The Wooddale Decision - Pro Rata Allocation Time Period Excludes Periods During Which Insured Lacked Coverage Because Insurance Coverage For Claimed Damages Was Not Available

In Wooddale Buildings, Inc. v. Maryland Casualty Co., et al., 2006 Minn. LEXIS 679, the Minnesota Supreme Court modified Minnesota law on how damages are to be allocated among insurers in a case involving continuous and indivisible property damage.  Specifically, the court found that under the pro-rata by time on the risk liability allocation method, periods in which insurance coverage was not available to the insured must be excluded from the allocation spread. 

The policyholder is a general contractor that constructs single-family homes.  In late 2000, the policyholder began to receive claims of defective construction and/or faulty workmanship from the owners of stucco homes it had built from 1991 to 1999.  Policyholder was ultimately notified of claims by 60 different homeowners.  The homeowners claimed that defective construction and/or faulty workmanship by the policyholder resulted in water intrusion and mold growth problems in their homes.  The sources of water intrusion existed since construction of the homes.  The parties agreed that the damage to the homes was not caused by a solitary, discreet, identifiable event, but rather, by repeated water intrusion occurring over an extended period of time, with continual, progressive, and individual damage occurring to the homes.  The parties also agreed that allocation of liability should be pro-rata by time on the risk under the circumstances.

The policyholder had continuous commercial general liability insurance coverage from five different insurers from November 13, 1990 to November 13, 2002.  Each of the CGL policies was an occurrence-based policy containing a standard insuring agreement calling upon the insurer to defend and indemnify the policyholder for “sums that [the policyholder] becomes legally obligated to pay [for property damage] to which this insurance applies.” 

The policyholder began making some of the repairs as it received the homeowners’ claims and tendered these claims to its insurers.  After some time had elapsed and the policyholder had not been reimbursed in full for the repairs, it commenced a declaratory judgment action against one of the insurers to establish that insurer’s obligation to defend and indemnify the policyholder for the homeowners’ claims.  That insurer, in turn, brought a third-party action against the four remaining insurers seeking “an amount of money equal to each third-party defendants’ share of the total damages awarded to [the policyholder], if any, [pro-rata by time on the risk].”  The parties filed cross-motions for summary judgment on the issues of liability and defense costs.  The parties agreed that the appropriate method for apportionment of liability among the insurers is pro-rata by time on the risk, and that the starting point for the liability allocation period for each claim is the closing date on the purchase of the home.  The parties disagreed, however, about the appropriate end date for the liability allocation period as well as the appropriate method by which to allocate defense costs.

The district court applied Minnesota’s “actual injury” rule and concluded that the damages were the result of continuous and indivisible injury.  The court concluded that the appropriate method of allocating damages to the insurers was pro-rata by time on the risk.  The court further concluded that the start date for allocation purposes should be the closing date on the purchase of each home and the end date should be the date that the policyholder was put on notice of the homeowner’s claim.  Further,

the court found that the cost of investigating and defending the homeowners’ claims should be borne equally by the insurers whose policies were triggered by each claim.

One of the insurers appealed, arguing that the district court erred in setting the end date for allocation purposes as the date the policyholder received notice of the claim and by allocating defense costs equally among the insurers whose policies were triggered.  The Court of Appeals affirmed the district court’s grant of summary judgment, but reversed that court’s ruling on the end date for allocation purposes and the apportionment of defense costs.  The appellate court concluded that the appropriate end date was the date of remediation and that fairness required that defense costs among consecutively liable insurers should be allocated according to the same method used to apportion indemnity costs.  Certain insurers sought review of the appellate court rulings on both the end date for allocation purposes and the allocation of defense costs.  The policyholder also sought review, requesting  clarification of whether the Court of Appeals’ ruling on the end date for allocation purposes means that the policyholder is potentially liable for the continuing damages occurring between the date on which the last triggered policy expired and the end of remediation. 

The Minnesota Supreme Court focused on the fact that Minnesota is an “actual injury” or “injury in fact” state, finding that a liability policy is triggered if the complaining party is actually damaged during the policy period, regardless of when the underlying negligent act occurred.  However, the court recognized that the policies prevent an insurer from becoming liable for damages to a home during the insurer’s policy period if the property damage was expected from the policyholder’s standpoint before the policy period began.  As a result, once the policyholder received notice of a claim with respect to a particular home, any subsequent damage with respect to that claim was expected, and all subsequent insurance policies excluded coverage for damages with respect to that claim.  Thus, the court concluded that once a specific notice of claim is received by the policyholder, no subsequent insurance policy can be on the risk with respect to that claim.  Thus, the court held that only insurers that provided coverage to the policyholder between the closing date of a particular home and the policyholder’s receipt of a notice of claim with respect to that property were on the risk for that claim. 

The Minnesota Supreme Court held that if on a remand, the policyholder could establish that no water intrusion insurance coverage was available to it after November 2002, the total period over which liability is allocated for each of the 60 claims ends with the end of the policy year in which the policyholder received notice of the claim, or with the end of the last period of insurance coverage, whichever is earlier.  However, if the policyholder was voluntarily self-insured during the time when damages occurred, then the total period over which liability was allocated for each claim must include the time period that the policyholder was self-insured and said time period will end with the end of the policy year in which the policyholder received notice of the claim, or with the date of notice of the claim, whichever is later.  The court recognized that this is a departure from the typical “actual injury” approach that requires each insured to be liable only for those damages which occurred during its policy period.  The court noted that this departure is due to the fact that the court found that the period over which damages should be allocated excludes periods during which the insured lacked coverage because no such coverage was available.  However, the court stated that the allocation of liability between insurers requires a flexible approach.  Moreover, the court noted that it is inaccurate to conclude that a CGL insurer can never be held liable for damages occurring outside of its policy period.

The Supreme Court sought a rule that would encourage insurers to resolve promptly the duty to defend issue.  The court noted that if insurers know from the beginning that defense costs will be apportioned equally among insurers whose policies are triggered, the possibilities for delay will be minimized because no insurers will benefit from delaying or refusing to undertake a defense.  Therefore, the court found that when the pro-rata-by-time-on-the-risk method applies to allocation of liability, and insurers participate in providing defense to a common insured, defense costs are apportioned equally among insurers whose policies are triggered.

In this decision, the Minnesota Supreme Court determined that in continuous and indivisible property damage cases, the time period over which damages should be spread under a pro-rata allocation methodology should run from the time the damage occurred through the date of notice of the claim.  The time period should exclude periods of time during which insured lacked coverage because no coverage was available.  However, the time period should include any time in which the insurer was voluntarily self-insured.