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An Insurer’s Words Can Be Used Against Them In A Court Of Law: First-Party Property Policy Language Resurrects Seemingly Untimely Construction-Defect Coverage Claim
by Erin E. Krejci
On November 18, 2014, the United States Court of Appeals for the Seventh Circuit released an opinion upholding coverage for insureds who discovered long-term water damage several years after expiration of the applicable insurance policies and ostensibly after the statute of limitations for a coverage claim had passed. In Strauss v. Chubb Indem. Ins. Co., 771 F.3d 1026 (7th Cir. 2014), the Seventh Circuit panel, applying Wisconsin law, closely examined the precise language used by the insurers in the policies and determined that such language resurrected the seemingly untimely coverage claim. The Strauss decision, as discussed in detail below, highlights the importance of precision and accuracy in policy drafting for insurers, the importance of vigilant policy language evaluation for insureds, and the importance of understanding the nuances of the insurance policy interpretation principles of the controlling jurisdiction for both insurers and insureds alike.
Plaintiffs Randal and Diane Strauss (the “Insureds”) constructed a new home in Wisconsin in 1994. To insure their home, the Insureds purchased “Masterpiece Deluxe Home Coverage” first-party property insurance policies (collectively, the “Policy”) issued by Chubb Indemnity Insurance Company, Vigilant Insurance Company, Federal Insurance Company, and Great Northern Insurance Company (collectively, the “Chubb Defendants”) from October 1994 to October 2005. From 2005 onward, the Insureds obtained coverage for their home from other insurers.
The Policy issued by the Chubb Defendants included several key provisions. First, the Policy stated that coverage was limited “only to occurrences that take place while this policy is in effect.” Second, the Policy defined “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.” Third, the Policy stated that a “‘covered loss’ includes all risk of physical loss to [the] house or other property…unless stated otherwise or an exclusion applies.” Fourth, the Policy included a “Legal Action Against Us” clause, which required any action against the Chubb Defendants to be initiated “within one year after the loss occurs.”
In October 2010 — about sixteen years after construction — the Insureds discovered that water infiltration had been causing damage within the building envelope of their home. The water infiltration that the Insureds discovered in October, 2010 was ongoing and progressive, beginning around the time of original construction back in 1994 and continuously occurring with each subsequent rainfall. On December 22, 2010, the Insureds submitted a claim to the Chubb Defendants seeking recovery for the damage under the Policy.
The Chubb Defendants denied the Insureds’ coverage claim. The Chubb Defendants claimed that denial of the Insureds’ December, 2010 claim was appropriate because the damage was not discovered during any of the Policy periods. Specifically, the Chubb Defendants maintained that coverage under the Policy had not been triggered because the damage did not manifest itself until 2010 — over sixteen years after the first policy period expired and over five years after the last policy period had expired. The Chubb Defendants further contended that the Insureds did not have any legal recourse against the Chubb Defendants because any legal action was time-barred pursuant to the applicable Wisconsin statute of limitations and the “Legal Action Against Us” clause found in the Policy.
The Insureds filed suit against the Chubb Defendants in the United States District Court for the Eastern District of Wisconsin on October 19, 2011, within one year of their discovery of the damage caused by the water infiltration. The Insureds and the Chubb Defendants cross-moved for summary judgment. Initially, the District Court denied both motions, finding factual issues regarding the language contained within the Policy. After reassignment to a Magistrate Judge, the Insureds and the Chubb Defendants sought reconsideration of their respective motions for summary judgment. On February 13, 2013, the District Court granted summary judgment in favor of the Insureds and found that the Chubb Defendants were liable for the damage to the Insureds’ home and that the Insureds’ claim was not time-barred. The Chubb Defendants filed a timely appeal.
The Seventh Circuit reviewed the District Court’s interpretation of the Policy, the District Court’s grant and denial of the respective summary judgment motions, and the District Court’s statute of limitations determination, de novo. On November 13, 2014, the Seventh Circuit affirmed the ruling of the District Court in its entirety.
In its opinion, the Seventh Circuit first addressed the trigger of coverage. The Court explained that in order for an insurance policy to potentially provide coverage to an insured, a triggering event must occur during the policy’s period of enforcement. The Court noted that “trigger of coverage” is not a term that is generally defined in insurance policies, but is instead a tool used to help determine what must happen during a policy period in order to identify which policy must respond to the claim.
The Court detailed the four different theories for determining whether a “triggering” event occurred during a relevant policy period that are recognized under Wisconsin law:
The “exposure” theory fixes the date of injury as the date on which the injury-producing agent first contacted the body or the date on which pollution began. The “manifestation” theory holds that the compensable injury does not occur until it manifests itself in the form of a diagnosable disease or ascertainable property damage. The “continuous trigger” theory, also known as the “triple trigger” theory, provides that the injury occurs continuously from exposure until manifestation. Finally, the “injury-in-fact” theory allows the finder of fact to place the injury at any point in time that the effects of exposure resulted in actual and compensable injury.
771 F. 3d at 1030 (internal citations omitted). Of these four, the parties raised two competing theories of coverage — “manifestation” theory vs. “continuous” theory.
The Chubb Defendants urged the Court to impose the manifestation trigger. The Chubb Defendants argued that under the manifestation trigger, only the insurer that bears the risk at the time the loss manifests can be responsible for indemnification once coverage is found to exist. The Chubb Defendants claimed that the continuous trigger theory should be limited to third-party coverage cases and the manifestation trigger theory should apply to all first-party property policy disputes in order to create certainty for insurers and prevent liability from arising under stale contracts of insurance. In essence, the Chubb Defendants sought a bright-line rule requiring use of the manifestation theory for first-party property insurance disputes on public policy grounds. The Insureds argued against the manifestation trigger and pressed the Court to apply the continuous trigger theory to the Policy. The Insureds claimed that in the context of progressive damage, all policies in effect from the time the loss begins to the time the loss manifests owe coverage.
In assessing the competing theories of coverage, the Court emphasized the principles of interpretation mandated under Wisconsin law. The Court stressed that the primary objective in interpreting an insurance policy, much like a contract, is to ascertain and carry out the intention of the parties. The Court expressly noted that Wisconsin law required that the words used in the Policy be given their common and ordinary meaning and when the language is plain and unambiguous, the Policy must be enforced as written. The Court further explained that if the language of the Policy is ambiguous, Wisconsin law requires that the ambiguity be construed in favor of coverage for the insured.
The Court determined that the provisions in the Policy “require the application of the continuous trigger theory” and that the “language [in the Policy] demands this result.” 771 F. 3d at 1031. Specifically, the Court noted that the Policy expressly states that it covers “all risk of physical loss…unless stated otherwise,” and applies to “occurrences that take place while this policy is in effect.” Id. The Court further observed that the defined term “occurrence” — per the Policy — means “a loss or accident to which this insurance applies occurring within the policy period” and expressly states that “continuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence.” The Seventh Circuit determined that these provisions were unambiguous and that the Chubb Defendants’ definition of “occurrence” — which includes “continuous or repeated exposure” — demonstrates that the parties “contemplated a long-lasting occurrence” that could give rise to a loss “over an extended period of time.” The Court ultimately held that it was the Chubb Defendants’ own policy language that dictated that the Chubb Defendants would unambiguously provide coverage for “all risk of physical loss to [the] house” as long as the claim was brought to cover an occurrence that took place while the policy was in effect. In this case, because there was continuous, recurring damage caused by each successive rainstorm between 1994 and 2010, the Court held that the Insureds would have coverage for all of the damage occurring during that time frame.
The Court made it abundantly clear that the Chubb Defendants’ own words sealed their fate:
Letting the Chubb Defendants off the hook now would reward their sloppy drafting. It is not the province of this court to alter the unambiguous terms of the Policy.
771 F.3d at 1034.
The Court rejected the Chubb Defendants’ invitation to impose a bright-line manifestation trigger theory to first-party property policies in order to create certainty for insurers and prevent liability from arising under stale contracts of insurance. The Court again focused on the Chubb Defendants’ own language, stating:
Creating a bright-line rule at the Chubb Defendants’ request because they perhaps regret the language they drafted for the Policy would be an inappropriate interference with the parties’ right to contract.
771 F.3d at1034. The Court found that the language specific to the Policy trumped the Chubb Defendants’ general public policy theory.
The Court next addressed the timeliness of the Insureds’ lawsuit under both statutory and Policy language grounds. The Chubb Defendants argued that the Insureds did not sue within the statutory time period which requires that an action must be initiated within twelve months “after the inception of the loss.” Wis. Stat. § 631.83(1)(a). The Court noted that this statute of limitations is not absolute because the parties to an insurance contract are free to alter the length of the statute of limitations and the date that the limitation period begins to run.
In this case, the Chubb Defendants altered the limitation period in which the Insurers could file suit by diverging from the language found in the Wisconsin statute. Rather than requiring claims to be filed with one year “after the inception of the loss,” the Policy permitted claims to the filed “within one year after a loss occurs.” The Seventh Circuit found the phrases “after a loss occurs” and “after the inception” to be fundamentally different. Per the Court, “inception of the loss” clearly and unmistakably means the beginning of the damage and “after a loss occurs” is ambiguous as applied to a progressive loss and can reasonably be interpreted to mean after a loss completes. As ambiguities are interpreted in favor of the Insured, the Court concluded that the Insurers’ claim — which was filed about ten months after the manifestation of the water infiltration — was timely because the Insureds “could have brought their claim at any point up until a year after the water infiltration damage halted.” 771 F.3d at 1035.
Shortly after the Strauss opinion was issued, the Chubb Defendants petitioned for a rehearing before the full Seventh Circuit. The Chubb Defendants challenged the composition of the Seventh Circuit panel that decided the case, which consisted of one circuit judge and a district court judge sitting by designation. The Chubb Defendants also argued that the decision conflicted with other federal circuits and that such conflicts will create “confusion and uncertainty” for insurers issuing first-party policies to homeowners. The American Insurance Association and the Property Casualty Insurers Association of America submitted an amicus brief in support of the Chubb Defendants’ request for rehearing and argued that the panel’s decision should be reconsidered because it could have wider implications for insurers in Wisconsin than intended and the panel’s use of the continuous trigger theory could expose property insurers in Wisconsin to “risks from the distant past they did not contemplate and for which they have charged no premium.” The Insureds argued that the panel’s ruling should not be disturbed because it lacks the “national significance” needed to justify a rehearing and is solely a state law issue. The Insureds claimed that the decision did not cause any confusion among or between judicial circuits because “[t]he other federal circuits are free to apply bright-line rules if supported by state law, just as this court is free to decline such an invitation where supported by Wisconsin law.” On January 15, 2015, the Seventh Circuit denied the Chubb Defendants’ petition for rehearing.
The Strauss opinion provides a stern warning for insurers. In Wisconsin, and potentially in states adopting similar trigger theories and canons of interpretation, policy language can and will be used against the policy drafters. Policy drafters must be careful to avoid broad or ambiguous terms in order to avoid unintended exposure. Policy drafters must also exercise precision and accuracy as the policy language will likely trump general public policy or fundamental fairness arguments. Counsel for policy drafters should be meticulous in evaluating policy language, mindful of the nuances of the applicable law, and wary of sweeping public policy arguments. For insureds, the Strauss opinion provides encouragement. It emboldens insureds to not just accept an insurer’s generic denial of coverage and instead, meaningfully evaluate — or engage counsel to meaningfully evaluate — the policy language at issue in order to obtain policy benefits. Strauss further encourages insureds and their counsel — after confirming applicable canons of interpretation in their jurisdiction — to strongly consider challenging coverage denials in situations involving broad or ambiguous policy language because the insurer’s words just may be used against them in a court of law.