WHO’S ON THE RISK?
ALLOCATING DAMAGES AMONG INSURERS
IN CONSTRUCTION DEFECT CLAIMS
By Brian H. Sande and Mark R. Bradford
RIDER BENNETT, LLP
I. INTRODUCTION
On January 31, 2006, the Minnesota Court of Appeals
decided Kootenia Homes, Inc. v. Federated Mutual Insurance Co.,1
holding that the liability carrier “on the risk” at the time of
improper stucco application was obligated to indemnify its
insured for all ensuing water damage. Many in the insurance
industry had hoped that the Kootenia decision would put an
end to years of speculation regarding whether—and to what
extent—courts should allocate damages between consecutive
insurers in construction defect claims. Instead, the Kootenia
decision left several important questions unanswered and,
given the specific facts upon which the case was decided,
arguably provided little guidance to insurers, policyholders,
and their counsel.
This article will provide an overview of relevant
Minnesota case law preceding the Kootenia decision. It will
then analyze the Kootenia decision itself in light of this case
law. Finally, this article will identify some of the potential
allocation problems that remain after the Kootenia decision.
II. MINNESOTA CASE LAW PRECEDING THE
KOOTENIA DECISION
A. TRIGGER AND ALLOCATIONS GENERALLY.
1. THE “ACTUAL INJURY” RULE
BRIAN H. SANDE is an attorney in Rider Bennett's Litigation Department,
practicing primarily in the area of insurance coverage. He is a member of the
Minnesota State and Wisconsin Bar Associations. Brian earned his B.A. from
St. John's University and his J.D. from William Mitchell College of Law.
MARK R. BRADFORD is a member of Rider Bennett’s Litigation Department
practicing primarily in the areas of insurance coverage and defense. He
received his law degree from the DePaul University College of Law and is
a member of the American and Hennepin County Bar Associations,
Minnesota Defense Lawyers Institute (MDLA), and the Defense Research
Institute (DRI).
A standard commercial general liability (“CGL”) policy
provides coverage for those amounts that the insured is legally liable to pay because of bodily injury or property damage
that occurs during the applicable policy period.2 Although
this coverage obligation appears straightforward, it has
proven difficult to apply in construction defect cases. An initial question that arises is what insurance policy (or policies)
is “triggered”—i.e., what policy applies to the loss.
Resolution of this issue depends on what “trigger theory” a
court employs. To this end, courts around the country have
developed four discrete “trigger” theories: (1) the “exposure”
theory; (2) the “manifestation” theory; (3) the “actual injury”
or “injury-in-fact” theory; and (4) the “continuous trigger” or
“triple trigger” theory.
Under the “exposure” theory, only those policies in effect
at the time the claimant (or property) was first exposed to the
injury-causing condition are triggered. In contrast, under the
“manifestation” theory—also known as the “first discovery”
rule—only those polices in effect when the damage first
becomes apparent (i.e., is discovered) are triggered. Under
the “actual injury” or “injury-in-fact” theory, only those policies in effect when the damage or injury actually occurs are
triggered, regardless of the time of either exposure or discovery. Lastly, under the “continuous” or “triple-trigger” theory,
all policies in effect from the time of first exposure to the time
of manifestation are triggered.3
Minnesota follows the “actual injury” rule to determine
what liability policy or policies have been triggered.4 Under
the “actual injury” rule, the occurrence “is not the time when
the wrongful act was committed, but rather, it is the time
when the complaining party was actually damaged.”5 The
vast majority of states that have considered the issue follow
this general rule.6
No. A05-278, 2006 WL 224162 (Minn. Ct. App., Jan. 31 2006), pet. for rev.
denied (Minn., Apr. 18, 2006).
2
Property damage is defined in part in the 1973 Insurance Services Office,
Inc. (“ISO”) policy as “physical injury to or destruction of tangible property
which occurs during the policy period, including the loss of use thereof at
any time resulting therefrom …” (emphasis added). The 1986 ISO occurrence policy includes the “trigger” qualification for bodily injury and property damage in the insuring agreement: “This insurance applies only to
‘bodily injury’ and ‘property damage’ which occurs during the policy period.”
(emphasis added).
3
See generally William R. Hickman & Mary R. De Young, Allocation of
Environmental Cleanup Liability Between Successive Insurers, 17 N. Ky. L. Rev.
291, 293-96 (1990).
4
Singsaas v. Diederich, 283 N.W.2d 878, 880-81 (Minn. 1976).
5
Jenoff, Inc. v. New Hampshire Ins. Co., 558 N.W.2d 260, 261-62 (Minn. 1997).
6
Id. at 263.
1
MN ∆ SUMMER 2006
11
One benefit of this approach is that it is easily applied
when the injured claimant has a specific injury that clearly
occurs only within the applicable policy period. The rule is
not so easily applied, however, in construction defect cases
when the property damage may be “continuous” or “progressive” in nature, thus potentially triggering multiple policy periods.
When damage has been ongoing, thereby triggering multiple policies, a second issue that arises is which insurer (or
insurers) will bear responsibility for the loss. How damages
are assigned when multiple policies are triggered is referred
to as “allocation”. Over the course of the past twelve years,
Minnesota courts have authored several decisions in this
increasingly complex area of insurance law.
2. NORTHERN STATES POWER CO. V. FIDELITY &
CASUALTY CO.
Much of the case law addressing trigger and damage allocation issues in continuous or progressive injury cases arose
in the context of environmental contamination. The first such
case was Northern States Power Co. v. Fidelity & Casualty Co. of
New York (“NSP”).7
In that case, Northern States Power Company (“NSP”)
operated a coal gas manufacturing plant in Faribault,
Minnesota. In 1981, the Minnesota Pollution Control Agency
(“MPCA”) discovered that the groundwater at the property
was contaminated with coal tars and spent oxide waste. The
MPCA ordered NSP to pay substantial remediation expenses. In response, NSP sought coverage from thirteen different
insurers that had insured NSP between 1946 and 1985. Each
insurer denied coverage, and litigation ensued.
The trial court determined that the contamination continually occurred during the term of each policy period at issue,
likely from a policy or practice of disposing contaminants
into the soil. The court of appeals affirmed this conclusion,
and held that damages were to be allocated among the insurers in relation to the damages that occurred during each specific policy period.8
The Minnesota Supreme Court affirmed this allocation
method and reaffirmed that Minnesota follows the actual
injury rule to determine whether a particular insurance poli523 N.W.2d 657 (Minn. 1994).
Northern States Power Co. v. Fidelity and Cas. Co. of New York, 504 N.W.2d 240
(Minn. Ct. App. 1993), pet. for rev. granted in part, denied in part (Minn., Nov.
16, 1993).
cy has been triggered. The court found that the “essence” of
the actual injury rule is that each insurer is held liable only for
those damages that occurred during its policy period. When
policy periods do not overlap, insurers are deemed consecutively, not concurrently, liable such that no insurer is liable for
damages occurring outside its policy period.
The court identified two options for allocating covered
damages that implicate multiple policy periods. First, it
could apportion damages “as proven,” where each policy
would cover only those damages shown to have actually
occurred during each policy period. Alternatively, it could
allocate damages pro-rata by each insurer's “time on the
risk.” The court conceded that the first option would be
“completely consistent” with policy language limiting an
insurer’s obligations to damages incurred during the policy
period. The court noted, however, that a strict application of
the actual injury rule in progressive injury cases was “unattractive” for a number of reasons. For example, a determination of precisely what harm occurred in what policy period
would often be administratively difficult given the extended
period of time over which damages may occur. Additionally,
depending on the facts of the case, the rule may prove impossible to apply given the indivisible nature of damages
between policy periods. Even where it is scientifically possible to establish the amount of harm that occurred during each
policy period, it might be too expensive to do so in relation to
the total damages sustained. Finally, the complex, factdependent nature of a pure actual-injury allocation carries
the inherent risk of reducing the likelihood of settlement,
increasing litigation costs, and placing unreasonable burdens
on the insured.9
In light of these problems, the court in NSP held that,
under certain circumstances, trial courts may allocate damages pro-rata by each insurer’s “time on the risk.” This
methodology presumes that damages are evenly distributed
(or continuous) through each policy period, beginning at the
point when damage is first shown to have occurred and ending at the time of discovery, cleanup, or whenever the last
triggered policy period ends. Each insurer thus bears a share
of the total damages proportionate to the number of years it
was “on the risk.” An insurer seeking to avoid liability bears
the burden to establish that “no appreciable damage”
occurred during its policy period.
7
8
12
MN ∆ SUMMER 2006
9
NSP, 523 N.W.2d at 663.
3. SCSC CORP. V. ALLIED MUTUAL INSURANCE CO.
Just one year later, in SCSC Corp. v. Allied Mutual Insurance
Co.,10 the Minnesota Supreme Court was called upon to further develop the allocation analysis articulated in NSP. Like
NSP, SCSC involved years of alleged environmental contamination. Specifically, SCSC operated a dry cleaning and laundry supply distribution facility from 1976 to 1988. During
that time, SCSC also distributed perchloroethylene, a volatile
organic compound. In 1988, the MPCA detected traces of this
compound in the groundwater below the SCSC facility, and
directed SCSC to undertake substantial remediation.
SCSC maintained comprehensive general liability insurance with Allied Mutual Insurance Company (“Allied”) from
1975 to 1985, and excess liability insurance with Tower
Insurance Company (“Tower”) from 1977 to 1982. Allied
denied coverage for the remediation expenses asserting,
among other defenses, that SCSC had not shown that any
property damage occurred during the Allied policy periods.
At trial, a hydrogeologist testified that the concentration of
perchloroethylene in the groundwater was not consistent
with a routine, continuous spilling. Rather, the concentration
profile suggested the contaminant entered the soil in high
concentrations on only one or two occasions. Likewise, several lay witnesses testified that a significant spill of perchloroethylene occurred at the SCSC facility in August 1977.
The jury ultimately concluded that property damage first
arose in August 1977, but that the ensuing property damage
was neither divisible nor the result of an overriding cause.
The trial court issued an order affirming the jury's findings
stating, as a matter of law, that each primary policy and
excess policy in effect during and after August 1977 was triggered “vertically.” In other words, the underlying remediation expenses were to be paid out of the primary policy in
effect during August 1977. When the applicable limits of that
primary policy were exhausted, the remediation expenses
were to be paid out of the excess policy in effect during
August 1977. Finally, when the applicable limits of the excess
policy were exhausted, this process would repeat chronologically beginning with the primary policy in effect during 1978.
The court of appeals affirmed this allocation scheme.11
The supreme court reversed the trial court's decision to
allocate damages “vertically.” The court, however, also
536 N.W.2d 305 (Minn. 1995) (en banc).
SCSC Corp. v. Allied Mut. Ins. Co., 515 N.W.2d 588 (Minn. Ct. App. 1994),
pet. for rev. granted (Minn., June 29, 1994).
rejected Tower's insistence that NSP required the application
of a “pro-rata by time on the risk” allocation method. The
court reasoned that the “pro rata” rule only applied when
damage was continuous and indivisible. Because the damage at issue was the result of a single, identifiable occurrence,
the pro-rata method outlined in NSP did not apply:
Under the facts of the present case, we reject the multiple-year
vertical triggering approach taken by the trial court. We also
decline Tower's invitation to apply NSP's pro rata by time on
the risk triggering approach. In NSP, the damages occurred
over multiple policy periods, and without evidence to the contrary, we concluded that such damages must be assumed to be
continuous. Our decision in NSP was an equitable decision
based upon the complexity of proving in which policy periods
covered property damage arose. In the present case, however,
we have sufficient evidence indicating that the damage arose
from a single event in 1977. The jury found that the damage
was not divisible and that it was the result of a sudden and
accidental occurrence.12
The court further noted that, based on this evidence, the only
covered “occurrence” was the spill that occurred in 1977.
Thus, the court went on to hold that the carrier on the risk at
the time of this event was liable for the entire loss:
The continual leaching of the chemicals from the soil into the
groundwater did result in damages to SCSC because of property damage. However, only Allied's 1977 $100,000 primary
policy and Tower's 1977 $1,000,000 excess policy are triggered.
Damages in excess of the $1,100,000 aggregate limit of the primary and excess policies on the risk in 1977 are not covered.
This result is consistent with the actual injury theory.13
4. DOMTAR, INC. V. NIAGARA FIRE INSURANCE CO.
In Domtar, Inc. v. Niagara Fire Insurance Co.,14 the Minnesota
Supreme Court substantially expanded its damage allocation
jurisprudence, holding that, under the “pro rata by time on
the risk” allocation method utilized in NSP, an insured was
liable for damages allocated to uninsured periods. The
insured, Domtar, Inc. (“Domtar”) owned and operated a tar
refining plant in Duluth, Minnesota, from 1924 through 1929,
and again from 1934 to 1948. During that time, Domtar systematically released hazardous substances into the soil surrounding the plant.
In 1979, the MPCA detected substantial contamination of
the groundwater beneath the site, and subsequently identified Domtar as one of the responsible parties. The MPCA
ordered Domtar to undertake substantial remediation of the
10
12
11
13
SCSC Corp., 536 N.W.2d at 318.
Id. at 318
14
563 N.W.2d 724 (Minn. 1997).
MN ∆ SUMMER 2006
13
site. Domtar tendered the defense of the matter to its primary
and excess insurers, who collectively insured Domtar from
1956 through 1970. Domtar could not locate any policies in
effect prior to 1956, and did not maintain insurance after
1970. All insurers ultimately denied coverage for the action
and the related remediation costs, prompting Domtar to commence a declaratory judgment action.
It is only in those difficult cases in which property damage is
both continuous and so intermingled as to be practically indivisible that NSP properly applies. NSP provides a judicially
manageable way for trial courts to adjudicate certain pollution-coverage disputes when it is difficult to determine when
an “event” or “occurrence” or “damage” giving rise to legal
liability has occurred. NSP does not establish hard-and-fast
rules; it offers a practical solution in the face of uncertainty.18
At trial, the parties agreed that the contamination could
not be attributed to one specific event. The parties likewise
agreed that all of the pollutants were released before the
effective dates of any of the policies at issue. Domtar contended, however, that property damage occurred during
the various policy periods. The jury ultimately returned a
verdict in favor of Domtar. The trial court, invoking NSP,
allocated remediation costs evenly between the date property damage first occurred and the date when remediation
first began. The trial court's holding effectively absolved all
of the insurers of liability for costs allocated outside their
respective policy periods. The court of appeals affirmed in
all respects.15
5. IN RE SILICONE IMPLANT INSURANCE COVERAGE LITIGATION
In In re Silicone Implant Ins. Coverage Litigation,19 the
Minnesota Supreme Court again addressed allocation of
damages, this time as it related to 3M’s ongoing silicone gel
breast implant mass tort litigation. 3M was insured under
various commercial general liability policies from 1977 to
1985. The implant claims for which 3M sought reimbursement were brought in the early 1990s, based largely on
implants that occurred between 1977 and 1985. The implants
were alleged to have caused various systemic autoimmune
diseases.
On appeal to the Minnesota Supreme Court, Domtar
argued that the lower courts improperly allocated losses to
years in which Domtar was uninsured. Specifically, Domtar
stressed that the policies at issue required the insurers to
pay “all sums” which the insured becomes liable to pay
because of property damage. The court rejected this argument, holding that, pursuant to the “pro rata by time on the
risk” approach adopted in NSP, an insurer's obligations are
limited to those damages allocated to its respective policy
period. The court further reasoned that “[t]he factual presumption of continuous damage cannot be amended solely
to benefit the insured.”16
In dicta, however, the Court cautioned that NSP should
not be read broadly so as to always absolve an insurer of liability for damages occurring outside of its respective policy
period. The court admonished that, “[w]hen environmental
contamination arises from discrete and identifiable events,
then the actual-injury trigger theory allows those policies on
the risk at the point of initial contamination to pay for all
property damage that follows.”17 The court continued:
This interpretation of the policies is in accord with the common understanding of the terms “occurrence” or “accident.”
Domtar, Inc. v. Niagara Fire Ins. Co., 552 N.W.2d 738 (Minn. Ct. App. 1996),
pet. for rev. granted (Minn., Oct. 17, 1996).
16
Domtar, Inc., 563 N.W.2d at 733.
17
Id. (citing SCSC, 536 N.W.2d at 318).
15
14
MN ∆ SUMMER 2006
At trial, experts from both sides agreed that the immune
system reacts immediately to the presence of a foreign substance in the body, but offered conflicting opinions regarding
the timing of the initial injury. The trial court concluded that
actual injury occurred on a cellular level at or near the time of
implantation, that injury continued after implantation, and
that 3M’s losses should be allocated pro-rata by time on the
risk from the time of each implantation through 1985.20 The
court of appeals affirmed the lower court’s continuous injury
determination, but determined that the appropriate allocation end date was the date of each the underlying plaintiff’s
claims or death.21
The supreme court rejected this application of the prorata by “time on the risk” analysis under these circumstances, reasoning that the trial court had confused “continuous trigger” with “continuous injury”. In applying the
Id. at 733-74.
667 N.W.2d 405 (Minn. 2003).
20
Interestingly, by the time the insurance coverage issues were tried to the
district court, the theory that silicone implants caused autoimmune problems had been disproved by the scientific community. The trial court recognized that "solid conventional science establishes no causal connection
whatsoever between silicone gel breast implants and systemic disease" but
the court nonetheless assumed legal causation and took testimony relative
to these subjects for purposes of determining the issues concerning insurance coverage matters. In re Silicone, 667 N.W.2d at 413.
21
In re Silicone Implant Ins. Coverage Litigation, 652 N.W.2d 46 (Minn. Ct.
App. 2002), pet. for rev. granted (Minn., Dec. 17, 2002).
18
19
actual injury rule, the court noted that an injury can occur
even though the injury is not diagnosable, compensable, or
manifest during the policy period, so long as it can be determined, even retroactively, that some injury occurred during
the policy period.22 The trial court’s factual finding that
bodily injury occurred in the form of cellular abnormalities
at the time of implantation was found not to be clearly erroneous, and was affirmed.
Relying on Domtar, the supreme court held that, prior to
making an allocation determination, a court must first determine which policies are “triggered” and therefore “on the
risk.” To this end, the court prescribed a two-step process.
First, inquiry must be made as to whether the alleged injury
was continuous—i.e., whether a progressive injury existed
over multiple policy periods. If it did not, the policies on the
risk at the time of the injury pay for all losses arising from the
injury. Second, if the injury was continuous, it must be determined whether the injury arose from a discrete, identifiable
event. If it did, the policies on the risk at the time of that event
are responsible for all sums damages arising out of that event.
If it did not, the allocation analysis set forth in NSP may be
appropriate.23
In the context of the case before it, the trial court found that
the alleged damages were continuous in that additional damage occurred as the ongoing leaking of silicone came into contact with new cells. However, the supreme court concluded
that the injury arose from a discrete identifiable event—i.e.,
the implantation of the silicone. As a result, only those policies on the risk at the time of implantation were triggered.
Importantly, the supreme court admonished that allocation
of damages across multiple policy periods was the “exception and not the rule.”24
B. ALLOCATION IN CONSTRUCTION DEFECT CASES
Beginning primarily in the late 1990s, Minnesota witnessed a significant increase in claims involving water damage resulting from alleged defective construction. Many of
these “wet house” cases involved allegations of improper
stucco application. Often evidence of water damage was first
observed years after construction was completed, with water
stains on windowsills or walls. Homeowners asserted claims
against their general contractors, often resulting in coverage
litigation between the contractors (or subcontractors) and
In re Silicone, 667 N.W.2d at 415.
Id. at 421.
24
Id.
22
their carriers. Allocation issues inevitably arose when the
contractor was insured under consecutive policies.
Resolution of these issues has been complicated and inconsistent. Although in most cases the parties agree that property
damage has been continuous, the question of whether such
damage was the result of a “discrete identifiable event”—and
thus not subject to the pro-rata allocation method outlined in
NSP—has been uncertain and vigorously disputed. With an
untold number of insurance cases—potentially involving
millions of dollars—hinging on this critical issue, the insurance bar eagerly awaited answers from the judiciary.
1. WESTFIELD INSURANCE CO. V. WEIS BUILDERS,
INC.
The Minnesota federal district court was the first court in
Minnesota to weigh in on these allocation issues in a construction defect case. In, Westfield Ins. Co. v. Weis Builders,
Inc.,25 Weis Builders, Inc. (“Weis”) was the general contractor
for the construction of a townhome development.
Construction of the development began in late 1996, with a
majority of the construction occurring in 1997. From January
1, 1997 to December 31, 1997, Weis maintained a commercial
general liability policy with Westfield Insurance Company
(“Westfield”). From January 1, 1998 to December 31, 1998,
Weis maintained a similar policy with Valley Forge Insurance
Company (“Valley Forge”).
In July 1997, after construction was completed, a heavy
rainstorm occurred, causing water from the courtyard area to
leak into several of the townhome units and garages.
Thereafter, the development experienced continued water
intrusion problems and related damage, and various claims
for those damages were submitted to Weis. In turn, Weis tendered the claims to Westfield and Valley Forge. Both insurers
agreed to provide Weis a defense to the claims under a reservation of rights, and Westfield subsequently commenced a
declaratory judgment action in federal court to determine the
extent of its coverage obligations.
On cross-motions for summary judgment, the trial court
concluded that coverage was triggered under the Westfield
policy, as some property damage occurred during its policy
period. The court went on to determine whether all ensuing
property damage arose out of a “discrete identifiable event”
and whether allocation was appropriate. To this end, the trial
court noted that three experts opined that the property damage stemmed from the improper installation of the drainage
23
25
No. Civ. 00-987 (JNE/JSM), 2004 WL 1630871 (D. Minn., July 1, 2004).
MN ∆ SUMMER 2006
15
and waterproofing systems during the Westfield policy period. In contrast, Westfield proffered no evidence to dispute
these opinions, and instead contended that the damages
were attributable to multiple events, including any number
of rainstorms that occurred after Weis completed its construction. Thus, Westfield argued, the “pro rata by time on the risk
allocation” method was appropriate.
The trial court found Westfield's argument “unpersuasive,” and concluded that all property damage arose out of a
discrete and identifiable event that occurred within the
Westfield policy period—i.e., the improper installation of the
drainage and waterproofing systems. Accordingly, the court
determined that Westfield—and Westfield only—was
required to indemnify Weis for all ensuing property damage.
Although the court applied Minnesota law, this opinion
from the federal district court was unpublished and did not
therefore definitively resolve the allocation issue in construction defect cases.26 Accordingly, the Kootenia decision was
eagerly anticipated.
III. KOOTENIA HOMES, INC. V. FEDERATED
MUTUAL INSURANCE CO.
A. Facts
Kootenia Homes, Inc. (“Kootenia”) constructed a series of
thirty-one stucco-sided homes between 1996 and 2000.
During that entire time, Kootenia was insured under a commercial general liability insurance policy issued by Federated
Mutual Insurance Company (“Federated”). On April 1, 2002,
Federated canceled its policy, and Kootenia purchased comparable insurance with Cincinnati Insurance Company
(“Cincinnati”).
Beginning in 2002, Kootenia received complaints of moisture intrusion in twelve of the homes. In turn, Kootenia tendered the complaints to Federated, which retained structural
engineer Charles Lane to investigate. Lane eventually concluded that each of the twelve homes was damaged by moisture intrusion, the primary cause of which was “the use of
improper materials and improper application of the stucco
wall system” by the stucco contractor.27 Lane further concluded that the property damage began shortly after the completion of each home, during the Federated policy periods.
See State ex rel. Hatch v. Employers Ins. of Wausau, 644 N.W.2d 820, 828
(Minn. Ct. App. 2002) (noting that federal court interpretations of state law
are not binding on state courts, and unpublished decisions generally are at
best regarded as persuasive authority).
27
Id.
26
16
MN ∆ SUMMER 2006
Federated subsequently advised Kootenia that it would
only provide coverage for repair of property damage that
was allocated to Federated policy periods—i.e., property
damage that occurred between April 1, 1996, and April 1,
2002. Federated concluded that it was not required to pay for
damages allocated to periods after April 1, 2002. For this reason, Kootenia also tendered the various complaints to
Cincinnati, which denied coverage.
In March 2003, Kootenia received complaints of moisture
intrusion at nineteen additional homes. Federated concluded, as it had with the prior homes, that the moisture intrusion
and related damages began shortly after each home was
completed and would continue until appropriate repairs
were completed. Federated memorialized this conclusion in
communications with Kootenia, with the various homeowners, with Cincinnati, in internal claims documents, and in the
course of subrogation claims against the stucco subcontractors. Finally, Federated advised Kootenia that because of an
endorsement to the policy in effect between April 1, 2001 and
April 1, 2002, it would no longer pay for any damages allocated to periods after April 1, 2001. In July 2003, Kootenia filed a
declaratory judgment action against Federated and
Cincinnati, seeking a defense and indemnification for the
thirty-one moisture-intrusion claims.
B. The District Court
All parties moved for summary judgment at the district
court level. Federated argued that Kootenia had not shown
that any property damage occurred during its policy periods.
In support of this position, Federated submitted the Affidavit
of Lane, who stated, in contrast to his earlier conclusions, that
“there is no way I can opine, with a reasonable degree of scientific certainty, when property damage occurred at the
Kootenia Homes.”
The district court granted summary judgment to Kootenia
and Cincinnati. First, the court concluded that there was no
genuine issue of material fact that at least some property
damage occurred at each of the homes during Federated policy periods, thus triggering those policies under the actualinjury trigger rule. The court referenced numerous “admissions” by Federated in this regard, including claims documents wherein Federated designated the “date of loss” as the
date on which each of the homes closed, as well as communications with Kootenia, with the various homeowners, and
with Cincinnati. The court also observed that Lane himself
concluded in at least two reports that property damage began
to occur when each of the homes were completed.
Second, the court concluded that losses should not be allocated between Federated, Cincinnati, and Kootenia. It reasoned that because the only evidence before it indicated that
the property damage to each home arose from a discrete and
identifiable event — the improper application of the stucco
siding — allocation was not appropriate. Thus, Federated
was required to indemnify Kootenia for all ensuing damages
under the policies in effect when each home was completed.
Federated appealed.
C. The Court of Appeals
The Minnesota Court of Appeals affirmed. With respect to
whether the Federated policies were triggered, the court reaffirmed the “actual-injury” or “injury-in-fact” coverage-trigger rule. Under that rule, the time of the occurrence is not the
time the wrongful act was committed, but the time the complaining party was actually damaged. In the case before it,
the court noted that “the record is replete with the insurer's
own admissions concluding that the damage began to occur
within its policy periods.” These “admissions” included
claims documents that assigned a “date of loss” as the date
each home closed; representations made in the subrogation
action against the stucco subcontractor; and correspondence
with other parties.
With respect to allocation of damages across policy periods, the court noted that, pursuant to In re Silicone, allocation
is meant to be the exception, not the rule. In determining the
propriety of applying allocation, two issues must be considered: (1) whether the alleged damages or injuries are continuous in nature; and, if so, (2) whether the continuous injuries
arose from a discrete and identifiable event. The court also
observed, “[i]f we can find a discrete originating event that
allows us to avoid allocation, we should do so.”28
With this analysis is mind, the court in Kootenia noted that
it was “undisputed” that the alleged water intrusion damages were continuous in nature. Moreover, the court concluded that the damages arose from a discrete and identifiable event—the improper application of the stucco siding on
each home. Rejecting Kootenia's argument that indivisible
water intrusion damages occurring over a period of time are
analogous to environmental contamination cases (where
allocation was held to be appropriate), the court reasoned
Kootenia, No. 405-278, 2006 WL 224162 at *6, quoting In re Silicone, 667
N.W.2d at 421-22.
28
that “the indivisibility and indeterminacy of the injury's origin is the critical issue to allocation, and not the incremental
progression of the ongoing damage.” The court concluded
that the stucco application was a discrete and identifiable
event, and the undisputed origin of all subsequent damages.
Therefore, Federated was liable for all damages. The Kootenia
decision was unpublished, and the Minnesota Supreme
Court has denied review.
IV. QUESTIONS LEFT UNANSWERED AFTER
THE KOOTENIA DECISION
Many in the insurance industry had hoped that the
Kootenia decision would clarify a number of issues regarding
the actual injury rule, triggers of coverage, and allocation
issues in construction defect cases. Instead, the decision
seems to have left a number of questions unanswered.
For example, the Kootenia decision might be interpreted to
stand for the proposition that the liability insurer “on the
risk” at the time of defective construction is always obligated
to indemnify its insured for all damages arising out of those
defects. This broad interpretation, though, is arguably inconsistent with the actual-injury rule and the facts providing the
framework for the court’s decision in Kootenia. Certainly, in
water intrusion cases, property damage does not occur until
elements of water are introduced to the defective construction. Thus, if there had been no “admissions” by the insurer
in Kootenia that property damage began to occur at the time of
improper stucco application, it is unknown how (or even if)
the court would have concluded when property damage first
occurred. The court could have concluded that this was a fact
issue for the jury to resolve.
Second, the Kootenia decision did not address the overarching question of whether it is scientifically possible—or
administratively feasible—to determine when property damage occurs in water intrusion cases. It remains unclear precisely how much water intrusion is sufficient to cause some
damage during a given policy period. For instance, can initial water intrusion, if insubstantial, “dry up” and not cause
damage? If so, how many instances of water intrusion equate
to “property damage”? Similarly, it remains unclear how an
insurer may establish that no “appreciable damage” occurred
in its policy period. Absent similar “admissions” by the parties, other courts might treat these cases more like NSP and
Domtar, where the strict application of the injury-in-fact rule
is too scientifically complex, causes a disproportionate burden on parties, and becomes too administratively difficult
MN ∆ SUMMER 2006
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and expensive in relation to the damages claimed to litigate
the actual injury issues.
Third, the Kootenia decision may prove difficult to apply in
certain factual settings. Assume, for example, that a home
was defectively constructed at the end of policy period A.
Further assume that no rain events occurred from the time
construction was completed to the end of policy period A.
Rather, the first water event occurred during policy period B.
Under these circumstances, policy A arguably would not be
“triggered” under the actual-injury trigger rule, as no property damage occurred during that policy period. Policy B
would be triggered but, because that property damage arose
out of a “discrete and identifiable event” (presumably the
defective construction), insurer B may argue that it is
absolved of liability under the court’s analysis in Kootenia.
To avoid this circumstance, it seems logical arguments can
be advanced that referring to “defective construction” as a
discrete and identifiable is inconsistent with SCSC and In re
Silicone. In those cases, the “event” produced immediate
damage. In defective construction cases, however, property
damage arguably does not occur until—at the earliest—elements of water are introduced to the defective construction.
Assuming a home is subjected to multiple water events, each
of which causes or contributes to indivisible “property damage,” construction defect cases might properly be subject to
the pro-rata by time on the risk analysis set forth in NSP.
Alternatively, a court may conclude that the first policy on the
risk at the time damage is proven to begin is the sole policy
implicated, even if the discrete identifiable event (e.g. defective stucco application) occurred in an earlier policy period.
Moreover, the relative simplicity of the facts in Kootenia is
somewhat uncommon. In many construction defect cases—
particularly those involving water intrusion—several distinct
defects are alleged to combine to cause property damage. It is
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MN ∆ SUMMER 2006
unknown how the court in Kootenia would have resolved the
question of whether a discrete identifiable event existed had
there been allegations of multiple defects over time—e.g.,
improper stucco application in one policy period and
improper window installation in another, or defective construction in one policy period and later defective repairs in
another policy period. Could the construction and sale of the
defective house as a whole be deemed to be the discrete and
identifiable event? Or, would these circumstances be more
akin to the NSP and Domtar “continuous dumping” situations where multiple acts, often stemming from work performed by different subcontractors, combine to cause indivisible damage?
The weight any given party affords the Kootenia decision is
likely to be entirely outcome-dependent. In other words,
where a given insurer was “on the risk” for one year, including the time of initial construction, but another insurer was
“on the risk” for the next five years, the first insurer will
undoubtedly seek to distinguish Kootenia while the latter will
classify it as precedent. Or, in the above example, if the
insured contractor has sufficient coverage amounts in the
first year and substantial deductibles on each of the five subsequent policies, it may also rely on Kootenia to seek to avoid
paying those deductibles. In effect, then, the Kootenia decision may prompt even more litigation and create further
uncertainly.
V. CONCLUSION
In sum, the much-anticipated Kootenia decision may prove
to be of limited benefit given the unique facts upon which it
was decided. Rather than clarifying allocation issues and
reducing related litigation, parties will undoubtedly litigate
the applicability of the decision to the specific facts at issue.
In the meantime, the insurance bar is left to await further
direction from the judiciary.
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