A federal district court judge in Pennsylvania ruled that first-party property claims for damages due to defective stucco arose from a single occurrence and, upon determining the date of loss, held that the coverage claims were barred by the insurance contract’s two-year suit limitations period. Smith, et al. v. Westfield Insurance Co., No. 06-3077; 2007 U.S. Dist. LEXIS 87431 (E.D. Pa. November 27, 2007).
In January 2003, the insureds procured homeowner’s insurance coverage on their newly-constructed home. Beginning in June 2003, the insureds noticed water leaking into a bathroom and a staircase of the premises. By May 2004, the leaks had become a continuous and repeated problem in at least five rooms. The cause of the leaks was determined to be a failure of the exterior stucco to keep out water from rain and snow.
The insureds filed a claim with their homeowner’s insurer, seeking indemnification for the water damage. The insurer denied the claim because, among other things, it was barred by the two-year suit limitation clause in the homeowner’s policy. On June 22, 2006, the insureds filed suit against the insurer in Pennsylvania state court for breach of contract and bad faith. On the basis of diversity jurisdiction, the insurer removed the case to federal district court. The federal district court dismissed the bad faith claim prior to trial, and held a one-day trial on the merits of the insureds’ coverage claim.
The Federal District Court’s Decision
The insurance contract defined “occurrence” as “[a]n accident, including continuous or repeated exposure to substantially the same general harmful conditions” which results during the policy period in bodily injury or property damage. The insurance contract also provided that “[n]o action can be brought against [the insurer] unless…the action is started within two years after the date of loss.” Following this language, it would first be necessary to determine whether the date of the loss occurred within two years of the date of the lawsuit.
It was undisputed that more than two years had elapsed between the time the insureds first noticed the water leaking into the premises and the time the insureds filed suit against the insurer. The parties disagreed, however, on whether the date the insureds first noticed the leakage constituted the “date of the loss” for purposes of assessing the insurance contract’s suit limitations provision.
Following the Third Circuit’s “cause of loss” test — under which an occurrence is determined by the cause or causes of the resulting injury — the Court concluded that all of the occasions of water leaking in the premises were attributable to a single uninterrupted and continuing occurrence — the permeability of the stucco. The Court then employed the Third Circuit’s “effect test” to determine the date of the loss. The Court observed that, for insurance coverage purposes, damages “occur” when they “first manifest themselves in a way that could easily be ascertained by reasonable diligence.” Thus, the Court concluded that the date of the loss was at some point after June 2003, when the water leaks first manifested themselves, but no later than May 2004, when the leaks had become a continuous and repeated problem in at least five rooms of the premises. Because the suit was not brought until June 22, 2006, the Court held that the insureds’ coverage claims were not brought within the insurance contract’s two-year suit limitations period and entered judgment in favor of the insurer.
Smith illustrates that, where a homeowner’s insurance contract defines “occurrence” to encompass continuous or repeated exposure to substantially the same general harmful conditions, a court in Pennsylvania faced with a case involving claims of damage to property caused by a defective building material such as stucco will likely find a “single occurrence.” This decision also demonstrates that, in such a case, the “date of loss” will be measured from the date the damage first manifests itself, not when the condition giving rise to the damage is created. Finally, this is an example of strict adherence by courts sitting in Pennsylvania to an insurance contract’s suit limitations period.