The 1999 CGL Insuring Agreement: ISO's "Montrose Endorsement"
March 2000
ISO has revised the CGL insuring agreement
to address "known loss" issues raised by the California Supreme Court in Montrose
Chemical v Admiral. Find out how significant the new restrictions on coverage
are.
by Jeff Woodward
IRMI
In July 1995 the California Supreme Court ruled in Montrose Chemical Corp. v Admiral Insurance Co.,
913 P2d 878, that the "continuous injury" trigger governs coverage under the
standard CGL policy; the court ruled further that the "known loss" rule does
not necessarily interfere with CGL coverage for loss or damage from a known
occurrence, as long as either (1) the scope of injury or damage occurring during
the policy period or (2) the insured's ultimate liability for that injury or
damage is still undetermined. (The "known loss" or "loss-in-progress" rule is
established by statute in California and some other jurisdictions; elsewhere
it has traditionally been recognized as an axiom of insurance law--the principle
that events already known to have taken place are uninsurable, that one may
not procure "fire insurance on a burning building.")
The reasoning of the Montrose decision has
since been adopted by a number of other courts, both in California and in other
jurisdictions. (See, for example, Pittston Company Ultramar
America Ltd. v Allianz Insurance Co., 124 F3d 508 (3rd Circuit 1997); E&L Chipping Co., Inc., v Hanover Ins. Co., 962
SW2d 272 (Tex App 1998).) In response to these judicial developments, insurers
manuscripted a variety of CGL endorsements to prevent application of one or
both of the "Montrose doctrines"--the continuous injury trigger and the restriction
on the known loss rule. In September 1999, Insurance Services Office, Inc. (ISO),
introduced its own version of a "Montrose endorsement"--a revision of the CGL
insuring agreement that addresses the applicability of the known loss rule,
specifically as that rule comes into play in the context of on-going or progressive
injury and damage.
The Known Loss Rule
In Montrose, some of the claims against the
insured arose out of the escape of toxic wastes from a disposal site over a
period of 4 years during which the insured had general liability coverage with
a single insurer. The first of the applicable policies took effect in October
1982. Just prior to that, in August 1982, the insured had received notice from
the Environmental Protection Agency (EPA) that it was a potentially responsible
party (PRP) for cleanup costs at the waste disposal site. In denying coverage
of these costs under its policies, the general liability insurer argued that
the EPA notice to the insured-before coverage went into effect under any of
its policies--took the escape of toxic wastes out of the "contingent or unknown"
category in which it would be insurable. In short, Montrose could not insure
itself against liability for a pollution event that had already happened and
of which it was already aware.
The California Supreme Court declined to apply the statutory known loss rule
to the claims against Montrose. The court's reasoning was simple. Although there
was a known event--the escape of toxic waste from a disposal site used by Montrose--there
was at the inception of the policy no known loss, no certainty that Montrose
would in fact be held liable. The court drew a distinction between the known
loss rule as it applies to first-party property insurance and application of
the rule within the context of third-party liability coverage. One cannot purchase
insurance on property that has already been damaged by the peril being insured
against. The corollary in liability insurance, said the court, is that one may
not insure one's own "known liability," since it is the liability that is the
loss, not the occurrence out of which liability may arise. The court then enunciated
this line of reasoning as a general principle.
In the context of continuous or progressively deteriorating property
damage or bodily injury insurable under a third party CGL policy, as long
as there remains uncertainty about damage or injury that may occur during
the policy period and the imposition of liability upon the insured, and
no legal obligation to pay third party claims has been established, there
is a potentially insurable risk . . . . Stated differently, the loss-in-progress
rule will not defeat coverage for a claimed loss where it had yet to be
established, at the time the insurer entered into the contract of insurance
with the policyholder, that the insured had a legal obligation to pay damages
to a third party in connection with a loss.
ISO's Response
The newly filed ISO amendatory endorsement, CG 00 57, addresses the issue
of "loss-in-progress" without reference to "known loss" or "known events" or
"known liability." Instead, the endorsement imposes coverage restrictions with
respect to "known injury or damage." Under current CGL editions, the policy's
insuring agreement places two conditions on how and when covered bodily injury
and property damage must occur. First, the injury or damage must be caused by
an "occurrence" that takes place within the "coverage territory." Second, the
bodily injury or property damage itself must occur during the policy period.
CG 00 57 adds a third condition to section b of the Coverage A insuring agreement.
(3) Prior to the policy period, no insured listed under Paragraph 1.
of Section II-Who Is An Insured and no "employee" authorized by you to give
or receive notice of an "occurrence" or claim, knew that the "bodily injury"
or "property damage" had occurred, in whole or in part.
This new provision may seem partly redundant. To be covered under the CGL,
bodily injury or property damage must occur during the policy period. Any injury
or damage that has occurred "in whole" and is known to the insured "prior to
the policy period" would not be covered in the first place, even without this
paragraph b.(3). The point of the new language becomes clearer, however, when
the rest of paragraph b.(3) is read. The issue is not injury or damage that
occurs "in whole" and is known before the inception of coverage. Rather, it
is injury or damage that occurs "in part" before the policy period begins. The
rest of the new paragraph reads as follows.
If such a listed insured or authorized "employee" knew, prior to the
policy period, that the "bodily injury" or "property damage" occurred, then
any continuation, change or resumption of such "bodily injury" or "property
damage" during or after the policy period will be deemed to have been known
prior to the policy period.
The only injury and damage eliminated from coverage by paragraph b.(3) of
the new CGL insuring agreement is injury or damage known to have occurred before
the policy period begins. But if that known injury or damage continues after
the policy's inception date, then, by the terms of the new insuring agreement,
the ongoing injury or damage during the policy period becomes injury or damage
known to have occurred before the policy period begins, and is therefore excluded
from coverage.
Let's look at how this new language would apply in the case of a typical
"continuous injury" claim of a kind covered under the current CGL form. In January
of a certain year a contractor builds storage tanks at a manufacturing plant;
the tanks are used to store the manufacturer's product, a toxic chemical. Some
months after the tanks are built, the manufacturer discovers that the tanks
have been allowing the chemical to leak into the ground virtually from the day
they were filled. The manufacturer informs the contractor of the leak on July
1. The contractor performs corrective work on the tanks and refers the manufacturer's
claim of soil cleanup costs to its CGL insurer. On August 1, the contractor
renews its CGL coverage under a policy with endorsement CG 00 57 attached. On
October 1, the manufacturer notices chemical fumes in another of its buildings
and discovers that chemical from the original leak has migrated to other parts
of the premises. On November 1, a property owner near the plant makes a claim
against the manufacturer and the contractor, alleging that his water well has
become contaminated with the chemical from the leaky tank. On December 1, other
nearby property owners sue the manufacturer and the contractor, alleging that
they have suffered bodily injury from drinking contaminated ground water caused
by the leak.
The contractor's original CGL policy responds to the cost of cleaning up
the manufacturer's premises--that is, the cost to repair property damage caused
by an unexcluded pollution event. (The contractor's cost to repair the leaky
tank would not be covered, since it is damage to the insured's work arising
out of the work.) The second claim of the manufacturer based on the October
1 discovery of additional pollution, and the property damage claim of the well
owner, represent allegations of damage that are continuations of the original
pollution event. Under the "continuous injury" coverage trigger, the insured
contractor could argue that the pollution of other parts of the manufacturer's
premises and the contamination of nearby water wells was property damage that
occurred during the policy period that began August 1, with a separate set of
policy limits applicable to those claims.
Regardless of what coverage trigger applies, however, many insurance professionals
would argue that the contractor cannot purchase on August 1 any insurance for
liability arising out of property damage that occurred (or began to occur) the
previous January and that the contractor knew about before the August 1 policy
took effect. The Montrose decision contradicts the opinion of these insurance
professionals, holding that the "known loss" rule is not applicable in such
circumstances. Paragraph b.(3) of the new CGL insuring agreement, on the other
hand, provides new specific grounds for invoking a "known loss" rule in exactly
these circumstances. The October 1 claim of the manufacturer and the November
1 claim of the water well owner represent a "continuation, change or resumption"
of property damage that the insured knew about before the August 1 policy period
began. Those claims are regarded under the new CGL language as property damage
"known prior to the policy period," even though the damage occurred during the
policy period. There is no coverage under the August 1 policy for this damage.
With respect to the subsequent bodily injury claims of nearby residents,
the new CGL language does not provide any clear grounds for denial. Prior knowledge
of "property damage" is not prior knowledge of "bodily injury," even if the
injury stems from the same release that caused the property damage. Nothing
in the new language makes the bodily injury claims a form of "known loss."
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