the policy period, not the causal conduct. 

D.A Whitacre Construction, Inc. (Whitacre) was a framing subcontractor.  Pennsylvania General Insurance Company (Pennsylvania General) issued a commercial general liability (CGL) policy to Whitacre, effective October 7, 1998 through December 31, 2001.  American Safety Indemnity Company (ASIC) insured Whitacre under a CGL policy for the period December 31, 2001 through December 31, 2002. 

In 1999, a general contractor retained Whitacre to provide framing and rough carpentry work on a construction project.  Whitacre substantially completed its work by June, 2001.  A final inspection notice for the entire project was issued in March, 2002.

In April, 2002, several construction defect lawsuits were filed which included claims that Whitacre's work was deficient and damaged the project.  Whitacre tendered its defense to Pennsylvania General and ASIC.  ASIC declined coverage, and Pennsylvania General funded the defense and paid settlement costs.  

Pennsylvania General then filed an action for declaratory relief and equitable contribution against ASIC.  The insurers filed cross-motions for summary judgment.  The trial court ruled in favor of ASIC.  It concluded ASIC's policy contained two separate triggers: occurrence and property damage.  Both must happen during the term of insurance.  Because Whitacre's allegedly defective work (i.e. the "occurrence") was completed before inception of the ASIC policy, the trial court concluded the claims asserted against Whitacre failed to trigger a coverage potential under the ASIC policy. Pennsylvania General appealed. 

The Court of Appeal concluded the pivotal issue is whether the terms of the ASIC policy clearly and unambiguously provide for two separate triggers of coverage.  In other words, must the causal acts by Whitacre and the damages resulting from those acts happen during the effective date of the policy before a coverage potential exists? 

ASIC agreed to indemnify Whitacre for any amount Whitacre became obligated to pay as "'property damage' to which this insurance applies."  This coverage "applies to . . . 'property damage' only if: (1) The . . . 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory'; and (2) The. . . 'property damage' occurs during the policy period." 

ASIC's policy however contained two endorsements that modified the standard policy provisions.  The first modified the definition of "occurrence," as follows:

'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.)

The second endorsement, titled "PRE-EXISTING INJURY OR DAMAGE EXCLUSION," stated: 

This insurance does not apply to [? ]1.  Any 'occurrence', incident or 'suit' . . . [? ] [(a)] which first occurred prior to the inception date of this policy . . . ; or [? ] [(b)] 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.

The Court of Appeal noted California courts have repeatedly concluded that "the time of occurrence of an accident within the meaning of an insurance policy is the time the complaining party was damaged, not the time the wrongful act was committed." In determining whether ASIC's two endorsements required a different conclusion, the Court observed ambiguities in coverage clauses must be resolved most broadly in favor of coverage, and exclusions and limitations on coverage narrowly construed.  Applying these rules of interpretation, the Court found ASIC's endorsement modifying the definition of "occurrence" failed to clearly state causal conduct must also occur during the policy period. The language of this endorsement, read as a whole, was at least equally susceptible to the interpretation that resulting damage, not the causal conduct, is the defining characteristic of the occurrence that must take place during the policy period to create coverage. 

This interpretation was supported by the Pre-Existing Injury Or Damage Exclusion endorsement, which used the term "occurrence" to refer to damage and not to the causal acts that caused the damage.  The cases ASIC relied upon were also distinguished. The Court of Appeal concluded these cases addressed a different question - how to construe the term "occurrence" in the context of determining whether to apply per-occurrence policy limits. None of these cases construed "occurrence" in the context of a coverage trigger.

The Court of Appeal did agree the ASIC policy language was designed to circumvent the "progressive damage-continuous trigger" rule set forth in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645. This did not assist ASIC, however, because that interpretation meant "the appropriate focus is on when the damages caused by the negligent causal acts of the insured first commenced, ? not on when the insured completed its work." (Emphasis in original.)  The trial court granted summary judgment based solely on its conclusion there was no coverage potential because Whitacre completed its work before inception of the ASIC policy.  This was an error because the policy was reasonably susceptible to the interpretation that coverage depended not upon the timing of the causal acts but upon timing of the resulting damage. Because there was a dispute over when property damage first began, the trial court erred granting summary judgment in ASIC's favor.

This interpretation was further reinforced by the policy's products-completed operations hazard coverage. This coverage is conditioned on damage occurring during the policy period, not on when the work itself is completed.

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This opinion is not final.  Though it has been certified for publication, it may be modified on rehearing, or granted review by the Supreme Court of the State of California.  Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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Aaron P. Rudin