Insurance Law

Montrose Endorsement Did Not Exclude Coverage

In general, insurers have had mixed results when it comes to enforcing the Montrose (known loss) endorsement in construction defect coverage cases. Some courts have interpreted them narrowly and applied a strict “sameness” (my term) test between the “property damage” that existed pre-policy inception date, and that which took place during the policy period, for which coverage is now being sought. In other words, it is the specific “property damage” itself that must be known by the insured prior to the policy period. Further, that an insured knew, before policy inception, that something was amiss, and caused some property damage, is not necessarily going to qualify as “known loss,” ala Montrose, for all property damage. [To be clear, the Montrose Endorsement isn’t actually an “endorsement” anymore, having been added to the CGL policy’s insuring agreement eons ago, but the name has stuck.]

Of course, this may not bother ISO, the inventor of the Montrose Endorsement, as it noted when drafting it that its concerns were particularly relevant in “those cases involving continuous or progressively deteriorating injury or damage.” See “Introduction of Various New and Revised Commercial General Liability Endorsements,” ISO Commercial General Liability Forms Filing GL-99-O99FO, at 3. The Montrose decision unquestionably involved traditional continuous or progressively deteriorating injury or damage.

The Ninth Circuit recently held in Ameron International v. Greenwich Insurance Co., No. 13-55838 (9th Cir. Sept. 9, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], that the Montrose Endorsement did not preclude coverage (at least not yet) for a claim that, while not exactly construction defect, resembled it.

Ameron supplied paint that was affixed to various facilities in a natural gas production project in Nova Scotia. Ameron was sued for paint failure, which allegedly caused corrosion of underlying steel structure and pipelines. Ameron sought defense costs under the terms of a general liability policy issued by American Home Assurance.

American Home argued that coverage was not owed on account of the policy’s “known damages provision” (which looks like a Montrose Endorsement) which precludes coverage for property damage that the insured “knew ... had occurred, in whole or in part [before the policy incepted].”

The court agreed with American Home that Ameron knew about corrosion to the underlying steel at the offshore facilities before the inception of the policy. However, there was more to it than that: “We must also ask: did the Ameron parties know about corrosion to the underlying steel at the onshore facilities and the pipelines? We hold that there is an issue of fact on this question. Although American Home Assurance has presented some evidence that the Ameron parties had pre-policy knowledge of corrosion and damage to the underlying steel at the onshore facilities and pipelines, none of this evidence is “conclusive[].” Additionally, several key Ameron employees testified that they did not have knowledge of corrosion or other damage to the underlying steel at the onshore facilities until after the policy’s inception. This testimony alone creates an issue of fact about the Ameron parties’ knowledge.” (emphasis added).

This is not an unusual decision in a Montrose Endorsement case. This is another example of a court applying a strict “sameness” test between the “property damage” that existed pre-policy inception date, and that which took place during the policy period, for which coverage is now being sought.

Likewise, this “sameness” issue is also relevant to the aspect of the Montrose Endorsement that involves a “continuation, change, or resumption” of property damage. Specifically, the Montrose Endorsement states that if an insured knew, prior to the policy period, that the “property damage” occurred, then any continuation, change or resumption of such “property damage” during or after the policy period will be deemed to have been known before the policy period.

However, here too the court saw fact issues: “American Home Assurance argues that ‘continuation, change, or resumption’ refers to the same type or same cause of damage, regardless of how widespread or physically separated that damage is. Under this definition, American Home Assurance argues that the later corrosion at the onshore facilities and pipelines qualifies as a ‘continuation, change, or resumption’ of the offshore property damage because the same paint continued to fail in the same ways giving rise to the same type of damage. However, even assuming that American Home’s interpretation of the policy is correct, there are issues of fact as to whether the corrosion at the various locations shared a common cause. Given these issues of fact, there remains the ‘possibility’ that the corrosion at the onshore facilities and pipelines is not a continuation, change, or resumption of the known damage at the offshore facilities and thus is within the policy’s coverage.”

This is what the future of “known loss” is going to look like. This is why I put the Montrose decision (Cal. 1995), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], on my February 5, 2015 list of the ten most significant insurance coverage cases of all time, describing it this way:

Montrose led to the so-called “Montrose Endorsement,” the insurance industry’s response to its dissatisfaction with the Supreme Court of California’s decision that a party was permitted to purchase a liability insurance policy to cover property damage that the insured knew existed at the time of the purchase, so long as the insured’s “liability” for such property damage was still contingent and not a certainty. In 1999, ISO introduced an endorsement, which came to be known as the “Montrose Endorsement,” [followed by incorporation of this language into the October 2001 edition of its CGL form (CG 00 01)], that amended the policy’s insuring agreement by stating that, prior to the policy period, no insured knew that the “bodily injury” or “property damage” had occurred, in whole or in part. Until the Montrose Endorsement, there had never been a “known loss” provision in a standard CGL policy. The Montrose Endorsement has begun, and will continue, to shape and reshape “known loss,” which is at the heart of the granddaddy of liability concepts -- fortuity. [Montrose is also well-known for its continuous trigger aspects – but that’s not the reason for its qualification as one of the ten most significant liability coverage cases of all time.]

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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