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CASE LAW -

"Continuous Injury" Is Applicable to Defense by Insurance Carrier. Maryland Casualty Company v. National American Insurance Co. of California (1996) 48 Cal.App.4^th 1822, 56 Cal.Rptr.2^d 498 [originally in Guralnick & Gilliland's Eleventh Annual Legislative Update]

CASE FACTS

Midway Homes was the builder of the Lake Park Terrace subdivision. It obtained liability insurance first from Maryland Casualty Company ("MCC") for policy periods between February 1977 and August 1984 and second from National American Insurance Company of California ("NAICC") from July 1984 through July 1985. In October 1991, Lake Park Terrace Homeowners Association filed an action against Midway Homes for construction defects. Midway Homes tendered defense to MCC which accepted. MCC in turn attempted to tender defense of Midway Homes to NAICC. However, NAICC refused to share defense costs, and MCC filed an action against NAICC in June 1993.

MCC presented evidence that numerous construction defect issues occurred in 1984 and 1985, during NAICC's liability coverage. NAICC argued that the carrier insuring the risk when damages first triggered coverage should bear sole responsibility for all resulting losses. The Superior Court concluded that the potential for coverage existed under the NAICC liability policy, and ordered NAICC to defend Midway Homes. NAICC appealed the ruling, contending that (1) MCC was not a party to NAICC's insurance contract with Midway Homes and had no standing to enforce any defense duty, (2) MCC was obligated to defend the insured under the "manifestation of damages" theory because damages had first occurred during MCC's policy periods, and (3) Midway Homes concealed pre-existing damages which would exclude coverage under the NAICC policy.

The Court of Appeal upheld the lower court's ruling and stated that (1) it was immaterial that MCC was not a party to NAICC's insurance contract with Midway Homes, that their respective obligations derive from equitable principles intended to accomplish ultimate justice, (2) the Supreme Court in Montrose II found that there is a "continuous injury trigger" in progressive damage cases, and successive policy periods are covered by all policies in effect throughout the period, and (3) NAICC produced no evidence to show that it had made inquiries of Midway Homes with regard to pre-policy property losses to support its decision to exclude coverage based on concealment.

ANALYSIS

In construction defect or progressive damage cases, the Supreme Court's ruling in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 42 Cal.Rptr.2^d 324, 913 P.2d 878 (Montrose II) of a "continuous injury trigger" provides that the date of discovery of the damage is not the primary issue. Rather, it is the effect, or the occurrence of damage during the policy period, which triggers liability coverage defense. The insurer is relieved of the duty to defend only when the complainant is unable to advance any issue which is within the scope of the policy coverage. Otherwise, the insurer must defend its insured even if ultimately no damages are awarded.

CONCLUSION

This is an extremely important case for community associations which are: (1) currently involved in a construction defect lawsuit or (2) experiencing problems that may eventually lead to the filing of a defect lawsuit against their developer. The court's ruling broadens insurance coverage when a claim is made by a third party (community association). In this case, the developer through the efforts of its first insurance company (Maryland Casualty Company) was able to prove that its second insurance company (National American Insurance) owed a duty of defense in the construction defect case. Thus, the court's decision will now result in broader insurance coverage for developers which have successive insurance policies when sued for construction defects. Community associations will benefit from this decision because additional insurance policies will be triggered which may increase the available pool of insurance proceeds that a plaintiff association may be able to recover from a builder in a construction defect case.

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