June 24, 2010
TO ALL INTERESTED COMPANIES
(PLEASE NOTE – This letter is not claim-file specific with regard to any claim you may be handling. This letter should be routed to whatever claims supervisor or manager is responsible for supervising Missouri casualty claims.)
MISSOURI SUPREME COURT REVERSES COURT OF APPEALS AS TO WHEN PROPERTY DAMAGE OCCURS UNDER OCCURANCE BASED LIABILITY POLICY
In D. R. Sherry Construction, Ltd. v. American Family Mutual Ins. Co., ____ S.W. 3d ____ (Mo. Banc June 15, 2010) the Missouri Supreme Court superseded the opinion of the Western District Court of Appeals in holding that liability coverage existed for the insured, a home builder, for defects in the home which first appeared after a liability policy had expired.
In this case, D. R. Sherry Construction, Ltd. (Sherry) built a house and sold it in August 2003. No defects were noticed in the house at the time of the sale by the homeowners. In April 2004, cracks began appearing in the foundation and by July 2004 the house was 8 inches out of level. The first notice that the house had problems came to Sherry in April 2004. In March 2005, Sherry repurchased the house to satisfy claims made against him by the homeowners. He turned the claims over to American Family, who refused to defend based on the fact that the damage occurred after American Family’s policy ended in December 2003.
The opinion of the Court of Appeals, which we previously reported, on has been superseded and can no longer be relied upon. It applied the “Injury-in-Fact” trigger of coverage and held that property damage does not occur until there is actual physical damage. It further held that the trigger is not the negligent act but the time when the damage or loss occurs. The Supreme Court, however, took a more liberal view and held that “*** an accident is not necessarily a sudden event; it may be the result of a process”. The Court recognized that the term “occurrence” under a liability policy has been defined as an “accident”; however, stated that the determinative question was whether the “occurrence” or “accident” was foreseeable or expected by the insured.
The Court then went through an analysis of the insured’s progressive damage claim and concluded that it was not foreseeable, to the insured contractor, that if he built a house on unstable soil, cracking would occur later on. The insured admitted that he knew the home was built on fill but attempted to prevent foundation problems by installing foundation piers at the time the house was built. Also the house passed the building code inspection.
Thus, the Court held that it was not foreseeable to the insured contractor that the house might settle and concluded that the house was inadvertently constructed in a manner that allowed it to settle. It also held that the evidence was sufficient to support the insured’s claim that the cause of the damage began during the policy period, even though there was apparently no evidence that the physical damage occurred during the policy period.
However, the Court recognized that the insured had to prove that “property damage” occurred during the policy period. The Court then appeared to equate the “cause” of the damage with the physical damage. The Court apparently assumed that because the evidence indicated that the cause of the damage (insufficient support for the foundation) may have been present during the construction of the house “and during the policy period” that, therefore, the result (“a cracked foundation and settling”) must have been a progressive loss extending from the cause to the actual cracks in the foundation.
The Court appears to have equated “poor soil condition” with “ensuing progressive damage”. While it is also true that the insured contractor may have been negligent in the manner in which he attempted to build on the poor soil conditions, there is no indication that there was any physical damage to the home during the policy period. The Court simply assumed, without proof, that such damage existed. Therefore, the Court held that there was liability coverage for the insured as a matter of law.
In addition the Court held that the insured’s evidence of vexatious delay was sufficient to support a jury finding of vexatious delay by American Family. This was based on failure to properly investigate the alleged occurrence and denial of the insured’s claim without an adequate investigation.
While the Court did not provide a name to the “trigger of coverage” that it applied in this case, it appears that the trigger of coverage is similar to the “Exposure Theory” or the “Continuous Trigger Theory”, which are not normally applied in cases of this type. Rather, these triggers are normally applied in environmental and bodily injury cases where a person develops a disease over a period of time.
As has been our practice in the past, I have not enclosed a copy of the opinion with this letter. If you would like to have a copy of the opinion, you can access here.
MANZ SWANSON & MULHERN, P.C.
Stephen D. Manz
7101 College Blvd., Suite 350
Overland Park, KS 66210
Telephone: (913) 317-8068
smanz@msmlawkc.com |
