The U.S. Court of Appeals for the Ninth Circuit recently affirmed a district court’s summary judgment ruling for insurers on the ground the insured’s alleged wrongful act occurred prior to the policy period. In City of San Buenaventura v. Insurance Company of the State of Pennsylvania, the Ninth Circuit declined to extend the holding in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, finding the insured’s failure to remedy a pre-coverage wrongful act did not itself constitute a continuing subsequent occurrence during the policy period.
The case arose out of the City of San Buenaventura’s development of condominium units for low - and moderate - income individuals. The sale and resale prices of the units were limited to ceilings set forth in the “Covenants, Conditions and Restrictions” governing the development. No unit could be sold until the City issued certificates of compliance with its affordable housing program.
In 2004, several buyers sued the City and the developers alleging they purchased condominiums in 2001, and obtained certificates of compliance from the City, without being told they were subject to the price ceilings. The buyers also alleged they paid prices higher than the ceilings for their units. The buyers sought either a declaratory judgment that the housing restrictions did not apply to their units or damages because the City failed to adequately review sale documentation, issued erroneous certificates of compliance or negligently failed to disclose the price ceilings.
The City purchased a general liability insurance policy from Great Lakes Reinsurance (UK) PLC covering July 2002 to July 2003, and purchased a general liability insurance policy from Insurance Company of the State of Pennsylvania (ICSOP) covering July 2003 to July 2004. Under both policies, the City self-insured the first $1 million of liability and the insurers covered liability exceeding that amount up to $10 million. In 2007, the City tendered the lawsuit to the insurers representing it had exhausted its $1 million self-insured retention. Both insurers rejected the City’s claim on the ground the City’s alleged negligence and wrongful conduct occurred in 2001 (when buyers purchased their units), prior to the policy periods.
The City sued its insurers seeking declaratory judgment to establish coverage. The district court granted summary judgment in favor of both insurers, finding that any occurrence or wrongful act occurred prior to the policy periods. The City appealed to the Ninth Circuit.
On June 26, the Ninth Circuit agreed it was undisputed the City’s alleged negligence occurred in 2001, prior to the policy periods. The City argued that, because the buyers continued to suffer the burden of having overpaid for their units and having resale prices subject to a ceiling, the “occurrence” continued into the at-issue policy periods. The City sought to extend the California Supreme Court’s decision in Montrose Chemical, which held that claims for pollutants deposited into the ground prior to the policy period, but which continued to leach into soil and groundwater during the policy period, created a duty to defend.
The Ninth Circuit rejected the City’s theory. First, the Ninth Circuit distinguished the policies at issue in Montrose Chemical, which covered “property damage . . . caused by an occurrence . . .” and defined property damage as “physical injury to or destruction of tangible property which occurs during the policy period. . . .” Based on that language, if the injury occurred during the policy period it was covered, even if the accident that caused the injury occurred prior to the policy period.
However, the Great Lakes policy provided indemnification for loss caused by property damage “first arising out of an Occurrence during the Policy Period. . . .” Similarly, the ICSOP policy provided coverage of liability incurred because of “property damage arising out of an occurrence during the Policy Period.” The Ninth Circuit noted that unlike the policies at issue in Montrose Chemical, these policies required the occurrence causing the damage to occur during the policy period, and not just the damages from the occurrence.
The Ninth Circuit held no occurrence could have occurred during the Great Lakes or ICSOP policy periods. The buyers alleged the City’s negligence occurred in 2001, over a year before the Great Lakes policy and two years before the ICSOP policy. The Ninth Circuit noted the buyers did not allege they were wrongfully damaged by the City’s affordable housing program or that the program was unlawful.
The Ninth Circuit also rejected the City’s argument the term “occurrence” should be broadly construed to apply to the City’s subsequent failure to remedy its 2001 errors. Occurrence was defined by the Great Lakes policy as “including continuous or repeated exposure to substantially the same general harmful conditions” and in the ICSOP policy as “including continuous, repeated, or related exposure to substantially the same general harmful conditions.” The Ninth Circuit stated that this language described the kind of continuing event resulting in exposure to toxic waste discussed in Montrose Chemical, but not the kind of event claimed by the condominium buyers. The Ninth Circuit concluded the City’s failure to remedy a pre-coverage occurrence is not itself a continuing, subsequent occurrence.
Finally, the Ninth Circuit noted that there might be circumstances where Montrose Chemical could be extended outside the pollution context, but found that this case was not one of them.
Please click here for the opinion.
The opinion in City of San Buenaventura v. Insurance Company of the State of Pennsylvania (9th Cir., June 26, 2013) ____ F.3d ____; 13 C.D.O.S. 6682 is not final. The Ninth Circuit may modify it on rehearing or the U.S. Supreme Court may order it depublished or grant review. The latter two events would render the opinion unavailable as legal authority in California courts.
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