When it comes to determining the number of occurrences, under a general liability policy, courts often start out by stating that they have the choice between two tests to guide their decision – the “cause test” and the “effect test.” The “cause test” is often associated with a finding of a single occurrence – and that’s usually how it is argued by insurers. And, as policyholders see it, the “effect test” should produce multiple occurrences. The cause test is the majority rule by a Reagan/Carter-size landslide.
But how often does the “cause test” in fact result in a finding of multiple occurrences? The answer – often. Based on a review of the Number of Occurrences chapter in the 4th edition of Insurance Key Issues, here is my scorecard on the issue: 15 states that have specifically identified themselves as applying the “cause test” have issued a decision finding multiple occurrences. So, when it comes to number of occurrences, labels do not always tell the entire story.
Case in point, Nevada refers to itself as a “cause test” state for purposes of number of occurrences. But that handy label hardly provided predictability, or a finding of a single occurrence, in Century Surety Co. v. United Specialty Ins. Co., No. 17-6589 (D. Nev. Apr. 18, 2018).
Century v. United was a classic number of occurrences dispute between a primary and excess insurer. You’ve seen this scenario. The primary insurer is arguing for a single occurrence and the excess insurer says its multiple occurrences. The reasons for these positions are obvious.
At issue was coverage for defective construction at the Palazzo Hotel in Las Vegas. [Incidentally, I saw Bob Anderson’s unreal Frank Sinatra impersonation show at the Palazzo a couple of years ago. Anderson’s talents are indescribable! Do not miss it if you ever get the chance.]
Ok, back to number of occurrences.
I’ll let the court describe the construction problems: “Approximately three years after the project was completed, maintenance personnel noticed corrosion of the steel support framing underneath the Palazzo’s pools and spas located on the third and fifth floors of the hotel. An investigation determined that water leaked into the unventilated crawl space beneath the pools creating a moist and humid environment that corroded the steel framing. That framing was also inconsistent with the project’s specifications, which called for cold-formed metal stud framing with G90 galvanization. Instead, the contractors used light-gauge steel finished with a primer that was not properly finished to prevent rusting. The corrosion was so significant that it reduced the load carrying capacity of the framing system, which required replacing the system.”
The Palazzo sued the contractor. An impediment to settlement was a dispute between Liberty Mutual, the primary insurer, and AIG, the excess insurer, over each insurer’s contribution. Liberty’s policy limit was $2 million per occurrence and $4 million general aggregate. Liberty tendered $2 million, contending that the property damage was the result of a single occurrence. AIG said not so fast. It contended that there were multiple occurrences, thus triggering Liberty’s $4 million limit. Litigation ensued and the number of occurrences issue came before the court.
As expected, the court started out by noting that there were two possible tests at issue: “Nevada follows the ‘causal approach’ to determine the number of occurrences. Under this approach, the inquiry focuses on ‘the cause or causes of the injury,’ not on the ‘number, magnitude or time of the injuries.’ Thus, ‘[a]s long as the injuries stem from one proximate cause there is a single occurrence.”
The court noted that, in making its evaluation, it considers factors such as how closely the events are linked in time and space and whether the events are interdependent. But the court added: “The test is more easily stated than applied, particularly in this case.”
The court’s note about the challenge in this particular case was tied to this observation: “This case is also complicated by the fact that numerous defects and negligent acts were identified but all affected only one area of the Palazzo: the steel framing beneath its pools and spas. Thus, this is unlike cases where a contractor engaged in negligent acts that caused damage to different parts of a project, resulting in multiple occurrences.”
The court look at each insurer’s position and concluded that both were too extreme:
“Liberty contends there is a single occurrence because there is only cause: ‘the negligent failure to follow design plans and thereby use proper materials.’ Liberty paints with too broad a brush. Such an interpretation in the context of a complex construction project would make almost all construction defects a single occurrence because the insurer could simply characterize them all as a failure to follow the design, a failure to exercise due care in construction, or a failure to adequately supervise subcontractors, regardless of the dissimilarities in time, space, impact to different parts of the project, or bases of liability. . . . Liberty's position is also too narrow. It does not address that more negligent acts were identified than selecting the wrong materials. Rather, there was faulty installation (including improper waterproofing and improper pipe and drainage installation), as well as contractors allegedly leaving trash in the crawlspaces that caused drains to clog.”
AIG’s position was also too extreme -- in the other direction, as the court explained: “AIG points to all the different types of defects that were discovered, including selection of the wrong steel, improperly sealed joints around the hatches, leaks in the drain pipes, faulty installation of drain pipes, faulty installation of waterproofing, clogged drains due to trash left by the contractors, and lack of adequate ventilation in the crawlspaces. But merely showing numerous acts of negligence is not enough to show multiple occurrences.”
In the face of these competing polar positons the court held that nobody was entitled to summary judgment: “While the parties have submitted two reports identifying numerous negligent acts in selection of materials, faulty installation of various aspects of the pool system, and failure to clean up, there is no opinion expressed about whether all of these defects together are the single proximate cause of the humid environment leading to the rusting, or whether there are multiple independent causes.”
As far as the court was concerned, number of occurrences came down to proximate cause: “Nevada defines proximate cause to mean a cause ‘without which the result would not have occurred. [I]f, for example, selection of faulty material combined with faulty waterproofing would have caused the rusting even in the absence of the other conditions, and faulty material combined with leaks also would have caused the rusting even in the absence of other conditions, then there is more than one proximate cause, and more than one occurrence.”
To summarize, Nevada is a “cause test” state, the Nevada Supreme Court has addressed number of occurrences, there are hundreds of number of occurrences cases available for guidance and both insurers were represented by fine lawyers. But, despite all this, the court couldn’t decide the number of occurrences at issue and rejected both insurers’ arguments. But this much is clear -- that Nevada is a “cause test” state did not lead to predictability nor dictate a single occurrence.
So, when it comes to number of occurrences, labels do not always tell the entire story.