Despite some initial predictions of doom regarding the implications of the
Montrose endorsement, whose wording has been incorporated into the CGL
insuring agreement beginning with ISO's October 2001 CGL edition,
litigation is still surprisingly light. And a fair amount of the litigation
that has resulted involves one insurer against another insurer, seeking
contribution for both defense costs and damages paid.
First Manifestation or Claims-Made Trigger?
At the time of the promulgation of the Montrose endorsement in 1999, a few
commentators predicted that the new Montrose wording would effectively
convert the CGL into a "first manifestation" or
"claims-made" policy trigger. Fifteen years later, it is obvious
neither is the case. Consider the following observation in 2009 by Randy J.
Maniloff in Mealey's Litigation Report: Insurance 23, no. 25
(2009): 5:
The Montrose Endorsement does not eliminate the continuous trigger by any
means. It is still alive and well for all policies on the risk during the
period of progressive "bodily injury" or "property
damage," so long as the insured was not aware of it.
In other words, the Montrose wording does not prevent the triggering of
multiple CGL policies, provided certain insureds do not have prior
knowledge of the progressive or continuing bodily injury or property
damage.
For example, if "property damage" begins and continues over five
CGL policy periods, the Montrose wording would not restrict coverage
until certain insureds have knowledge of the continuing property
damage. And then, the coverage restriction applies only to
subsequent CGL policies, so it is entirely possible all five CGL policies in
this example would be triggered—even with the Montrose wording. Today's
CGL is certainly not a "first manifestation" or
"claims-made" policy simply by virtue of the Montrose wording.
The purpose of the Montrose wording is to explicitly establish by the
policy terms the date that coverage for "continuous trigger"-type
claims will end. In short, no coverage is provided in future CGL
policies for injury or damage known to certain insureds prior to the
inception date of these future CGL policies.
Excludes All Bodily Injury or Property Damage Commencing Prior
to the Policy Period?
Some insurers may exclude any progressive or continuing bodily
injury or property damage that starts before the CGL policy
inception, regardless of whether any insured knew of the prior
bodily injury or property damage. It is all too common for insurers to refer
to or explain this highly restrictive non-ISO CGL endorsement as its
"Montrose" wording or to say that such wording is the equivalent of
the Montrose endorsement.
Such characterizations are extraordinarily misleading. The difference is
this: for the ISO Montrose wording to apply, the insured must have
knowledge, prior to the policy inception, of the continuing bodily
injury or property damage. Excluding any and all bodily injury or
property damage that has commenced before the CGL policy inception
(but that continues into the policy period) bears little resemblance to the
ISO Montrose wording—and is most decidedly not the equivalent of the Montrose
endorsement. In other words, the difference between excluding known
or unknown continuing bodily injury or property damage is
enormous.
Failure to understand the trigger of an "occurrence"-based CGL
policy also contributes to unnecessary confusion about the effect the
Montrose wording. For example, consider the following in which the insurer
argues that the "occurrence" did not take place during the policy
period and thus no coverage was triggered. This fundamental misstatement of
coverage was quickly cleared up by the court in Travelers Cas. & Sur. Co. of Am. v. Netherlands Ins.
Co., 312 Conn. 714 (2014):
Netherlands argues, however, that "[a]ll of the water intrusions
constitute one occurrence, which began soon after January, 1996," and
"all of the property damage alleged by the state was caused by
Lombardo's alleged defective construction. The fact that the property
damage progressed and took different forms over time does not trigger
subsequent policies."
Netherlands' argument, however, contradicts the plain and unambiguous
language of the policy, which "does not require that the
'occurrence' take place within the policy period, only that the
resulting injury or property damage occur during the policy
period." [Emphasis supplied.]
Prevents Stacking of CGL Policy Limits?
Wording to prevent the stacking of limits in liability policies is
sometimes referred to as "Montrose" wording. For example, so-called
noncumulation endorsements appended to CGL policies are loosely (and
incorrectly) referred to as "Montrose" endorsements.
In an attempt to strike the "Known-Injury Amendment" as an
unenforceable "noncumulation clause," the US District Court for the
Southern District of New York noted the difference between the two in
Travelers Cas. & Sur. Co. v. Dormitory
N.Y., 732 F. Supp. 2d 347 (S.D.N.Y. 2010):
The struck clause, however, was not a known-injury-or-damage exclusion, but
rather, a "limit of liability" clause providing that the insurer
would construe "all personal injury and property damage arising out of
continuous or repeated exposure to substantially the same general
conditions" as "arising out of one occurrence."
The Known-Injury Amendment contained in the Ohio Casualty Policy, by
contrast, deals not with the determination of when or how many
"occurrences" have happened, but rather the insureds'
knowledge at the time the insurance was purchased. As such, Spaulding does
not support Travelers' argument.
Similar to the predictions that the Montrose wording changes the CGL
coverage trigger to "first manifestation" or
"claims-made," the notion that the Montrose wording is intended to
prevent stacking of limits like a "noncumulation" clause is also
mistaken.
Known "Loss" or Known Injury or Damage?
Attempting to equate the "known loss" doctrine with the Montrose
known injury or damage wording may result in a more favorable coverage
outcome for the policyholder. However, most courts (including Travelers Cas. & Sur. v. Netherlands, cited above)
recognize that the two are separate and distinct:
… the "known injury or damage" exclusion in the CGL policy stands
in distinction to that common law principle [known loss doctrine]; the
contractual provision, when it exists governs independently of the
common-law rule, although they may have overlapping effects…. Thus a
state's narrow formulation of the known loss rule cannot be used to
defeat the unambiguous contrary intent of the parties as reflected in the
policy language itself.
Stated differently, whether and to what extent a state may apply the
common law known loss doctrine is not relevant to determine the application
of the Montrose known injury or damage wording.
What Injury or Damage Must Be Known?
The question of what must be known to trigger the Montrose wording
limitation is a bit mixed. Some courts have followed what is referred to as
the "strict sameness" test—meaning the known injury or damage must
be the same injury or damage that is being claimed.
An illustration of the "strict sameness" test is found in
Essex Ins. Co. v. H&H Land Dev. Corp., 525
F. Supp. 2d 1344 (M.D. Ga. 2007). In that case, the land developer was
alleged to have damaged the property of abutters due to sediment and silt
runoff from the development:
Essex's evidence that H&H knew of the property damage relates
entirely to complaints by a neighboring land owner, Ron Carter, in 2000 and
2001. There is no evidence of any complaints by Malone or Blair.
Even though the cause of some property damage was known to the insured
(H&H) prior to the CGL policy period, as the property damage was to the
property of abutter Ron Carter and not to the abutters (and claimants) Malone
and Blair, it was not the same property damage and thus did not fall
within the Montrose wording limitation.
Stated differently, while H&H might have known the cause of
prior property damage (sediment and silt runoff to the property of abutters),
H&H did not know about prior property damage to the properties of
claimants Malone and Blair. Thus, in this instance, the actual property
damage itself—rather than the general cause of the property damage—must be
known by certain insureds to trigger the Montrose wording limitation.
Are Attempts To Repair Considered Knowledge of Prior Injury or
Damage?
Undoubtedly, one of the most difficult interpretations and applications of
the Montrose known injury or damage wording will arise out of a
contractor's attempt to repair problems that later result in property
damage or even bodily injury. Any inquiry into how the Montrose wording
applies is greatly dependent on the facts.
For example, in American States Ins. Co. v.
Edgerton, 2008 U.S. Dist. LEXIS 79866 (D. Idaho Sept. 3, 2008), a
plumbing contractor, Blair Edgerton, attempted at least a year prior to the
purchase of insurance to fix the leaks in a water heater he previously
installed. The leaks continued and caused property damage, prompting his
insurer to deny coverage for the resulting property damage as property damage
known by Mr. Edgerton prior to the CGL policy period:
Mr. Edgerton attests that there was not any property damage when
he repaired leaks in 2003. Because Pioneer claims there was no
property damage in 2003, there is a factual dispute as to whether Pioneer
had knowledge prior to the effective dates of the policy [June 23, 2004]
that property damage had, at least, begun to occur. This dispute will
preclude summary judgment.
In this case, whether property damage had occurred prior to the purchase
of the policy was a factual matter—and therefore not suited for summary
judgment. That does not mean, however, that the insurer may not be able to
demonstrate at a jury trial that the property damage was known by Mr.
Edgerton prior to the insurer's CGL inception and thus would be excluded
by the Montrose wording. On the other hand, the insurer may not be able to
demonstrate to a jury that by fixing leaks Mr. Edgerton was aware that
property damage had begun to occur.
In a different matter, in Harleysville Mut. Ins.
Co. v. Dapper LLC, 2010 U.S. Dist. LEXIS 73237 (M.D. Ala. July 21,
2010), a contractor, Dapper, attempted to repair soil erosion, but the court
found he knew of property damage prior to the policy period and the fact that
he tried to fix the problem did not change the fact that he had knowledge of
certain property damage prior to the insurer's policy period.
It is undisputed that Dapper received notice of the Fantail property damage
directly from Fantail at least 2 months before the Dapper property was
added to the Harleysville policies. The fact Palmer thought his remediation
efforts would resolve the situation does not belie his knowledge of the
damage.
Duty To Defend and Montrose?
Due to the broad nature of the duty to defend in a CGL policy,
particularly in those state that follow the "four-corners"
rule,1 insurers may still need to defend allegations even if
the facts ultimately show that the insured did know, prior to the policy
inception date, of the continuing bodily injury or property damage. Consider
the following, also from Travelers Cas. & Sur. v.
Netherlands, cited above:
Although the allegations in the underlying complaint arguably permit a
reasonable inference that Lombardo knew of the property damage in the law
library prior to the inception of its policies with Netherlands … they do
not compel that conclusion as a matter of law. Although paragraph 43 of the
underlying complaint avers that the "defendants were given notice of
these [water intrusion] problems and frequently visited the [law] library
to ascertain the nature and extent of the problem," those allegations
do not specify exactly when Lombardo received notice, other than to state
that the water problems began "[d]uring the months and years"
following the project's completion and the state's occupancy in
January, 1996, and that forensic engineers were retained in the
"2000s." … we conclude that the trial court properly determined
that the facts alleged in the underlying complaint do not preclude coverage
for purposes of the duty to defend.
Conclusion
In retrospect, the impact of the Montrose endorsement has not been as
eventful as expected. Coverage litigation as to the application of the
Montrose endorsement to the CGL remains limited—and is often between
insurers.
Predictions that the Montrose endorsement would render the CGL a
"first manifestation" or "claims-made" policy were
speculative and did not materialize. Of substantial importance is
distinguishing the ISO Montrose endorsement from other, non-ISO exclusionary
endorsements that are too often characterized to be "like
Montrose." Such descriptions or understandings may be misleading to the
extreme, especially if the exclusion for prior bodily injury or property
damage does not turn on whether an insured knew, prior to the
policy, of the continuing bodily injury or property damage. Similarly,
wording that is intended to avoid stacking of CGL policies, such as so-called
noncumulation clauses, is clearly not and should not be understood to
function as Montrose endorsements.
What constitutes knowledge by certain insureds of prior property damage or
bodily injury is crucial and highly fact sensitive. On the one hand,
knowledge that a repair has to be made is not, by itself, knowledge of
property damage, which is defined in the CGL as "physical injury to
tangible property." On the other hand, an insured may be charged with
knowledge of property damage when the insured's attempts to repair do
uncover property damage but the insured fully repaired at the time and fully
believed the matter was resolved, only to have that same property damage
resume or continue after the repair. Many courts limit the application of the
knowledge of the property damage by applying the "strict sameness"
test—while the cause of the property damage may be known, it must be the
same property upon which the property damage resumes for the
Montrose limitation to apply.
Finally, the Montrose wording may not be effective in eliminating the duty
to defend, as whether certain insureds knew about the bodily injury or
property damage is a factual matter that may not have been established at the
time of the suit.
1The "four-corners" rule
generally refers to the requirement that insurers determine their duty to
defend by comparing the allegations in the complaint against the wording of
the CGL policy—resort to extrinsic evidence is prohibited.
Craig F. Stanovich, CPCU, CIC, CRM,
AU, is cofounder and principal of Austin & Stanovich Risk Managers LLC, a
risk management and insurance advisory consulting firm specializing in all
aspects of commercial insurance and risk management, providing risk
management and insurance solutions, not insurance sales. Services include
fee-based "rent-a-risk manager" outsourcing, expert witness and
litigation support, and technical/educational support to insurance companies,
agents, and brokers. E-mail at