I’ve been saying this for a while. 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.

Based on some recent decisions (discussed in Coverage Opinions), and now Anderson v. Nationwide Mutual Ins. Co., No. 12-1057 (E.D. Calif. Sept. 7, 2018), it seems that courts are trending toward applying a strict “sameness” test. [Of course, construction defect cases are not what ISO had in mind when it put pen to paper on the Montrose endorsement.]

Anderson is a somewhat lengthy and complex case. I’ll limit the discussion here to just enough needed to make the point about application of the strict sameness test.

At issue in Anderson was the availability of coverage for an insured for construction defects that it caused. [The facts are not set out in a simple manner.] The key date at issue is April 10, 2007. This is when a Century Surety policy went into effect. The key policy provisions were described by the court as follows:

“The policies provided coverage for property damage which occurred during the policy period. The policies also defined an ‘occurrence’ to mean an accident, and stated that all property damage arising out of such an accident or series of related accidents was ‘deemed’ to have taken place at the time of the first such property damage, even if the nature and extent of the damage changed; and even if the damage was continuous, progressive, cumulative, changing or evolving. Additionally, the policies provided that there was no coverage for property damage which was known to the insured prior to the inception of the policy. Stated otherwise, the policies provided coverage only for new and different damage caused by new and different occurrences which occurred for the first time during the Century policy periods (in other words, after April 10, 2007).”

This is not exactly “Montrose Endorsement” language (at least what’s shown), but it is close and akin to it.

The court held, a least for duty to defend purposes (which included the consideration of extrinsic evidence), that the insurer could not deny coverage on the basis that “all of the damage was (a) caused by events that occurred prior to April 10, 2007, or (b) was of the same nature or extent as the damage that had occurred prior to April 10, 2007.”

The issue is highly fact intensive. Thus, I’ll cite liberally here from the opinion to best demonstrate the court’s application of a strict sameness test:

“Mr. Lohse [insured’s expert] also testified that this new and different damage was caused by new and different occurrences for the first time after April 10, 2007: ‘The causes we saw in 2008 were different from the prior drainage causes.’ The causes prior to 2008 were ‘partially because the park was still being developed . . . so that means you have a lot of construction debris’ and partially from ‘drainage design problems that were corrected before 2008’ or ‘poor design.’ In contrast, the new and different damage which occurred for the first time during Century’s policy period was caused by ‘the failure to maintain the drainage system so the water would freely flow into the retention pond’ and ‘because the drainage wasn’t maintained, kept free of debris.’ ***

Thus, the foregoing exhibits and testimony constitute evidence that the occurrences which pre-dated the Century policies were caused by improper design of the drainage system, while the occurrences after the inception of the Century Surety Company policies were caused by the negligence of the insured in failing to properly maintain off-site drainage, and not the same design issues which had been corrected prior thereto. These occurrences are plainly not ‘exposure to substantially the same general harmful conditions.’ They are patently different harmful conditions.

In other words, substantial evidence demonstrated new and different occurrences that happened for the first time within the Century policy period. Substantial evidence also demonstrated new and different harm as a result thereof.”

Lastly, and significantly, the court went on to hold that the insurer could be liable for a stipulated judgment – in excess of the policy limits.