Expert Commentary

Pennsylvania Adopts "First Manifestation Rule" as the CGL Coverage Trigger

On December 15, 2014, in Pennsylvania Nat'l Mut. Cas. Ins. Co. v. St. John, 106 A.3d 1 (Pa. 2014), the Pennsylvania Supreme Court decided that, absent a narrow exception for asbestos-type claims, the proper coverage trigger under a standard Insurance Services Office, Inc. (ISO), commercial general liability (CGL) policy is "first manifestation"—that is, only the policy in effect when "either bodily injury or property damage becomes reasonably apparent" is triggered.


Liability Insurance
July 2015

This coverage trigger, which by definition restricts coverage to a single policy year even when bodily injury or property damage occurs progressively over multiple policy years, has been categorized by at least one legal source as "clearly the minority view" and "resoundingly rejected" as a coverage trigger theory.1

The Project

Thunder Valley Farm engaged LPH Plumbing and Heating LLC to install a wastewater drainage system and a freshwater drinking system to expand its dairy operations. LPH Plumbing subcontracted Stoltzfus Welding to assist in welding pipes to a holding tank for the new freshwater drinking system. The project was completed and put to its intended use by Thunder Valley by July 1, 2003.

What Went Wrong

Unknown to Thunder Valley, the plumbing systems were defectively installed. The PVC piping used by LPH Plumbing for the wastewater was cracked—allowing waste byproducts, known as "gray water," produced during the dairy farm's milking operations, to escape. In addition, the intake pipe leading to the holding tank that was part of the freshwater drinking system was not properly welded by Stoltzfus, allowing the gray water to infiltrate into the freshwater holding tank.

The Resulting Property Damage

The dairy herd was exposed to the contaminated drinking water shortly after the expanded dairy operations began, causing various health and reproductive problems with the herd beginning in April 2004, progressing with greater frequency, though intermittently, over the next few years. Unaware of the graywater contamination, Thunder Farm consulted numerous veterinarians and nutritionists to help diagnose and remedy the herd's maladies, such as reduced milk production, but Thunder Farm could not identify the source of the problem, as they tested the freshwater wellhead rather than the holding tank. Finally, Thunder Farm suspected the herd's freshwater drinking supply was the cause of their difficulties in March 2006, as they noticed the cows thrashing their heads in their drinking troughs and refusing to drink.

After investigating further, Thunder Farm discovered the cracked PVC piping and the failed welds to the freshwater tank and thus found the seepage of the gray water into the herd's freshwater drinking supply.

The Underlying Litigation

In 2007, Thunder Valley sued LPH Plumbing and Stoltzfus for negligent installation of the plumbing system. Penn National had issued to LPH Plumbing three CGL policies (July 1, 2003, to July 1, 2006) as well as an umbrella policy, but the umbrella was only for the period July 1, 2005, to July 1, 2006. Penn National defended LPH Plumbing against the Thunder Valley negligence claim, but the jury found in favor of Thunder Valley, determining LPH Plumbing and Stoltzfus (LPH's subcontractor) were jointly and severally liable for $3.5 million in damages to Thunder Valley with an additional $277,505.36 in delay damages.2

Penn National appealed the jury verdict but agreed to discontinue the appeal of the jury verdict in exchange for paying Thunder Valley $1.2 million. (The amount represented the each occurrence limit on one of Penn National's CGL policies plus a portion of the delay damages.) Thunder Valley, however, retained the right to seek all $3.5 million directly against Penn National if covered by Penn National's CGL policies issued to LPH Plumbing.

The Coverage Dispute

On cross-motions for summary judgment, Penn National argued it was liable only under the first CGL policy issued to LPH Plumbing—July 1, 2003, to July 1, 2004—as this was the policy in effect when the injuries first manifested. Thunder Valley counterclaimed, arguing that the injuries manifested in the later policy period—July 1, 2005, to July 1, 2006, the policy period that included the Penn National umbrella policy. In the alternative, Thunder Valley sought declaration that all four of the LPH Plumbing policies with Penn National were triggered.

The Stipulated Facts

What makes this coverage dispute noteworthy is what was agreed upon in the declaratory judgment—the insurer and Thunder Valley agreed that (1) the damages to Thunder Valley's herd constituted "property damage" as defined; (2) the property damage took place during the policy period of each of the Penn National policies at issue; and (3) no exclusion applied.

Normally, if the insurer agreed that the property damage occurred during all of its policy periods and further that no exclusion applied, all of the policies would be triggered. In this instance, the policy wording was specifically quoted, including the insertion of Penn National and the named insured, LPH Plumbing:

(a) [Penn National] will pay those sums that the insured [LPH Plumbing] becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies....

(b) This insurance applies to "bodily injury" and "property damage" only if:

(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory";

(2) The "bodily injury" or "property damage" occurs during the policy period; and

(3) Prior to the policy period, no insured listed under Paragraph 1. of Section II—Who Is An Insured and no "employee" authorized by [LPH Plumbing] 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.

Without explanation, the Pennsylvania Supreme Court thought it necessary at this point in its opinion, before offering any written analysis of the trial or appeals court's decisions, to characterize the policy wording, observing that the policies were "occurrence policies" and further observing by footnote and citation to older cases that "[a]n 'occurrence' policy protects the policyholder from liability for any act done while the policy is in effect, whereas a 'claims-made' policy protects the holder only against claims made during the life of the policy." D'Auria v. Zurich Ins., 507 A.2d 857 (Pa. Super. 1986).

While this may be helpful in generally distinguishing "occurrence" from "claims-made" policies, this aphorism does not accurately describe the coverage trigger of the Penn National "occurrence" CGL policies employing the above standard ISO CGL wording.

Trial and Appeals Courts' Decisions

In its findings, the trial court determined that an occurrence triggers coverage under one of the CGL policies when the effect of a negligent act first manifests itself in a manner that would put a reasonable person on notice of damage to personal property—the so-called first manifestation rule. Further, the trial court rejected a multiple trigger approach, ruling such a trigger theory did not apply outside of latent disease cases, such as asbestosis or mesothelioma.

The appeals court was divided but affirmed the trial court's findings—agreeing that the "first manifestation rule" served as the appropriate test for "determining when an occurrence happens pursuant to a policy of commercial general liability insurance, like the Penn National policies." [Emphasis added.] The appeals court also declined to find multiple triggers, refusing to expand the multiple trigger theory beyond asbestos. However, Judge Mary Jane Bowes dissented, opining that she would have accepted the argument that the property damage constituted continuous and progressive damages warranting application of the multiple trigger theory and would have granted coverage under each of the four of Penn National's liability policies. Judge Bowes further opined that application of multiple trigger theories "would best effectuate the reasonable expectations of the parties pursuant to the underlying CGL policies."

Pennsylvania Supreme Court's Opinion

Thunder Valley appealed the Pennsylvania Superior Court's (appeals court's) decision, raising three specific issues. The first two issues raised presumed that the "first manifestation" coverage trigger was correct—and argued that the property damage manifested in 2006 and not in 2004. The third question raised was whether the multiple trigger theory applied to cases "presenting continuous, progressive 'property damage,' so that all policies on the risk from exposure to the harmful condition through 'manifestation' of the injury are triggered."

Much of the court's opinion concerned what constitutes "manifestation," with the Pennsylvania Supreme Court concluding that the facts were such that the property damage first manifested in 2004 and not 2006.

Multiple Trigger Analysis

After observing that "The policy language plainly states that coverage is triggered when 'bodily injury' or 'property damage' occurs during the policy period," the court nonetheless concluded, absent evidence of any analysis of the Penn National CGL policy wording, that:

Thus, we hold, consistent with the first manifestation rule articulated in D'Auria, that coverage is triggered under one of the Penn National policies when either bodily injury or property damage becomes reasonably apparent. See D'Auria, 507 A.2d at 861.

As respects the multiple trigger of coverage, the court simply reiterated that "the first manifestation rule serves as the appropriate trigger of coverage theory under the Penn National policies …" and further:

A close reading of the language contained in the Penn National policies reveals that, consistent with the first manifestation approach, only the policy in effect when an occurrence first arises is answerable for the ensuing bodily injury or property damage. [Emphasis added.]

D'Auria

As is evident, the court relied in large part on prior insurance case law—D'Auria v. Zurich Ins., 507 A.2d 857 (Pa. Super. 1986)—to arrive at its "first manifestation rule." This reliance, however, is badly misplaced. D'Auria represents an attempt by the court to determine the appropriate coverage trigger for an occurrence-based medical malpractice policy.

In D'Auria, a physician was being sued by a former patient for alleged negligent medical treatment from 1957 to 1963, which the patient alleged resulted in renal failure in 1979. The coverage question was what coverage trigger should be adopted for the numerous malpractice policies that protected the physician. The court determined that all of the alleged injuries arose out of one occurrence, that the occurrence was the policy trigger, and that "an occurrence happens when the injurious effects of the negligent act first manifest themselves in a way that would put a reasonable person on notice of injury."

Today's occurrence medical malpractice policies are often triggered by an "incident," and that "incident" must take place during the policy period. In many instances, an "incident" is defined as a "negligent act, error, or omission" in the performance of professional services. Unlike the medical malpractice policy relied on in D'Auria, the plain wording of the CGL policy requires that the bodily injury or property damage occur during the policy period.

It should be evident that the insuring agreement and coverage trigger of occurrence in medical malpractice policies bear virtually no resemblance to the wording in the ISO CGL insuring agreement at issue here. The only observable similarity between policy interpreted in D'Auria and the Penn National policy is that both the medical malpractice and the CGL policies were occurrence policies. But when the occurrence itself takes place is irrelevant in any analysis of the CGL policy wording employed by Penn National—the only requirement in Penn National's CGL policy is that the bodily injury or property damage must be caused by an occurrence and the occurrence must be within the coverage territory.

In his dissent, Justice Thomas G. Saylor pointed out the majority's failure to properly analyze Penn National's CGL policies' coverage trigger:

I also have reservations concerning the majority's analysis. For example, the majority opinion often recognizes the conceptual difference between an "occurrence" and a "trigger" of coverage (such as first manifestation).... Nevertheless, the majority cites affirmatively to cases which conflate these insurance-law concepts. See, e.g., id. at 28–29 (relying upon D'Auria v. Zurich Insurance Co., 352 Pa. Super. 231, 507 A.2d 857 (1986), for the proposition that "[a]n occurrence happens when the injurious effects of the negligent act first manifest themselves in a way that would put a reasonable person on notice of injury" (emphasis in original)).

In other words, the court's reliance on D'Auria resulted in confusing and ultimately failing to distinguish between an occurrence and the result of the occurrence—in this instance, the property damage—which is crucial for the appropriate analysis of the Penn National CGL policies.

A Single Occurrence

In following the "cause" test, it was agreed that Thunder Valley's claim was the result of one occurrence. There is some suggestion, albeit not expanded upon in any detail by the court's decision, that such a finding requires the triggering of only one CGL policy, despite the stipulation that property damage occurred in all three Penn National policy years.

However, the court in J.H. France Refractories v. Allstate Ins. Co., 626 A.2d. 502 (Pa. 1993), found that, simply because the bodily injury or property damage was caused by a single occurrence, coverage was not, for this reason alone, restricted to one CGL policy.

An "occurrence" includes "continuous or repeated exposure to conditions which result in bodily injury." The insurers which drafted the definition obviously contemplated the possibility of injury resulting from continuous or repeated exposure to conditions, and specified that the process of exposure was to constitute one occurrence. If prolonged exposure, constituting one occurrence, resulted in injury, and if the injury occurred during the time a given policy was in effect, then the injury is an insurable risk under the terms of that policy. [Emphasis added.]

When the policy limits of a given insurer are exhausted, J.H. France is entitled to seek indemnification from any of the remaining insurers which was on the risk during the development of the disease.

In other words, while the Thunder Valley claim may constitute one occurrence, such a finding does not restrict coverage to only one of Penn National's CGL policy periods.

The Ambiguity

Curiously, the court pointed out an ambiguity in Penn National's coverage, conceding that "… apropos of the multiple trigger theory, it can be construed to mean that continuous, progressive property damage by a single occurrence but spanning multiple policy periods triggers coverage under each policy," but refused to resolve the ambiguity against Penn National and instead quickly reverted to reliance on D'Auria, concluding:

When LPH Plumbing and Penn National drafted the Penn National policies, it is reasonable to believe that they intended to invoke the prevailing first manifestation rule with the requirement that property damage "[occur] during the policy period." It is unlikely that the parties would have intended or expected a single occurrence, albeit with property damage continuing past the end of the respective policy period, to trigger coverage under multiple consecutive policies. At the very least, they should have anticipated its application to the Penn National policies, and drafted around the first manifestation rule if they preferred a different trigger of coverage.

Certainly, the court recognizes that neither LPH Plumbing nor Thunder Valley "drafted the policies" or that either was afforded any genuine opportunity to "draft around the first manifestation rule." This finding was directly addressed by Justice Saylor's dissent:

Indeed, the majority ultimately discerns a critical ambiguity in the policy language, but it nevertheless declines to apply the rule of construction (which it otherwise acknowledges should pertain) that "the policy is to be construed in favor of the insured to further the contract's prime purpose of indemnification and against the insurer, as the insurer drafts the policy, and controls coverage."

The majority further acknowledges that, under these circumstances, the policies could be construed to support Appellants' multiple-trigger theory per the third issue accepted for review. Still, the majority refers to the parties' "reasonable expectations" to defeat such interpretation and to adopt the construction favored by the insurance company.

Aside from its problematic reliance on D'Auria, the court deviated from usual insurance policy interpretation and construction—resolving an ambiguity the court itself identified in the policy wording in favor of the insurer, apparently justifying its position by citing the reasonable expectations doctrine to avoid providing coverage.

Known Injury or Damage Wording

To further its position that the "first manifestation rule" should apply, the court cited the so-called Montrose wording (known injury or damage).3 Specifically, the court stated "… it is evident that the first manifestation approach for determining coverage is better construction," cited portions of the known injury or damage wording, and concluded, "if a single occurrence could trigger coverage under multiple policy periods, then Section 1 (c.) would be rendered largely irrelevant."

Section 1 (c.) is properly interpreted only when read as part of Section 1 in its entirety, including Section 1 (b.) (3.) and Section 1 (d.). The purpose of the known injury or damage wording is to eliminate coverage for injury or damage that was known to certain insureds prior to the policy period. Section 1 (c.) is stating that once certain insureds know of ongoing injury or damage, any continuation, change, or resumption in future policy periods will be deemed to have occurred during the policy period in which the insureds first knew of the continuing injury or damage.

The crucial coverage issue here is that this provision (Section 1. (c.)) applies to certain insureds—and does not apply to claimants. Throughout its decision, the court maintained that the CGL policy is triggered "when the property damage became reasonably apparent" to claimants.4

Stated differently, the court determined that coverage applied when the property damage first manifested to Thunder Valley—not when the property damage first manifested to LPH Plumbing or any other insureds under LPH Plumbing's CGL policies issued by Penn National.

The court was clearly mistaken in pointing to the known injury or damage wording as a basis for its "first manifestation rule," as the wording cited did not apply to bodily injury or property damage that became reasonably apparent to the claimants—this provision applied only when injury or damage was known to certain insureds under LPH Plumbing's CGL policies. The court's opinion offered no evidence that LPH Plumbing knew of the damage to the herd in April 2004 or any date earlier than sometime in 2007, when Thunder Valley brought suit against LPH Plumbing.

Conclusion

Pennsylvania policyholders and their coverage counsel should be aware of the implications of this case—under Pennsylvania law, a CGL policy is triggered only when the bodily injury or property damage first manifests. Not only is this the minority view; it is a very narrow interpretation of the CGL policy trigger, as only one CGL policy can be triggered for progressive injury or damage, despite the fact that the policyholder may be paying premium for multiple policies.

What is particularly troublesome about this high court's decision is the fact that there was no dispute as to when the property damage took place. As everyone agreed that the property damage took place over all three policy periods, the decision would seem to be straightforward—all three Penn National CGL policies were triggered. The opinion and now the law are contrary to the plain meaning of the CGL policies at issue. Put differently, the CGL policies at issue, which included standard ISO wording, clearly stated that the policy was triggered when the bodily injury or property damage occurred:

(b) This insurance applies to "bodily injury" and "property damage" only if:

(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory";

(2) The "bodily injury" or "property damage" occurs during the policy period;… [Emphasis added.]

As noted by Justice Saylor in his dissent:

Since Penn National stipulated that property damage took place during each of the three policy periods, see Stipulation at 2 ¶14, R.R. 166a, I am unable to discern an explicit reason deriving from unambiguous policy language brought into issue in this appeal why coverage should not obtain under each such period.

Nothing in the CGL wording suggested that the manifestation of the property damage was relevant. Confusing the occurrence with the resulting bodily injury or property damage has resulted in wrongly decided insurance law in Pennsylvania.


1Randy Maniloff and Jeffrey Stempel, General Liability Insurance Coverage—Key Issues in Every State, 3d ed., © Matthew Bender & Company, Inc., January, 2015, pp. 539, 543.

2The Supreme Court of Pennsylvania opinion does not explain the "delay damages."

3See "Known Injury or Damage" (October 2003) and "The Montrose Endorsement—15 Years Later" (September 2014).

4"We therefore affirm the trial court's holding the injurious effects of LPH Plumbing's negligent installation of the plumbing system first manifested in April, 2004…. The fact that Appellants did not discover the cause of the herd's various maladies until March, 2006 … has no bearing on our determination of which Penn National policy applies."


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

Learn More