Insurer Responsible for Continuous Water Damage Discovered After Policy Period

A threshold question for insurance coverage is whether an event occurred to trigger coverage under the policy. Various theories of coverage triggers may apply depending on state law, the policy language, and the nature of the event or loss. An insurer’s obligations and the availability of coverage can depend on the type of coverage trigger. The Seventh Circuit Court of Appeal recently faced such a question in determining whether a previous insurer, whose policy period had ended five years earlier, was responsible for covering a homeowner’s loss caused by progressive water damage. In Strauss v. Chubb Indem. Ins. Co., No. 13-2580, 2014 U.S. App. LEXIS 27194 (7th Cir. 2014), the court affirmed a district court ruling that the policy provided a “continuous” trigger theory which treated the continuous or repeated exposure to the water infiltration as a single occurrence that triggered the insurer’s policy despite its delayed discovery by the insured.

The continuous trigger theory treats continuous or repeated exposure to the same condition as one occurrence, as the injury “occurs continuously from exposure to manifestation.” Under the theory, all policies from the time the loss begins until it is discovered owe coverage. However, in this case, the insurer argued that the “manifestation” trigger theory should apply to homeowner’s first-party property damage claim. Under the manifestation trigger, the injury occurs only when it manifests itself in ascertainable property damage and “only the insurer that bears the risk at the time the loss manifests or can be discerned is responsible for indemnification…”

The insurer urged the Seventh Circuit to adopt a general rule that the continuous trigger theory be reserved for third-party claims and the manifestation trigger used for all first-party claims. But the Seventh Circuit was not convinced that Wisconsin law, as applicable in this case, embraced such a general rule. Instead, the court found that Wisconsin “has unequivocally held that the language of the policy guides the analysis and determines whether coverage exists… not generalizable concepts.” Despite the insurer’s appeal to other states’ laws, the court thought that Wisconsin provided a “straightforward path for interpreting the policy” and declined to confuse the situation by borrowing from other states’ decisions. The court stated that regardless of whether the claim is for first-party or third-party liability, the policy language controls the application of coverage.

Rejecting a general rule, the court analyzed the policy language and found that policy defined continuous or repeated exposure to substantially the same general conditions as a single occurrence, with coverage applying to all occurrences that take place while the policy is in effect. Therefore, “The latent water infiltration constituted a single occurrence under the policy” and for all legal purposes occurred during the insurer’s policy period and triggered coverage.

Moving beyond the policy language, the insurer also appealed to public policy considerations, suggesting that a bright line rule mandating manifestation triggers for first-party property claims would create certainty for insurers and would prevent insurers from being liable for property damage indefinitely. The court was not persuaded by this argument and returned to the importance of policy language. Emphasizing that insurers are free to draft policies to fit their needs and elicit certainty, the court said that the insurer is in “the best position to dictate how the Policy would be activated, its coverage, and its exclusions.”

In fact, the court observed that had the insurer used different language it could have changed the outcome. The insurer could have more clearly limited the broad definition of occurrence to the third party liability portion of the policy and more specifically defined the coverage trigger for the first party property coverage portion of the policy. The court also pointed to the Wisconsin statute of limitations for property indemnity insurance, which requires claims to be filed within one year “after the inception of the loss.” But here, the policy modified the statutory minimum and instead permitted a claim to be filed within one year “after a loss occurs.” Given the policy’s definition of “occurrence” and the application of the “continuous trigger theory,” the loss, for purposes of the claim’s timeliness, “occurred all the way up until the damage manifested in October 2010” making the suit timely.

The Seventh Circuit’s rejection of a general rule for the application of trigger theories is helpful to insureds, allowing recovery for ongoing latent defects that may not be discovered for some time. Despite the insurer’s attempts to impose a general rule regarding trigger theories, the Seventh Circuit affirmed that the language of each policy ultimately controls how coverage applies. Here, the insurer’s definition of occurrence opened the policy to the application of the continuous trigger theory and allowed the insured to recover under the policy.