When Does a Property Loss Occur?

It’s generally clear when a property loss has occurred. The building burns down, the insureds call the fire department, and then call their insurance producers. But sometimes the damage occurs and the insured doesn’t know about it. It’s the insurance variation of “If a tree falls in a forest and no one is around to hear it, does it make a sound” philosophical question. Is coverage provided by the policy in force when the damage occurred even though the insured didn’t report it until years later? Suppose one or more policies expire and are renewed before the insured becomes aware of the loss. In that case, which policy, if any, is triggered?

While problems with policy triggers are infrequent in property policies, they do happen. There are two theories that courts use to determine which policy is triggered:

• Manifestation trigger—the policy in force when the injury or damage can first be detected is triggered.
• Continuous trigger—all policies in force while the claimant is exposed to the harmful conditions; policies in force when the actual injury or dam- age occurs, and the policy in force when the injury or damage is mani- fest are triggered. 5

Here are two examples of losses that were discovered long after they com- menced.

Winding Hills Condo in Pompton Lakes, NJ received a report in January 1991 from its engineering consultant that defi- ciencies in the on-site drainage system had resulted in structural failures of the founda- tion footings of its two buildings. Winding Hills gave notice to the six insurance com- panies that had provided coverage for the condo between 1986, when it opened, and 1991. All the insurers declined the claim and Winding Hills commenced suit.

The court decided that the loss was covered and that coverage was triggered when the loss became manifest; that is, the insured could reasonably be expected to be aware of the damage. The court ruled that the loss became manifest when the engineering consultant delivered its report in January 1991.

Therefore, the summary judgment motions of five of the insurers who pro- vided coverage prior to January 1991 and had denied liability were granted. Only the motion by North American Specialty, whose policy was in force from May 1990 to May 1992, was denied. Because it pro- vided coverage when the loss became man- ifest, the court decided its policy covered the loss.

North American Specialty appealed. It argued that the continuous loss theory should apply and therefore all the insurers should share the loss. The appellate court, however, agreed with the lower court that the manifest theory was the correct one to use. 6

A Wisconsin court came to a different conclusion in the case of Randal and Diane Strauss’s home in Mequon, Wisconsin. Their home was insured under a Chubb Masterpiece Deluxe Home Coverage poli- cy from 1994, when it was built, until 2005. After that it was insured with other insur- ance companies. In October 2010, the Strausses discovered that water infiltration had been causing damage to their home. The infiltration was ongoing, starting around the time of original construction and continuing with each subsequent rain- fall. The Strausses submitted a claim to Chubb in December 2010. Chubb denied liability on two bases: (1) the damage wasn’t discovered while any of the Chubb policies were in force and (2) the claim was barred by the time limit to make claim contained in the policy.  In 2011 the Strausses filed a lawsuit.

The Wisconsin court decided that the policy covered ongoing losses and that the “continuous” trigger theory applied. Because the “continuous” trigger theory applied, the district court also held that the Strausses’ claim was not time-barred. The Chubb policy required that claim be made within one year after a loss occurs. The court pointed out that this differs from one year after the inception of the loss. The implication being that if Chubb had used “inception” wording, the Strausses would have lost. (ISO HO policies say that suit must be started within two years “after the date of loss.” That wording would probably not have improved Chubb’s position.)  The district court’s decision was affirmed on appeal.

There are lessons here for us as insur- ance practitioners:

Losses that occurred in the past can be covered by the policy(ies) in force when the loss is discovered or by the policies that were in effect while the loss was continu- ously occurring. Different states, different legal interpretations.

If you’re faced with a loss that may have occurred during prior policy periods and the insured was unaware of its occur- rence, report it as soon as possible to all the insurers who provided coverage or rec- ommend that the insured get an opinion from an insurance coverage attorney.