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Vol. 5, Iss. 1
January 13, 2016

Federal Court Demonstrates Insurers’ Challenge In Applying “Montrose Endorsement”

 

In general, insurers have had mixed results in construction defect cases when it comes to enforcing the Montrose (known loss) endorsement. Some courts have interpreted them narrowly and applied a strict “sameness” test (my term) between the “property damage” that existed pre-policy inception date and that which took place during the policy period, for which coverage was being sought. Further, it is the “property damage” itself that must be known by the insured prior to the policy period and not the cause of the “property damage.” You could put it this way – if it looks like a mallard duck, and quacks like a mallard duck, it’s only a mallard duck and not a perching duck.

[Of course, construction defect cases are not what ISO had in mind when it put pen to paper on the Montrose endorsement.]

This insurer challenge is the story of Scottsdale Ins. Co. v. Kaplan Family Trust, No. 15-538 (N.D. Calif. Nov. 23, 2015). Residents of a hotel in San Francisco brought suit against the hotel owners for an array of habitability issues. This was known as the Toliver action and involved 78 plaintiffs (keep that name in mind). The hotel owners had been sued earlier by residents – represented by the same plaintiffs’ firm – over habitability issues.

The hotel owners sought coverage from Scottsdale under a commercial general liability policy. The insurer defended under a reservation of rights and filed a declaratory judgment action. Scottsdale’s argument was that, based on the existence of these prior habitability lawsuits and the owners’ knowledge of them, the policy’s “known loss” provisions (i.e., Montrose language) precluded coverage. The court set out the specific policy language, but summarized it this way: “Essentially, the policy creates a coverage exclusion if the insured had been put on notice, before inception of the policy, by receiving a demand for damages or by other means, of the injury claimed during the policy period.”

The court concluded that, despite these earlier habitability suits, summary judgment for Scottsdale was not warranted: “Many of the defects alleged in the previous actions overlap with the Toliver allegations. Many of the same units are involved and all allege violations in common areas. The existence of the prior lawsuits likely put landlord defendants on notice of at least some violations alleged in Toliver. This is especially true in regards to the claims of the seventeen plaintiffs in Toliver who were also plaintiffs in the previous Santa-Iglesias action. Nevertheless, Scottsdale has not established beyond ‘any doubt’ that the known-loss provisions in the policy apply to all of the claims in Toliver.” (emphasis in original).

Here is the take-away/money language from the case: “An insured being on notice of general habitability allegations in certain parts of a building does not negate any future insurance coverage for allegations relating to other partially overlapping, partially different habitability issues. . . . [T]he Toliver action involves twenty-five separate units not implicated in prior suits. Based on the differences between the underlying action and the previously settled actions, factual issues remain to be decided as to the scope of landlord defendants’ knowledge of the alleged Toliver violations.”

Essentially, Kaplan Family Trust is another court applying a strict “sameness” test for purposes of denying coverage based on Montrose language. 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, must be the same. The insured’s knowledge of prior property damage in general, or the cause of property damage, may not be enough.

 
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