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February 10, 2009
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February 10,  2009
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Featured Article from Brown Sims, P.C.

Determining the Trigger of Coverage for the Third Party Environmental Claims.
 
by... 
Kenneth G. Engerrand
 
The Comprehensive General Liability ("CGL") policy has been the basic coverage agreement used in the United States for protection against third party liability claims for decades.[1] As this policy provides protection against liability arising from "property damage" or "bodily injury,"[2] it has been a source of continued litigation with respect to environmental claims.

The exposure to hazardous substances that can cause property damage or bodily injury may span a number of policy periods. Additionally, the injury or contamination may not be discovered until years after the release or exposure occurred. Therefore, in order to ascertain the scope of liability coverage available to an insured for an environmental claim under its CGL policies, the necessary first step is to determine which policies are triggered.

Coverage under a standard CGL policy is afforded for an "occurrence" that results in "bodily injury" or "property damage" during a particular policy period.[3] The term "occurrence" is a "term of art" that is typically defined as follows:

An accident, including continuous or repeated exposure to substantially the same general conditions, which results in bodily injury or property damage that is neither expected nor intended from the standpoint of the insured. Continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.
 
[4]  While the word "trigger" is not found in CGL policies, it "is a term of convenience used to describe that which, under the specific terms of an insurance policy, must happen in the policy period in order for the potential of coverage to arise."[5]  Where pollutants have been released into the environment for many years before the injury or damage is discovered, the identification of the "occurrence" for the claim is often a difficult task. Courts considering the appropriate trigger of coverage for injuries and damage caused by such exposure have adopted several approaches due to the intrinsic difficulties in determining the exact time of an occurrence and the competing interests of the parties. Where the insured has changed insurance carriers over a period of years during which the exposure occurred followed by injury or damage and then discovery of the injury or damage, a court must determine the time of occurrence in order to sort out which of the insurers' policies afford coverage for the insured's claims.

Many different trigger-of-coverage theories have developed over time; however, there are at least four primary trigger of coverage theories for CGL policies with variations on some of those triggers:
(1) exposure
(2) manifestation (pure or relaxed)
(3) injury in fact and
(4) continuous injury or triple trigger.
 
[6] Courts applying the exposure trigger hold that coverage is triggered when exposure to injury-causing conditions occurred. [7] For example, in the case of exposure to asbestos, the Sixth Circuit reasoned that "the bodily injury first occurred when the worker first started breathing asbestos fibers." [8] The court noted that "[c]umulative disease cases are different from the ordinary accident or disease situation."
[9] The court declined to adopt the manifestation theory on the ground that "there is universal medical agreement that the time when sbestosis manifests itself is not the time when the disease occurred. No doctor would say that asbestosis occurred when it was discovered." [10] The court concluded: "'Bodily injury' should be construed to include the tissue damage which takes place upon initial inhalation of asbestos. That is both a literal construction of the policy language and the construction which maximizes coverage."
[11] The  manifestation theory of occurrence (also known as the "discovery rule" [12] was adopted because "[d]etermining exactly when damage begins can be difficult if not impossible."
[13] This trigger corresponds to the general rule "that the time of an occurrence is when a claimant sustains actual damage--not necessarily when the act or omission causing the damage is committed." [14] Courts adopting the manifestation rule have declined to adopt the exposure rule on the ground that it is inconsistent with medical evidence and policy language. The court in Eagle Picher Industries, Inc. v. Liberty Mutual Insurance Co. explained: "The medical experts agreed that the sub-clinical injuries do not occur simultaneously with initial exposure; rather, before any 'insults' to the lung occur, the asbestos fiber must travel through a number of passageways in the throat and lungs and evade the body's natural defense mechanisms which are designed to prevent foreign substances from entering the body." [15] The court added that "the policy language does not support the exposure theory. The policies clearly distinguish between the event which causes injury-the accident or exposure and the resulting injury or disease. . . .[I]t is the resulting injury not the exposure, which must take place 'during the policy period' in order to trigger coverage; and it is uncontested that even sub-clinical injury to the lung does not occur simultaneously with the inhalation of asbestos." [16] Despite its providing of greater ease and certainty with respect to the determination of coverage, the manifestation rule has more than one interpretation. A pure or strict manifestation trigger provides that the disease "becomes manifest, as measured by the date of actual diagnosis or, with respect to those cases in which no diagnosis was made prior to death, the date of death." [17] A relaxed manifestation rule is analogous to health insurance policies where "a disease results 'when there is a distinct symptom or condition from which one learned in medicine can with reasonable accuracy diagnose the disease." [18] Thus, "a disease 'results' under the policies when it becomes clinically evident, that is when it becomes reasonably capable of medical diagnosis."
[19] The injury-in-fact trigger for coverage takes issue with the other theories as being inconsistent with the language of the CGL policy. In American Home Products Corp. v. Liberty Mutual Insurance Co.,
[20] the Second Circuit addressed coverage for exposure claims arising out of the sale of pharmaceuticals. The court initially rejected the insurer's manifestation argument because "[s]ome types of injury to the body occur prior to the appearance of symptoms; thus the manifestation of the injury may well occur after the injury itself. There is no language in the policies that purports to limit coverage only to injuries that become apparent during the policy period, regardless of when the injury actually occurred." [21] The court also rejected the insured's exposure argument: "Injury cannot be read as the equivalent of exposure, because the policy contemplates injury caused by exposure; since a cause normally precedes its effect, it is plain that an injury could occur during the policy period although the exposure that caused it preceded that period." [22] Therefore, the court concluded that "the occurrence of an injury in fact, an injury that has occurred, is the only interpretation of the clause that neither departs from the policies' language nor imports expansions of or limitations on the words that do not ordinarily exist." [23] The court cautioned that "injury in fact" does not require an "injury that is 'diagnosable' or 'compensable' during the policy period" as that would impose "an unwarranted limitation on the injury-in-fact concept."
[24] The continuous or triple trigger theory of coverage "interprets the term 'occurrence' in CGL policies to include continual, recurring damage as well as damage that occurs at one moment in time."
[25] With this trigger, all insurers whose policies were in effect during the time that covered persons or property were exposed, injured in fact, or when the injury was manifested, are each obligated to defend and indemnify the insured: "We conclude, therefore, that inhalation exposure, exposure in residence, and manifestation all trigger coverage under the policies." [26] The Texas Supreme Court has not given a definitive answer concerning trigger of coverage, but the Texas courts have addressed the issue on many occasions. In American Physicians Insurance Exchange, the Texas Supreme Court noted the possible triggers of coverage but declined to choose which trigger should apply as the outcome of the case did not require resolution of that issue. [27] Texas courts have frequently [28] followed the manifestation rule set forth by the Dallas Court of Appeals in Dorchester Development Corp. v. Safeco Insurance Co. that "no liability exists on the part of the insurer unless the property damage manifests itself, or becomes apparent, during the policy period."
[29] The court in Dorchester reasoned that "coverage is not afforded unless an identifiable damage or injury, other than merely causative negligence, took place during the policy period." [30] In the event of continuous[31] or repeated manifestation of damage or injury, there may be coverage under multiple policies. [32]  When presented with the issue of what trigger to follow in the context of asbestos-related disease, the Fifth Circuit, in Guaranty National Insurance Co. v. Azrock Industries, Inc.,[33] departed from the manifestation rule that Texas courts had been using in property damage claims. The court in Azrock reasoned: "'Cumulative disease cases are different from the ordinary accident or disease situation.' Accordingly, we do not find instructive prior opinions of this court or of Texas appellate courts that apply the manifestation theory in entirely different contexts, particularly property damage cases." [34] The court continued to apply the manifestation trigger for a property damage claim,[35] but the court made an Erie guess that Texas would choose the exposure theory as the trigger for coverage for asbestos personal injury cases. [36] After Azrock, the Houston Court of Appeals addressed claims of bodily injury and property damage from exposure to perchloroethylene and other hazardous substances released by the insured in Pilgrim Enterprises, Inc. v. Maryland Casualty Co. [37] The court did not consider itself bound by the manifestation rule adopted in prior Texas cases in light of the Texas Supreme Court's declining to adopt a trigger in American Physicians Insurance Exchange. [38] Instead, the Court of Appeals in Pilgrim agreed with the reasoning in Azrock "that, for CGL policies covering continuous or repeated exposure to conditions, injury can occur as the exposure takes place."
[39] The court found "that the policies[40] cover physical injury or property damage caused by exposure occurring during the policy periods, even if the contamination began before the policy periods."
[41] On August 8, 2007, the United States Court of Appeals for the Fifth Circuit took definitive action designed to answer the unresolved issue regarding what rule determines when property damage occurs for purposes of an occurrence-based commercial general liability insurance policy in Texas.

In One Beacon Insurance Co. vs. Don's Building Supply, Inc. on appeal from the Northern District of Texas, Dallas Division, One Beacon sought a declaration that it had no duty to defend or indemnify its insured, Don's Building Supply ("DBS"), in 22 lawsuits filed by various homeowners against DBS.  The lawsuits involved claims arising from water intrusion into the wall cavities caused by allegedly defective synthetic siding known as Exterior Insulation and Finish Systems ("EIFS").  The EIFS was distributed and sold by DBS.  According to the lawsuits, the EIFS would fail as a weather proofing system and allow water penetration into wall cavities resulting in extensive damage to the home.  The One Beacon policy periods in effect were from December 1, 1993 through December 1, 1996.  All of the 22 homes had the EIFS installed at some time during the policy period.  DBS sought defense and indemnity from One Beacon against these claims.

The first of these lawsuits was filed on August 13, 2003, well after the policy period had expired.  Each of the plaintiffs pled the discovery rule asserting that the damage was latent and could not have been discovered during the policy period.  In response, the Fifth Circuit noted that the Texas Supreme Court had not yet adopted a particular rule for determining when property damage occurs for purposes of an occurrence-based commercial general liability insurance policy.  As a result, the Fifth Circuit declined to rule on the outstanding legal issues and certified the following questions to the Texas Supreme Court:

1.       When not specified by the relevant policy, what is the proper rule under Texas law for determining the time at which property damage occurs for the purposes of an occurrence-based commercial general liability insurance policy?

2.       Under the rule identified in the answer to the first question, have the pleadings in lawsuits against an insured alleged that property damage occurred within the policy period of an occurrence-based commercial general liability insurance policy, such that the insurer's duty to defend and indemnify the insured is triggered, when the pleadings allege that actual damage was continuing and progressing during the policy period, but remained undiscoverable and not readily apparent for purposes of the discovery rule until after the policy period ended because the internal damage was hidden from view by an undamaged exterior surface? 

Once these questions are answered by the Texas Supreme Court, the uncertainty surrounding the trigger(s) of coverage for third party environmental claims under a commercial general liability insurance policy should be resolved.  Stay tuned. 

[1]See generally James A. Robertson, How Umbrella Policies Started, available at <http://www.irmi.com/irmicom/expert/articles/2000/robertson04.aspx>.
[2]Id.
[3]Aetna Cas. & Surety Co. v. Naran, 1999 WL 59782 *3 (Tex. App.--Dallas 1999, pet. denied); Montrose Chem. Corp. of Calif. v. Admiral Ins. Co., 10 Cal. 4th 645, 654, 913 P.2d 878, 880 (Cal. 1995) (en banc).
[4]American Physicians Insurance Exchange v. Garcia, 876 S.W.2d 842, 854 n.21 (Tex. 1994).
[5]Montrose Chem. Corp., 10 Cal. 4th at 655 n.2, 917 P.2d at 880 n.2.
[6]See American Physicians Insurance Exchange, 876 S.W.2d at 853 n.20; Auto Owners Ins. Co. v. Travelers Cas. & Surety Co., 227 F. Supp. 2d 1248, 1266 (M.D. Fla. 2002).
[7]See, e.g., Continental Ins. Cos. v. Northeastern Pharmaceutical & Chem Co., 842 F.2d 977 (8th Cir. 1988); MAPCO Alaska Petroleum Inc. v. Central Nat'l Ins. Co of Omaha, 795 F. Supp. 941 (D. Alaska 1991).
[8]Insurance Co. of N. Am. v. Forty-Eight Insulations, Inc., 657 F.2d at 814, 816 (6th Cir.), cert. denied, 454 U.S. 1109 (1981).
[9]Insurance Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212, 1219 (6th Cir. 1980), clarified on rehearing, 657 F.2d 814 (6th Cir.), cert. denied, 454 U.S. 1109 (1981).
[10]Id.
[11]Id. at 1223. The court addressed proration with the insured for the non-covered period that was outside of the coverage afforded by the insurer. Id. at 1224-25.
[12]See Home Indem. Co. v. Hoechst Celanese Corp., 128 N.C. App. 189, 196, 494 S.E.2d 774, 779 (N.C. App.) ("discovery rule mandates that 'for insurance purposes, property damage 'occurs' when it is manifested or discovered'"), aff'd, 505 S.E.2d 870 (N.C. 1998).
[13]Mraz v. Canadian Insurance Co., 804 F.2d 1325, 1328 (4th Cir. 1986).
[14]Snug Harbor, Ltd. v. Zurich Ins., 986 F.2d 538, 544 (5th Cir. 1992).
[15]682 F.2d 12, 18 (1st Cir. 1982), cert. denied, 460 U.S. 1028 (1983).
[16]Id. at 19.
[17]Eagle-Picher Indus., Inc. v. Liberty Mut. Ins. Co., 523 F. Supp. 110, 118 (D. Mass. 1981), modified, 682 F.2d 12 (1st Cir. 1982), cert. denied, 460 U.S. 1028 (1983); see also Home Indemnity, 128 N.C. App. 196, 494 S.E.2d at 779.
[18]Eagle-Picher, 682 F.2d at 24 (quoting Malone v. Continental Life & Acc. Co., 89 Idaho 77, 83, 403 P.2d 225, 228 (Idaho 1965).
[19]Eagle-Picher, 682 F.2d at 25 (footnote omitted); see also CPC Int'l, Inc. v. Northbrook Excess & Surplus Ins. Co., 688 A.2d 647, 650 (R.I. 1995) ("we conclude that coverage under a general liability policy is triggered by an occurrence that takes place when property damage, which includes property loss, manifests itself or is discovered or in the exercise of reasonable diligence is discoverable").
[20]748 F.2d 760 (2d Cir. 1984).
[21]Id. at 764
[22]Id.
[23]Id. at 765.
[24]Id. The court explained: "[A] real but undiscovered injury, proved in retrospect to have existed at the relevant time, would establish coverage, irrespective of the time the injury became [diagnosable]." Id. at 766 (paraphrasing the district court opinion, American Home Prods. Corp. v. Liberty Mut. Ins. Co., 565 F. Supp. 1485, 1497 (S.D.N.Y. 1983), aff'd as modified, 748 F.2d 760 (2d Cir. 1984)).
[25]American Family Mut. Ins. Co. v. American Girl, Inc., 268 Wis.2d 16, 55; 673 N.W.2d 65, 84 (Wis. 2004). "Under this trigger of coverage theory, bodily injuries and property damage that are continuous or progressively deteriorating throughout successive policy periods are covered by all policies in effect during those periods." Montrose Chemical Corp., 10 Cal. 4th at 675; 913 P.2d at 894.
[26]Keene Corp. v. Insurance Co. of North America, 667 F.2d 1034, 1047 (D.C. Cir. 1981). The court held that an insurer whose coverage was triggered was "liable in full, subject to the 'other insurance provisions'" in its policy and the other triggered policies. Id.
[27]See 876 S.W.2d at 853.
[28]See, e.g., Snug Harbor, Ltd. v. Zurich Ins., 968 F.2d 538, 544 n.18 (5th Cir. 1992); State Farm Mut. Auto. Ins. Co. v. Kelly, 945 S.W.2d 905, 910 (Tex. App.--Austin 1997, pet. denied); Vanguard Underwriters, Inc. Co. v. Forist, 1999 WL 498200 *2 (Tex. App.-- San Antonio 1999, pet. denied); Closner v. State Farm Lloyds, 64 S.W.3d 51, 53 (Tex. App.--San Antonio 2001 no pet.). State Farm Fire & Cas. Co., 88 S.W.3d 313, 322 (Tex. App.-San Antonio 2002, pet. denied).
[29]737 S.W.2d 380, 383 (Tex. App.--Dallas 1987, no pet.). The term "apparent" does not mean "discovered." American Home Assurance Co. v. Unitramp Ltd., 146 F.3d 311, 314 (5th Cir. 1998). "The date of occurrence is when the damage is capable of being easily perceived, recognized and understood." Id.
[30]Dorchester, 737 S.W.2d at 383.
[31]The manifestation theory was held to control, rejecting other triggers, even though the property damage was alleged to be part of "a continuous process." Aetna Cas. & Surety Co. v. Naran, 1999 WL 59782 *3 - *4 (Tex. App. Dallas 1999, pet. denied).
[32]See Commonwealth Lloyd's Ins. Co. v. Cullen/Frost Bank of Dallas, N.A., 852 S.W.2d 252, 259 (Tex. App.--Dallas 1993), pet. denied, 889 S.W.2d 266 (Tex. 1994).
[33]211 F.3d 239 (5th Cir. 2000).
[34]Id. at 247 (quoting Forty-Eight Insulations, 633 F.2d at 1219).
[35]Azrock, 211 F.3d at 248.
[36]Id. at 251-52. The court stated: "To trigger [the insurer's] duty to defend, the pleading must allege (1) exposure to [the insured's] asbestos-containing products during the policy period and (2) that such exposure caused bodily injury-even if the particular asbestos-related disease was not diagnosed until sometime after the policy expired." Id. at 250. Outside the context of insurance, the Texas Supreme Court noted that the Fifth Circuit had stated: "[The plaintiff's] injury is . . . the inhalation of fibers and the invasion of his body by those fibers, thus causing him physical damage." Pustejovsky v. Rapid-American Corp., 35 S.W.3d 643, 647 (Tex. 2000) (quoting Gideon v. Johns Manville Sales Corp., 761 F.2d 1129, 1137 (5th Cir. 1985)). The court in Pustejovsky declined, however, to follow the single cause of action rule for exposure claims from the Gideon decision. Pustejovsky, 35 S.W.3d at 653.
[37]24 S.W.3d 488 (Tex. App. Houston [1st Dist.] 2000, no pet.).
[38]Id. at 495.
[39]Id. at 497.
[40]Although the Texas Supreme Court did not determine the appropriate trigger in American Physicians Insurance Exchange, the court did note that the coverage for temporally distinct policies may not be stacked. See 876 S.W.2d at 855. The court then explained:
If a single occurrence triggers more than one policy, covering different policy periods, then different limits may have applied at different times. In such a case, the insured's indemnity limit should be whatever limit applied at the single point in time during the coverage periods of the triggered policies when the insured's limit was highest. The insured is generally in the best position to identify the policy or policies that would maximize coverage. Once the applicable limit is identified, all insurers whose policies are triggered must allocate funding of the indemnity limit among themselves according to their subrogation rights.
Id.
[41]Pilgrim, 24 S.W.3d at 499. In Millennium Petrochemicals, Inc. v. Brown & Root Holdings, Inc., 390 F.3d 336, 344 (5th Cir. 2004), the Fifth Circuit applied similar exposure analysis to that invoked in Azrock for insurance coverage in the context of contractual indemnification with respect to asbestos claims.
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Knneth G. Engerrand is a shareholder in Brown Sims, P.C.
 
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