Ever since the California Supreme Court rejected a “manifestation of damage” trigger for insurance coverage and replaced it with a “continuous trigger of damage” in Montrose Chem. Corp. of California v. Admiral Ins. Co., 10 Cal.4th 645, 655 (1995), insurers have attempted to endorse and amend their policies to avoid the holding in Montrose. Specifically, insurers have used so-called “anti-Montrose” exclusions to try to avoid liability for damages that began (or are alleged to have begun) prior to the policy period. Several courts have acknowledged the possible validity of such endorsements, without actually enforcing them. See Pennsylvania Gen. Ins. Co. v. American Safety Indem. Co., 185 Cal.App.4th 1515, 1532 (2010); Westoil Terminals Co., Inc. v. Industrial Indem. Co., 110 Cal.App.4th 139, 148 (2003). This has left insurers uncertain whether these exclusions would withstand a serious challenge. The applicability of such exclusions has been a particularly common source of conflict in construction defect cases in California.
Now there is a decision which aggressively enforces “anti-Montrose” exclusions to bar any coverage for construction defect damages under policies issued after construction was completed. In American Zurich Ins. Co. v. Ironshore Specialty Ins.Co., 2016 WL 6441610 (E.D.Cal. October 31, 2016), a federal district court in the Eastern District of California issued a comprehensive ruling granting summary judgment finding no coverage for an insurer whose policies incepted after construction was completed on multiple projects. The court enforced the insurer’s “anti-Montrose” endorsements and held the insurer had no duty to defend or indemnify its insured.
In American Zurich, multiple liability insurers defended their mutual insureds – Matt’s Roofing and Sherman Loehr – in twenty-one underlying construction defect lawsuits. These insurers also paid on behalf of the insureds to settle those lawsuits. The insurers then instigated suit against a co-insurer of the same insureds – Ironshore Specialty Insurance – in a complaint containing 63 causes of action seeking declaratory relief, equitable contribution and equitable indemnity for each of the underlying lawsuits. Unlike the plaintiff insurers, Ironshore denied coverage for the lawsuits based on the “anti-Montrose” exclusionary endorsement in the Ironshore policies.
The Court looked to the language of the Ironshore exclusions which broadly excluded coverage for damage “which first existed, or is alleged to have first existed, prior to the inception of this policy.” The Court then applied this language to the facts of the twenty-one underlying lawsuits. The Court found that 20 of the 21 underlying lawsuits either explicitly alleged in their complaints that the subject homes were defective and suffering damage from the date of purchase, or inherently alleged that the damages began from the time the construction was completed, because they alleged damaged caused by defects created during construction. Only with respect to one home, which suffered a fire years after construction, did the court find issues of fact which prevented a ruling for or against coverage.
This decision is somewhat surprising. Since most insurance policies now contain “anti-Montrose” exclusions of the sort contained in the Ironshore policies, this holding could dramatically limit available insurance coverage for construction defect lawsuits. This decision will serve as ammunition for insurers to argue that the only policies which provide coverage for construction defect damages are those in effect at the time the work is completed and/or the houses are purchased. While this was always the goal of “anti-Montrose” exclusions, due to uncertainty regarding the willingness of courts to enforce them, such exclusions were more often used to limit coverage or negotiate for lower settlements, rather than as a basis to outright deny claims. For insureds, such a limitation of coverage to one or perhaps two policies could lead to exhaustion of aggregate limits and inadequate insurance to cover large claims.
Additionally, the Court in American Zurich seems to brush over questions of exactly when resultant damage actually occurs in construction defect cases. The court assumes that if the damages are caused by construction defects, they must have first occurred immediately after construction is completed. An argument can be made that such a position is incorrect. For instance, a defective roof might actually function properly and without any resultant damage for years before it actually fails, leading to water intrusion. One can expect insureds to dispute the American Zurich court’s ruling on this basis.
As for the rejection of coverage for complaints that explicitly allege damages began at the time of completion or purchase, there is a definite lesson for plaintiffs’ counsel – such aggressive allegations may only succeed in eliminating available insurance coverage. Indeed, such language in “anti-Montrose” exclusions has already led more savvy plaintiffs’ counsel to steer clear of any specific allegations regarding when damages began to occur.
The effect of this ruling remains to be seen. It is currently an unpublished federal district court decision. As such it can be cited, but is of limited precedential value. State courts would certainly have no obligation to follow this holding, and even other district courts would not be bound to follow it. Additionally, it is telling that this case involved an inter-insurer dispute. It is worth considering whether a court would rule the same way if the plaintiff was an insured whose policy in effect at the time of completion was exhausted. While “result-oriented” decisions are not officially favored, the reality is that it is easier for a court to deny a contribution claim between insurers than it is to find that an insured with multiple years of policies has no coverage. In fact, one must wonder whether the insurers which “lost” this lawsuit will bother to appeal. Such an aggressive position in favor of “anti-Montrose” exclusions might have produced a negative result for the plaintiff insurers in this case, but it could easily have a positive effect for those same insurers in multiple pending and future cases.
It will be interesting to see how future courts handle the holding in American Zurich. It could be the first in a wave of cases enforcing “anti-Montrose” exclusions, or, just as possibly, it could be found to be an outlier and be explicitly distinguished or rejected by future courts. Ultimately, although this decision provides support to insurers seeking to enforce their exclusions, it does not provide strong enough precedent for insurers to be completely confident that other courts will follow its holding.
Stephen L. Cope is a litigator with Musick, Peeler & Garrett in its Los Angeles office. His full bio and contact information can be found at: http://musickpeeler.com/professional/Stephen_Cope