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Vol. 8 - Issue 7
August 21, 2019


Montrose Endorsement Does Not Apply: Injury And Damage Not Same Enough


As I’ve discussed lots of times in the past, in general, insurers have had mixed results in construction defect cases when it comes to enforcing the Montrose (known loss) endorsement (which, of course, hasn’t been an endorsement for years, but it hasn’t shed that label).  Some courts have interpreted the Montrose provision narrowly and required a strict “sameness” (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.” 

In Mesa Underwriters Specialty Ins. Co. v. Blackboard Insurance Specialty Co., No. 18-4410 (N.D. Cal. July 15, 2019), the California federal court declined to preclude coverage on the basis of a Montrose endorsement.  Again, the pre- and post-policy period injury and damage was not sufficiently the same to trigger the applicability of the Montrose/known loss provision.

As is often the case when it comes to litigation over the Montrose endorsement, the decision is “insurer vs. insurer.”          

NDO Group acquired a “single room occupancy,” long-term residential hotel located in Oakland.  A number of low-income tenants resided there.  NDO group began renovations on common areas and some units in the Hotel.

Over time, various tenants began to file suit against NDO, alleging a variety of claims in connection with the habitability of their units on account of the NDO construction work.  The first complaint was filed on July 8, 2016.  A first amended complaint, filed on July 21, 2016, alleged: “NDO Group directed ongoing construction and renovation activities that disrupted the quiet enjoyment of the plaintiffs’ homes and resulted in the constructive and wrongful evictions of tenants.  The tenants were no longer being supplied heat, garbage pickup, or secure mail delivery.  The apartments all around them were gutted to the studs, large holes were created in the ceilings of apartments (including apartment of a tenant-plaintiff), and construction debris was dumped down the holes.  Some of the tenants were forced to vacate their units due to water leaks, failure to repair habitability defects, ongoing wrongful entries to their apartments, noise, dust, and a continuing nuisance resulting from the construction activities.”

A second amended complaint was filed on May 1, 2017 and a third amended complaint was filed on May 22, 2018.  These amended complaints contained further allegations concerning an alleged lack of habitability of the units.

Mesa Underwriters undertook NDO’s defense.  However, Mesa tendered the defense to Blackboard Insurance, which issued two one-year general liability policies to NDO covering the period from November 18, 2016 to November 16, 2018.     
Blackboard argued that it had no duty to defend based on “no occurrence” and no “bodily injury” or “property damage” during the policy period.  The court rejected both of these arguments.

Turning to the issue relevant here, Blackboard also argued that it had no duty to defend based on the Montrose endorsement.  As Blackboard saw it, NDO knew, prior to its policy periods, that the “bodily injury” or “property damage” had occurred, in whole or in part” including any “continuation, change or resumption of such ‘bodily injury’ or ‘property damage’”

It is easy to see why Blackboard made this argument.  The first complaint was filed on July 8, 2016.  A first amended complaint was filed on July 21, 2016.  These were both before the inception of the first Blackboard policy issued to NDO, which was November 18, 2016.  Then, the complaints filed after November 18, 2016 contained further – and similar -- allegations concerning an alleged lack of habitability of the units.
But Mesa disagreed, arguing that each discrete injury claimed must be evaluated separately for this purpose.  The court agreed with Mesa, concluding that the Montrose endorsement did not preclude coverage, as there was not enough sameness between the “bodily injury” and “property damage” that existed prior to inception of the Blackboard policies and that which took place during the policy period. 

The court explained: “Here, while NDO Group may have been aware of some of the bodily injuries and property damage alleged before Blackboard’s coverage began on November 18, 2016, many of the alleged injuries and property damage occurred after the policy’s inception, including loss of electricity, bathroom facilities, damage to property due to water leaks in unit’s closet, a slip-and-fall injury to one tenant navigating an unlit stairwell, and a physical attack on another tenant by a construction worker on the Hotel project. These allegations raised a potential for coverage of new, distinct injuries and property damage not alleged to have been known to NDO Group prior to Blackboard’s policy period.” 

The court pointed to a single, simple, word in the policy language to support this conclusion: The known-loss provision bars coverage of ‘property damage’ if the insured “knew that the “property damage” had occurred.”  The court stated that “the use of the definite article [the] particularizes the subject which it precedes and indicates that the claimed damage must be the same as the known damage.”

Or, as I call it, the strict “sameness” test.

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