The ongoing battles over construction defect coverage remind me of the good old days in the ‘80’s and ‘90s when we used to fight over asbestos and environmental coverage claims (we still have some of those claims, but to a much lesser extent). Construction defects even involve battles over the appropriate trigger of coverage! Ah, nostalgia!
Recently, in Carithers v. Mid-Continent Ins. Co., the Eleventh Circuit wrestled with a case involving defective work by a subcontractor, which included, for example, the incorrect application of exterior brick coating. The carrier, Mid-Continent, disclaimed coverage for the subsequent liability suit on several grounds, including that the required “property damage” only takes place when the damage actually manifests itself (which, coincidentally, was outside Mid-Continent’s policy period). Mid-Continent offered two variations on this theme. First, Mid-Continent argued that damage only occurs when it’s discoverable by a reasonable inspection. Second, Mid-Continent argued that damage occurred when it was actually discovered.
The Court made short work of Mid-Continent’s arguments, writing: “The plain language of the policy does not support Mid-Continent’s reading. Property damage occurs when the damage happens, not when the damage is discovered or discoverable.” Quoting prior Eleventh Circuit authority, the Court also wrote: “There is no requirement that the damages ‘manifest’ themselves during the policy period. Rather, it is the damage itself which must occur during the policy period for coverage to be effective.”
The Carithers Court’s ruling is in accord with the New Jersey Supreme Court’s ruling in Potomac Ins. Co. v. OneBeacon, which confirmed a continuous trigger in construction defect cases. The Carithers Court said that it was applying an “injury-in-fact” trigger, but for practical purposes, that’s essentially the same thing as a continuous trigger. All insurance policies in effect during any part of the injurious process are in play.
The Carithers Court also had some interesting things to say about the duty to defend. Mid-Continent essentially asked the Court to make new law deciding which trigger applies, and, using that law, to justify retroactively its refusal to provide a defense to the policyholder. The Court rejected that position, writing: “Given the uncertainty in the law at the time, Mid-Continent did not know whether there would be coverage for the damages sought in the underlying action because Florida courts had not decided which trigger applies. Mid-Continent was required to resolve this uncertainty in favor of the insured and offer a defense.” (Emphasis added.)
That, of course, is the way the duty to defend is supposed to work, although insurance companies dealing with New Jersey claims frequently cite the 1970 New Jersey Supreme Court case of Burd v. Sussex, 56 N.J. 383, for the (silly) position that they never have to provide a defense if they’re questioning the merits of the claim (meaning that they’d hardly ever have to provide a defense). As discussed elsewhere on this blog though, Burd does require a defense as long as the policyholder agrees to a reservation of rights.
In adopting the “injury-in-fact” trigger, the Carithers Court noted “the difficulty that may arise, in cases such as this one, where the property damage is latent, and is discovered much later,” and stated that its ruling was limited to the facts before the Court. (The Court also noted that the trial court had found that the property had been damaged in 2005, during Mid-Continent’s last policy period.) I’m guessing that when insurance defense lawyers discuss Carithers, they’ll argue that the case is limited to its facts. Still, it’s an important decision for policyholders involved in construction defect claims to know about.
You can read the full decision here.