PRACTICAL POLICYHOLDER ADVICE

In Strauss v. Chubb Indemnity Insurance Co., the U.S. Court of Appeals for the Seventh Circuit (in a case applying Wisconsin law) recently denied en banc review of a panel’s earlier  holding  that an insured property owner could recover for an unknown, ongoing loss under all policies in effect during 16 years of undiscovered water infiltration.

The ruling has potentially far-reaching positive implications for policyholders as it affects various sources of recovery, as well as scope of notice issues. Because  the Seventh Circuit based its holding on common policy definitions of “occurrence” and “loss,” its application of a continuous trigger opens the door for policyholders to obtain coverage for ongoing losses that occur over several policy periods and, possibly, to spread those losses over several policy periods and insurers. The extent to which this decision may be binding or persuasive authority in other jurisdictions will be played out in coming years.

Factual Background

Plaintiff policyholders Randal and Diane Strauss originally filed suit in 2011 in the U.S. District Court for the Eastern District of Wisconsin, seeking coverage from Chubb Indemnity Insurance Co., Vigilant Insurance Co., Federal Insurance Co., and Great Northern Insurance Co. (collectively, “the Insurers”), under “Chubb Masterpiece Deluxe Home Coverage” policies covering the period October 1994 through October 2005, for water damage to the couple’s suburban Milwaukee home.1   The Strausses asserted that, from the completion of construction in 1994 until 2010, their home suffered water damage due to a construction defect, yet the couple did not discover the issue until 2010.  Strauss v. Chubb Indemnity Insurance Co., 771 F.3d 1026, 1028 (7th Cir. 2014).

Two months after learning of the defect, in December 2010, the Strausses sought coverage from the   Insurers.  Id.  The Insurers denied coverage on the basis that first-party property policies are subject to a “manifestation” trigger, and the water damage did not manifest until the Strausses discovered the issue in 2010, five years after their last policy with the Insurers lapsed, and also on the basis that the Strausses’ claim was barred by the one-year Wisconsin statute of limitations for such claims and the “Legal Action Against Us” policy language.  Id.

The policies provide coverage “only to occurrences that take place while this policy is in effect.”  Id. at 1029.

The policies define “occurrence” as “a loss or accident to which this insurance applies occurring within the policy period.  Continuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence.”  Id.  The policies define “covered loss” to include “all risk of physical loss to [the] house or other property . . . unless stated otherwise or an exclusion applies.”  Id.  The policies also require that any legal action brought by a policyholder against Chubb must be commenced “within one year after a loss occurs.”  Id.

In the District Court, the parties filed cross motions for summary judgment.  Id.  In February 2013, the District Court ruled in favor of the Strausses, holding that the claim was not time-barred and the Insurers were liable for the damage under the “continuous trigger” theory.  Id.  The Insurers appealed to the U.S. Court of Appeals for the Seventh Circuit.  Id. at 1030.  The American Insurance Association, Property Casualty Insurers Association of American, the Wisconsin Insurance Alliance, and Lloyd’s America filed amici briefs on behalf of the Insurers.

The Seventh Circuit’s Opinion

On November 18, 2014, a Seventh Circuit panel affirmed the District Court’s ruling in favor of the Strausses. Id. at 1035.  The Insurers argued that a continuous trigger was inappropriate for first-party property cases and sought a ruling that the manifestation theory should be universally applied in all such cases.  Id. at 1031.  The Seventh Circuit refused to adopt such a bright-line standard, noting that Wisconsin courts had not limited application of the continuous trigger to third-party liability cases and that the policy language at issue required application of the continuous trigger method.  Id. at 1031-32.  The Seventh Circuit explained: “[G]iven the Chubb Defendants’ definition of ‘occurrence,’ which includes ‘continuous or repeated exposure,’ the parties contemplated a long-lasting occurrence that could give rise to a loss ‘over an extended period of time.’”  Id. at 1032.  It explained further: “Once such an occurrence takes place, the Policy protects against ‘all risk of physical loss’ to the home.  The latent water infiltration constituted a single occurrence under the Policy. Because the Policy covers all risk of physical loss, the water damage triggered coverage.”  Id. at 1032-33.

The Insurers further contended that the relevant policy language supported application of the manifestation theory because the definition of “occurrence” referred simply to “loss” and not “physical” loss.  Id. at 1032-33. The Seventh Circuit rejected the Insurers’ argument and found that the policy language unambiguously supported application of the continuous trigger obligating the Insurers to provide coverage for property damage caused by recurring water infiltration in each policy year.  Id. at 1033.

The Seventh Circuit also dismissed the Insurers’ public policy argument that application of continuous trigger in the context of first-party property insurance would unduly burden insurance companies by rendering insurers liable for property damage well after the policies expired, noting that the Wisconsin Supreme Court would not apply a universal trigger standard to all first-party property cases.  Moreover, the court found that insurance companies could continue to modify or revise policy language to address circumstances such as those present here.  Id. at 1033-34.

On December 2, 2014, the Insurers filed a 24-page petition for rehearing en banc.  In their brief, the Insurers asserted that the Seventh Circuit’s continuous trigger ruling created a conflict with other circuit courts of appeal, most notably the Third and Ninth Circuit, as well as numerous other state courts and commentators, that have applied or provided support for the application of the manifestation trigger in the first-party property insurance context.  (Insurers’ Br. at 4, 6-7.)  The Insurers went so far as to assert that the Seventh Circuit’s holding regarding the Wisconsin Supreme Court’s likely trigger ruling would place Wisconsin in a “minority of one.”  (Id. at 8.)  The Seventh Circuit denied the petition on January 15, 2015.

Implications For Policyholders

The Seventh Circuit’s ruling has potentially significant and far-reaching positive implications for all first-party policyholders because, as the Insurers admitted, the “occurrence” and “loss” language of the Chubb policies at issue is not unique and, in fact, is “very common.”  (Id. at 13, 19.)  As the Insurers argued, “first party insurance policies across the industry use the same (or a materially identical) [‘loss . . . occurring within the policy period’] phrase.  Thus, this decision will be used as a tool to chip away at the previously majority position that the manifestation trigger applies in first-party cases.”  (Id. at 19.)  The Insurers asserted that the Seventh Circuit’s ruling will “inflict substantial damage on the insurance industry” by, among other things, creating uncertainty regarding an insurers’ liability even after a policy period has ended and no loss has manifested and thereby disincentivizing insurers from providing lower premiums to policyholders.  (Id. at 6, 20.)   But insurers, for decades, have been affording coverage for liability after the end of a policy period for long-tail claims, pursuant to occurrence-based policies, and have been setting premiums accordingly the entire time.

The Seventh Circuit’s January 15, 2015 Order denying the Insurers’ petition for rehearing en banc, absent a rarely-granted petition for writ of certiorari to the U.S. Supreme Court, may provide the last word on this dispute.  The Seventh Circuit’s application of a continuous trigger in the first-party property insurance context represents another step forward for the widespread application of continuous trigger and a significant victory for first-party property policyholders.  Although Insurers undoubtedly will seek to downplay the significance of the Strauss opinion and limit its application to Wisconsin law, the Insurers’ own petition for rehearing acknowledges the potential impact of the ruling given the widespread use of the “occurrence” definition at issue in Strauss.  The ruling provides established precedent for policyholders to seek coverage for ongoing losses that occurred over several policy periods, but that went undiscovered until well after the policies lapsed.  Additionally, application of a continuous trigger provides policyholders flexibility, as policyholders potentially can spread liability for a loss over several policy periods and several different insurers. Policyholders should consider these options when deciding to whom they should provide notice and whom they should sue.