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Armstrong Decision Clarifies Allocation of Coverage Issues for Progressive Damage Claims
October 4, 1996
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ConstructionWebLinks.com
Shortly
after the California Supreme Court adopted the "continuous
trigger" theory for progressive damage claims in Montrose
v. Admiral Ins. Co. (1995) 10 Cal. 4th 645 ("Montrose
II"), a new set of issues surfaced pertaining to
the allocation of coverage for such claims. The California
Court of Appeal for the First District tackled many of those
issues head on in Armstrong World Industries, Inc. v.
Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th
1. With the Supreme Court's recent decision declining
review of that opinion, Armstrong is now final and
provides important guidance for contractors, owners, design
professionals and suppliers on the allocation of general
liability insurance coverage for construction-related damage
claims. Several of the Armstrong rulings most germane
to construction risk management are highlighted below.
Allocation of Coverage Between Multiple Policies
The Armstrong case, which arises from a dispute
over coverage for asbestos bodily injury and property damage
claims, establishes much needed ground rules for the allocation
of coverage for continuous trigger claims. Addressing
that issue from the insured's perspective first, the court
concluded that each policy (and each insurer) has an independent
obligation to respond "in full" to a claim up
to the policy limits. This obligation by insurers
provides insureds the flexibility to maximize their insurance
assets by selecting the appropriate policy or policies to
respond to a progressive damage claim. The insured's
policy selection, however, does not determine the final
allocation because an insurer that pays a claim "in
full" is entitled to seek contribution from other insurers
based on the "other insurance" clause in its policy
and a right of equitable contribution. The Armstrong
court also approved the trial court's allocation based
on policy limits and time on the risk, but cautioned that
allocation methods must be determined from the specific
language of the policies at issue in each case.
Multiple Deductibles And Effects of Self-Insurance
Armstrong also addressed the insurers' contention
that a policyholder with years of self-insurance or no insurance
must share in responsibility for a risk spanning multiple
policy periods. Following standard CGL policy language
that obligates an insurer to pay "all sums" for
which the insured is legally obligated to pay because of
bodily injury or property damage, the court again found
that each carrier has an independent obligation to respond
to a claim in full irrespective of other policies that contain
deductibles or self-insured layers. Probably the most
important ramification of this finding is that it dispels
any notion that an insured must exhaust all applicable deductibles
before receiving benefits from any of several triggered
policies. In fact, Armstrong seems to permit
an insured to target policies with low levels of self-insurance
when seeking coverage for a continuous damage claim.
Incorporation of Defective Material Constitutes Property
Damage
Another aspect of Armstrong relevant to construction
related claims is the court's finding that the incorporation
of asbestos into a structure alone can constitute "physical
injury" to the building. The court is careful
to point out that this portion of its ruling does not alter
the axiom that contractors cannot receive insurance coverage
for claims of "defective material or poor workmanship"
since such claims are an uninsurable commercial risk.
Nonetheless, the court drew a distinction based on Armstrong's
status as a supplier of asbestos containing materials and
found that it was entitled to coverage for claims of injury
to buildings caused by the mere presence of those materials.
By analogy, the policy of a material supplier that provides
defective material to a project may cover a claim for damage
to the project caused by the incorporation of the supplier's
defective product. A contractor named as an additional
insured under such a policy would presumably receive the
same coverage benefits.
The Armstrong decision provides much needed guidance for insureds and insurers in unraveling the numerous coverage issues associated with progressive damage claims. In light of Armstrong, insureds are now better able to maximize insurance benefits for continuous damage claims and insurers can then equitably allocate the coverage between all applicable policies.
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©1996 ConstructionWebLinks, Inc.
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