In insurance coverage, there are a lot of occurrences, including bodily injury and property damage occurrences, triggers of occurrence, number of occurrences, and payment of occurrences involving allocation of damages under a commercial general liability policy (CGL).
All of these are related to the definition of “occurrence” in the CGL: This insurance applies to “bodily injury” and “property damage” only if “caused by an ‘occurrence’ that takes place in the ‘coverage territory.’” And “occurrence” means an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” (See Insurance Services Organization CG0001).
Property Damage: Occurrence and Construction Defects
Accidents involving buildings, homes, real property, personal property, and fixtures may be covered under the CGL.
Since 1986, state courts have been divided on whether a CGL policy covers a general contractor when a subcontractor’s faulty work damages previously undamaged work of another contractor. Courts have varied in their analyses of whether construction defects satisfy the requirement of an “occurrence” and whether the defect equates to property damage.
Over the past decade, the majority of the states, when evaluating this issue, have determined coverage exists for claims against a general contractor, finding an “occurrence” and applying the subcontractor exception to the “your work” exclusion. In U.S. Fire v. J.S.U.B., 979 So. 2d 871 (Fla. 2007), an influential early case from the Florida Supreme Court, the court explained why defective work by a subcontractor causing damage to a contractor’s completed project can be property damage caused by an “occurrence” under a post-1986 CGL policy. Most recently, the Illinois Supreme Court, in Acuity v. M/I Homes of Chicago, LLC, 234 N.E.3d 97 (2023), joined the majority.
Conversely, the Pennsylvania Supreme Court, in Kvaerner Metals Division of Kvaerner of United States, Inc. v. Commercial Union Insurance Co., et al., 908 A.2d 888 (2006), held that language in a CGL policy defining an “occurrence” was unambiguous and did not provide coverage for claims against the insured, which were premised on allegations of faulty workmanship. Recently, the Ohio Supreme Court, in Ohio Northern University v. Charles Construction Services, Inc., 155 Ohio St. 3d 197 (S.Ct. 2018), similarly determined that property damage caused by a subcontractor’s faulty workmanship is not fortuitous and does not meet the definition of an “occurrence” under a CGL policy.
Finally, it should be noted that, contemporaneously, several legislatures—including in Colorado, Hawaii, Arkansas, and South Carolina—stepped into the fray and defined “construction defects” and “occurrence” by way of statute. In each state, the legislature was motivated by judicial decisions from the highest court in that state that limited insurance coverage for construction-defect claims, and a desire to return coverage for construction contractors.
Triggers of Occurrence for Property Damage
Insureds and insurers use “trigger of occurrence” concepts to determine the number of policies involved and the total indemnity in multi-policy claims. Determining the trigger is often straightforward, but in cases like extended environmental pollution and latent property damage, courts use different tests to decide which policies apply and the amount of coverage. Recognized triggers include “manifestation,” “injury-in-fact,” and “continuous,” each providing varying coverage over different policy periods.
Property Damage and Construction-Defect Triggers
There are several triggers of occurrence for property damage, and they usually involve construction defects. Each trigger is outlined and discussed in detail in the South Carolina Supreme Court decision in Joe Harden Builders v. Aetna Casualty & Surety Co, 326 S.C. 231 (1997).
Most courts apply the continuous trigger or injury-in-fact, while the manifestation trigger has been rejected in many jurisdictions. Many courts now favor the continuous and injury-in-fact triggers, and these triggers “have enjoyed much success in coverage litigation for construction defects.” [See Randy Maniloff, "General Liability Insurance Coverage: Key Issues in Every State" (Oxford, 5th Ed., available on LexisNexis)].
In explaining its shift to injury-infact and away from the manifestation trigger, the Texas Supreme Court, in Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 24 (Tex. 2008), pointed out that “property damage occurred when a home that is the subject of an underlying suit suffered wood rot or other physical damage. …The date that the physical damage is or could have been discovered is irrelevant under the policy. …This policy links coverage to damage, not damage detection. …The policy asks when damage happened, not whether it was manifest, patent, visible, apparent, obvious, perceptible, discovered, discoverable, capable of detection, or anything similar.”
Following this analysis, the Texas Supreme Court adopted the injury-infact trigger, likely the most often used trigger of occurrence. In the evaluation, the court explained:
“Looking to the date of actual injury, besides being consistent with the policy terms, is also consistent with scholarly authority. To quote one leading insurance law treatise, ‘[T]he time of the occurrence of the accident within an indemnity policy is generally not considered to be the time the wrongful act was committed but the time when the complaining party was actually damaged.’ Focusing on the date injury manifests itself basically operates to provide certainty to insurers, but the injury-in-fact approach probably is more technically in tune with the spirit of the parties’ actual intentions, and with the insured’s expectations, based on frequently encountered policy language tying bodily ‘injury’ or property ‘damage’ to the concept of ‘occurrence.’”
The “Cause” and “Effect” Tests: How Many “Occurrences” In Each Policy Period?
Courts have developed several ways to interpret this question, however the two main tests are known as “cause” or “effect.” The majority position is the “cause” test, which looks to a common unifying cause. This issue and its resolution affect indemnity dollars available under the CGL policy or policies.
For example, with defective drywall, concrete, or siding installed in many homes, is there one occurrence (cause) or multiple occurrences (effect)? Assume the defective materials caused $100,000 in damages to 20 houses. Under the “cause” test, this could be deemed one occurrence with $1 million in coverage. If all 20 homeowners were paid under a CGL policy with $1 million per occurrence and a $2 million aggregate, they would only receive $50,000 each.
Conversely, under the “effects” test, the court allows for multiple occurrences. With a $2 million aggregate and $1 million per occurrence, the 20 homeowners would share $2 million, each receiving $100,000.
The juxtaposition of the following cases illustrates how the tests affect construction property damage cases. An Indiana federal court held that property damage caused by defective concrete supplied by the insured to contractors and used on varied and different projects constituted multiple occurrences. [See Irving Materials, Inc. v. Zurich Am. Ins. Co., 2007 U.S. Dist. LEXIS 98914 (S.D. Ind. 2007)]. Irving Materials supplied “ready-mixed concrete to contractors (or subcontractors) for various uses at job sites, pursuant to the contractors’ contracts with the building or site owners.” The contractors alleged that Irving Materials’ concrete was defective and “resulted in property damages, posed a risk of significant structural damage, and other consequential damages….” Finally, in applying the “effect” test, the court explained, “[Irving Materials’] mixing and distribution of the concrete batches did not occur pursuant to a single contract with a single customer [rather they] had multiple sales contracts with multiple customers and these contracts were almost entirely unrelated to each other, both temporally, in that they were spread over the course of two-and-a-half years, and spatially, as the concrete was delivered to multiple job sites.”
In contrast, and with similar facts, the U.S. Court of Appeals for the Ninth Circuit, in Chemstar, Inc. v. Liberty Mut. Ins. Co., 41 F.3d 429 (9th Cir. 1994), determined that an insured’s supplying of lime plaster, which ultimately caused plaster pitting in 28 homes, constituted one “occurrence.” In applying the “cause” test over the “effect” test, the court explained that “[w]ithout the single trigger, courts may, at their whim, allocate losses among insurers by drawing arbitrary lines between, say, two condominiums in the same building, two halves of one duplex, a house and a guest house on one property, or two homes on the same street.” The court found the “effect” test could result in “anomalous outcomes…[and] expose insurers to greater uncertainty.”
Allocation
For allocation, Insurance Company of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980)(pro rata), and Keene Corporation v. Insurance Company of North America, 667 F.2d 1034 (D.C. Cir. 1981) (joint and several or all sums), are regarded as the leading cases for evaluating applicable insurance policies in a continuous trigger or exposure trigger applied in a claim involving construction defects, long term pollution property damage, or diseases related to asbestos or harmful substances in the workplace.
In “New Appleman Insurance Law Practice Guide,” the treatise provides the following examples of how pro rata works: “Assume the insured sustains a $10 million loss for an injury that continued for 10 years. Each year is assigned $1 million of the loss. Thus, if Carrier A insured the policyholder for three years, and Carrier B for seven years, then Carrier A’s share would be $3 million, and Carrier B’s share would be $7 million.”
Alternatively, this is how all sums or joint and several works, according to the guide: “Assume an insured suffers a $20 million loss that triggers 10 successive policies. In the first five years, the insured did not purchase insurance that would cover the loss. In years six through nine, it purchased primary coverage with limits of $1 million and excess coverage in the amount of $2 million. In year 10, it purchased a $5 million primary policy and a $10 million excess policy. Under the ‘all sums’ method, the insured will pursue coverage under year 10, as it has the most coverage in that year. In some jurisdictions, the insured will recover $15 million and pay on its own the remaining $5 million. In some jurisdictions, the insured can recover the remaining $5 million by ‘spiking’ policies in years six through nine until it has fully satisfied its loss. The insurers who paid a disproportionate amount of the loss can then pursue coverage from other carriers that have not paid their proportionate share.”
Although insurers sometimes differ on their views of policy language and its effects, many insurers likely agree with the “view that the coverage responsibility for consecutively triggered liability insurers should be allocated by time on the risk, the position advanced by most insurers facing long-tail claims.” [See Randy Maniloff, “General Liability Insurance Coverage” (5th Ed.)]. Section 41 of the American Law Institute’s “Restatement of the Law of Liability Insurance” notes that where there is an application of a continuous or exposure trigger of occurrence over multiple policy periods, “a default rule of pro rata allocation under occurrence-based liability policies should apply for indemnity costs.” In explaining this recommendation in the Restatement, it notes that this “method is the ‘most consistent, simplest, and fairest solution’ as opposed to the all-sums method to allocation, which ‘allows an insurer to be held responsible for a large amount of losses that did not occur during the policy period that the insurer agreed to cover.’” (Id., citing Restatement § 41).
In the insuring agreement of a CGL, there are a lot of moving parts, so keep your eye on “occurrence” for an evaluation of coverage.