No Coverage For Continuing Water Intrusion Damage That Manifested Prior To Policy Inception
December, 2002
In Factory Mutual Ins. Co. v. Estate of Campbell, 2002 District LEXIS 8053 (C.D. Cal.), the court granted Factory Mutual’s motion for summary judgment declaring no coverage under its property insurance policy for water-intrusion damage at the defendant’s shopping center in Mission Viejo, California.
Facts
The insured acquired the shopping center in question in two phases, in August, 1984 and in January, 1985. Water intrusion damage occurred immediately upon the insured’s acquisition of the center. A 1984 internal memo revealed that the owner acknowledged that “we have already experienced several severe leaks in buildings A, B and C.” Water-intrusion damage occurred at the shopping center every year thereafter and in 1987 the owner settled construction defect claims against the shopping center developers including claims for water-intrusion damage. However, there was no permanent remedial solution put in place. By 1988, the owner discovered severe water-intrusion damage, including mold and mildew, in stairwells at the center. Some wood rot and other damage was so severe that stairwells were closed to pedestrian traffic and had to be replaced.
Factory Mutual (“FM”) began insuring the center on September 1, 1995. Water-intrusion damage continued to occur after the policy incepted. There were many reports from the property managers of major leaks in various sections of the center virtually every time it rained through 1996 and 1997. The owner first notified FM of the water-intrusion damage and mold and mildew claim on March 19, 1998 “after nearly 14 years of continuous water intrusion.”
Analysis: The Parties Each Argue Prudential-LMI
FM argued it was entitled to summary judgment because the owner’s loss manifested itself before the Factory Mutual policy coverage incepted, citing Prudential-LMI Commercial Ins. Co. v. Superior Court, 798 P.2d 1230, 1246 (Cal.1990)(where there is a gradual, continuous, and progressive loss over several policy periods, the carrier on the risk at the time of manifestation is solely responsible for all loss, whether discovered or undiscovered). Under the manifestation rule, there can be no coverage if the loss manifested before the insurer’s policy incepted—“insurers whose policy terms commence after initial manifestation of the loss are not responsible for any potential claim relating to the previously discovered and manifested loss.” The term “manifestation” was defined as “that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered.
The insured property owner argued that the damages that were the subject of their claim were hazardous mold and its investigation, remediation and repair, as well as physical damage from the unprecedented El Nino weather system occurring during the FM policy term. Citing Prudential-LMI’s holding that “manifestation occurs when: 1) appreciable damage occurs and 2) is or should be known to the insured, such that a reasonable person would be aware that his notification duty under the policy has been triggered,” they contended that the damage at issue actually occurred within the policy term; and that “hazardous molds” did not first appear at the site and could not have been known by defendant until late 1997, more than two years after the policy incepted. The insured argued that little or no appreciable hazardous mold damage occurred prior to the inception of FM’s policy and it therefore could not have known of such damage.
The court entered summary judgment for FM.
Learning Point:
The Court unfortunately did not enter an opinion supporting its ruling. The inference that can be drawn, however, is that FM’s arguments concerning the manifestation of the loss long prior its policy inception convinced the court that there was a continuing loss in progress at the time FM’s policy incepted. The parties’ summary judgment memoranda are available through the court and through Mealy’s Litigation Report: Insurance, Vol. 16, No. 23. It is suggested that when faced with a mold damage and remediation claim, property insurers must determine whether the loss first manifested itself outside or within the policy term. This may seem elementary, but is not always scientifically easy to determine.
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