The Seventh Circuit Court of Appeals, in a decision by District Judge Virginia Kendall, upheld coverage for damage to an insured's home discovered five years after the insurer's policy with the insured expired.
The Strausses built a house in Mequon, Wisconsin in 1994. They insured their home with a number of policies, including a “Chubb Masterpiece Deluxe” property insurance policy (hereinafter “Policy”) effective from 1994 until October 2005. The Strausses insured their home with other policies following this time.
In October 2010, the Strausses discovered that water infiltration had been causing damage within the building envelope of their home. The infiltration was ongoing and progressive in nature, beginning around the time of original construction in 1994 and continuously occurring with each subsequent rainfall.
On December 22, 2010, more than five years after their Chubb policy lapsed, the Strausses submitted a claim to Chubb for the discovered damage. Chubb denied coverage on the basis that: (1) the damage was not discovered during the policy period and (2) any legal action was time-barred pursuant to both Wisconsin Statute § 631.83(1)(a), and the “Legal Action Against Us” clause found in the Policy which required the Strausses file their claim within one year.
The Strausses filed suit in federal court in October 2011, and both parties cross-moved for summary judgment. The District Court for the Eastern District of Wisconsin found the water infiltration was an occurrence triggering coverage because the plain language of the Policy provided coverage for continuous losses. Because the Policy provided for continuous losses, the Strausses claim would not be time-barred. Chubb appealed.
The issue before the Seventh Circuit was how the water infiltration triggered coverage under the Policy for property damage to the home. The Court evaluated the Policy's language against four theories how an “occurrence” may trigger coverage. Many attorneys who work in insurance coverage are familiar with these theories, but for review they are:
- The “exposure” theory which fixes the date of injury as the date on which the injury-producing agent first contacted the body or the date on which pollution began. In this case, that would be when the water infiltration first began in 1994.
- The “manifestation” theory which holds that the compensable injury does not occur until it manifests itself in the form of a diagnosable disease or ascertainable property damage. In this case, that would be when the Strausses finally discovered the water infiltration in October 2010 because that is when the occurrence, the water infiltration, actually manifested into physical property damage.
- The “continuous trigger” theory, also known as the “triple trigger” theory, which provides that the injury occurs continuously from exposure until manifestation. In this case, an occurrence would include the time of construction in 1994 until the water infiltration was discovered in 2010.
- The “injury-in-fact” theory which allows the finder to place the injury at any point in time that the effects of exposure resulted in actual and compensable injury.
The Policy protected against “all risk of physical loss” to the home for an “occurrence” which was defined to include “continuous or repeated exposure to substantially the same general conditions” which take place “while the policy is in effect.”
The Court found the Policy's plain language required application of the continuous-trigger theory. It seemed obvious the parties “contemplated a long-lasting occurrence” that could give rise to a loss “over an extended period of time.” The Court opined that if Chubb did not wish to provide this breadth of coverage, it should not draft its policy this way.
Chubb advocated for the manifestation theory, arguing the continuous trigger theory should be limited to third-party coverage cases. Drawing this line would protect insurers from liability for stale policies, among other reasons. The Seventh Circuit refused to adopt such a bright-line rule, citing Wisconsin case law has unequivocally held that the language of a policy guides the analysis and determines whether coverage exists. That did not mean every policy would warrant the continuous trigger theory.
STATUTE OF LIMITATIONS
The Policy's language also dictated the Strausses claim was no time barred under either statute or the “Legal Action Against Us” clause.
Under Wis. Stat. § 631.83(1)(a), a claim for property damage must be filed within one year “after the inception of the loss.” Under this interpretation, the Court acknowledged that the Strausses claim might have been time barred since they filed their claim more than one year after the water infiltration began in 1994.
However, the Policy language required that claims be filed within one year “after a loss occurs.” The Court found this language was ambiguous and could be reasonably interpreted to allow an insured to file a claim within one year after a loss completes. Resolving ambiguities in favor of the insured, the Court held the Strausses could have filed their claim within one year after the water infiltration halted.
The Policy language allowed the insured to win on both fronts. The definition of “occurrence” was broad enough to reach back and provide coverage for an occurrence which began within the policy period. The Policy also defined “occurrence” as late enough as manifestation to avoid being barred by the statute of limitations.
The Seventh Circuit's opinion reinforces the importance of careful drafting. Insurers with similar provisions should revisit their policies and evaluate if their language would raise the same coverage issues.
To read the full Seventh Circuit opinion, follow the link: Strauss v. Chubb Indem. Ins. Co., --- F. 3d ---, 2014 WL 6435314 (7th Cir. (Wis.) Nov. 18, 2014).
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