Foran Glennon Palandech Ponzi & Rudloff

December 2014

Seventh Circuit applies “continuous trigger” theory to first-party water damage claim

John Eggum

 

In a decision that borrowed third-party liability insurance concepts and applied them to a homeowner’s first-party property insurance claim, the Seventh Circuit rejected a “manifestation” rule for determining coverage, and instead adopted a continuous trigger theory that permitted multiple expired homeowners insurance policies to be implicated by water damage that was caused by a defect present since the construction of the insured home.

Factual Background.  The homeowners discovered damage to their home in 2010, resulting from water infiltration that they determined occurred beginning in 1994, when the home was built.  Following the discovery of the damage, the homeowners asserted claims under all homeowners insurance policies that insured the property since 1994.  In response to this request for coverage, Chubb Indemnity Insurance Company and its affiliates, which insured the home from 1994 to 2005, denied coverage.  It was the Chubb Defendants’ position that since the damage manifested in 2010, they could not be responsible for the damage because the “manifestation” trigger applies to first-party property insurance.  The Chubb Defendants also asserted that the claim was submitted well-beyond the applicable limitations period under the terms of the policies and state law.  The homeowners then commenced an action against Chubb. The United States District Court for the Eastern District of Wisconsin entered judgment in favor of the homeowners, finding that the claim was covered under each policy that was in effect while the damage occurred and that there were no limitations issues due to the language of the policies.  Chubb appealed.

Amicus on Appeal.  In connection with the appeal to the Seventh Circuit, the American Insurance Association (AIA), the Property Casualty Insurers Association of America (PCI), the Wisconsin Insurance Alliance (WIA), and Lloyd’s America, Inc. (LAI) jointly-filed an amicus brief in support of Chubb’s position on coverage.  The amici argued that the Wisconsin District Court erred in looking to third-party liability cases for the appropriate insurance coverage trigger in what was a first-party property coverage situation.  They stated that the virtually all states that have considered the issue apply a manifestation trigger in the context of first-party property coverage cases, and that a manifestation trigger provides a clearer, more understandable rule. The amici further argued that uncertainty over the coverage period responsible for a loss will promote insurer uncertainty in establishing premiums for first-party property coverage claims because of the difficulty of accurately assessing the insurer’s potential exposure, and that adoption of a continuous trigger theory will prompt parties to frequently resort to litigation to determine which of several possible insurance policies apply to a claim.

Discussion.  The property at issue was located in Wisconsin, and accordingly Wisconsin law applied.  The Seventh Circuit found that Wisconsin courts applied traditional principles of contract interpretation to assessing insurance policy provisions, and that insurance coverage case law in Wisconsin rejected broad rules and expansive principles of interpretation, in favor of close, discrete readings of the particular policy language at issue.

Under this approach, the Court found that Wisconsin courts “have never adopted a rule that applies the manifestation trigger independent of the language found in a policy in the first-party context nor exiled the continuous trigger theory to the third-party liability landscape.”  Focusing on the language of the policies (which the Court referd to collectively as the “Policy”), the Court noted that the term “occurrence” was defined to mean: “a loss or accident to which this insurance applies occurring within the policy period. . . . Continuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence.”  Based on this definition, the Court found that the parties “‘contemplated a long-lasting occurrence’ that could give rise to a loss ‘over an extended period of time.’”  The Seventh Circuit disagreed that the language of the policies required a “manifestation trigger” given the broad language employed, and found that the Chubb Defendants’ arguments regarding a manifestation trigger where an attempt to create ambiguity where there was none.

Based on its interpretation, the Court stated: “Here, while there was only one ongoing occurrence as defined by the Policy, there was continual, recurring damage to the property with each successive rainfall. . . . The Chubb Defendants do not dispute that physical damage to the building envelope of the home took place during each policy period from October 1994, when the home was constructed, to October 2010, when the effects of the water infiltration manifested. . . . Because the Policy language demonstrates that the parties intended for the continuous trigger theory to apply, the benefits of the Policy [again, a term defined to mean all insurance policies in effect from October 1994 to October 2005] are now available to the Strausses.”

Addressing the arguments of the amici, the Court refused to allow public policy concerns to affect what it determined was the meaning of the policy language at issue, particularly since there was no indication from the Wisconsin Supreme Court that public policy concerns should require a single “trigger” interpretation.

The limitations issues were also decided adversely to Chubb.  Although Section 631.83(1)(a) of the Wisconsin Statutes provides that “[a]n action on a fire insurance policy must be commenced within 12 months after the inception of the loss,” this did not control the outcome of the dispute.  The Court found that the suit limitations period in the policies expanded the time in which suit could be commenced beyond the statutory period.  The Wisconsin statute of limitations language stating that a claim must be filed within one year “after the inception of the loss” starts the clock running “from the date of the damage suffered by the insured from any peril covered by the policy of insurance.” [emphasis supplied].  The policies did not use the word “inception.”  Instead, the policies stated that claims must be filed “within one year after a loss occurs.” [emphasis supplied].  The Court found that: “‘After a loss occurs’ is fundamentally different from ‘after the inception.’ . . . ‘[A]fter a loss occurs’ is ambiguous as applied to a progressive loss and can entirely reasonably be interpreted to mean after a loss completes.”  Since the claim was made and suit was filed within one year of the time the water infiltration was discovered, the Court found that the claim was timely.

Conclusion.  Although this decision represents the minority approach, the Seventh Circuit’s decision in Strauss is highly concerning.  It may prompt policyholders to make claims under numerous expired policies for a single loss, which at a minimum increases administrative and claim handling costs, and may result in legal expenses, without reasonable justification.  As the numerous amicus parties noted in their brief, an insured’s currently in-force property insurance policy should be sufficient to make the insured whole, and therefore the prospect for claims under numerous expired policies merely adds unnecessary redundancy and uncertainty for all involved parties regarding which insurer is responsible for paying for a loss.  The interpretation of the applicable limitations period is likewise troubling, as it takes what should be a straightforward inquiry into the deadline for filing suit and obfuscates it by suggesting that the limitations period may be dramatically longer than expected under certain factual scenarios.

The case is Strauss v. Chubb Indem. Ins. Co., 771 F.3d 1026 (7th Cir., Nov. 18, 2014).