Known Injury or Damage Exclusion not Applicable in Case of Continuing and Progressive Water Infiltration Resulting from Defective Construction

I recently posted an article, CGL Coverage:  “Known Injuries or Damages” in Minnesota and Beyond”, addressing the “Known Injury or Damage” provision in CGL policies.  In August 2014, the Connecticut Supreme Court addressed the provision in the context of a construction defect case involving ongoing water infiltration issues in Travelers Cas. & Sur. Co. of Am. v. Netherlands Ins. Co., 312 Conn. 714, 95 A.3d 1031 (2014).  Although the insured contractor was placed on notice of the infiltration problems before the policy inception date, the court held the Known Injury or Damage provision did not bar coverage because extrinsic evidence of when the insured was placed on notice could not be used and the underlying complaint did not “specify exactly” when the insured was first placed on notice of the problem.

In 1994, the state of Connecticut contracted with Lombardo to perform masonry for the construction of the law library, which was completed in 1996. In 2008, twelve years after construction was completed, the state sued Lombardo and other entities seeking to recover approximately $18 million because of continuing and progressive water intrusion in the library. Travelers, which insured Lombardo from 1994 to 1998 agreed to defend but Netherlands, which insured Lombardo from 2000 to 2006, refused to defend.

Travelers brought a declaratory judgment against Netherlands. The trial court declared that Netherlands was obligated to defend Lombardo, and pay to Travelers its pro rata share of the costs incurred in defending Lombardo in a suit.  The trial court rejected Netherlands’ reliance on the known injury or damage clause because “the underlying complaint [did] not state with certainty when Lombardo was aware of the actual damage.”

Netherlands appealed and raised numerous issues. Among others, Netherlands argued the “known injury or damage” exclusion in its CGL policies barred coverage. Netherlands claimed that Lombardo had been on notice of problems with the law library “on or before January, 2000,” and, as such, the exclusion applied and barred coverage.

The CGL policies Netherlands issued to Lombardo provided that insurance only applied if:

Prior to the policy period, no insured listed under Paragraph 1. of Section II—Who Is An Insured and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage during or after the policy period will be deemed to have been known prior to the policy period.

“Bodily injury” or “property damage” which occurs during the policy period and was not, prior to the policy period, known to have occurred by any insured …includes any continuation, change or resumption of that “bodily injury” or “property damage” after the end of the policy period.

“Bodily injury” or “property damage” will be deemed to have been known to have occurred at the earliest time when any insured . . .:

(1) Reports all, or any part, of the “bodily injury” or “property damage” to us or any other insurer;

(2) Receives a written or verbal demand or claim for damages because of the “bodily injury” or “property damage”; or

(3) Becomes aware by any other means that “bodily injury” or “property damage” has occurred or has begun to occur.

The Connecticut Supreme Court first held the underlying complaint alleged an “occurrence” and “property damage” within Netherlands’ policy periods: “as we recently decided in interpreting identical CGL policy language in [Capstone Building Corp. v. American Motorists Ins. Co., 308 Conn. 760, 67 A.3d 961 (2013)] the “occurrence” is the defective work, whereas the “property damage”—in this case water intrusion—results from that occurrence.” Netherlands, 95 A.3d at 1054.  The allegations of the underlying complaint alleged “property damage” through the Netherlands’ policies:

We conclude that the underlying complaint alleges property damage that triggered Netherlands’ duty to defend Lombardo. Netherlands’ policies covered periods from August 31, 2000 until June 30, 2006. Although the construction of the law library was completed in 1996, the problems began in the “months and years” that followed the state’s occupancy on January 31, 1996, and the “water intrusion proved to be continuing and progressive” into the 2000s, when the “state retained forensic engineers to investigate the full extent and likely causes of the problem.” Thus, the property damage alleged in the underlying complaint—however broadly worded—extended into Netherlands’ policy periods.

The court next addressed Netherlands’ claim that the “known injury or damage” exclusion barred coverage.  Netherlands claimed that Lombardo knew about the property damage to the library, at least in part, before Netherlands’ coverage began on August 31, 2000.

In addressing the known injury or damage issue, the court first noted that the outcome was dependent on the language of the policy exclusion, not the common law known loss doctrine. Netherlands, 95 A.3d at 1054 (“[a] state’s narrow formulation of the known loss rule . . . ‘cannot be used to defeat the unambiguous contrary intent of the parties as reflected in the policy language itself’”) (quoting Travelers Casualty & Surety Co. v. Dormitory Authority, 732 F. Supp. 2d 347, 362 (S.D.N.Y. 2010)). “[T]he contractual provision, when it exists, governs independently of the common-law rule, although they may have overlapping effects in certain cases.” Netherlands, 95 A.3d at 1054.

The court next addressed the issue of whether extrinsic evidence, along with the allegations in the underlying complaint, could be used to determine whether the insured knew of the property damage for purposes of the known injury or damage provision applied. If extrinsic evidence was allowed, the known injury or damage provision would no doubt have barred coverage as it was apparent the insured had been placed on notice of the water infiltration problems prior to issuing the policy in August 2006.  The court cited cases from other jurisdictions where courts had allowed the use of extrinsic evidence. See e.g., Tower Ins. Co. v. Dockside Associates Pier 30 LP, 834 F.Supp.2d 257, 266–67 (E.D.Pa.2011) (considering complaint letters to and from insured’s management about water infiltration into condominiums, produced by insurer, in concluding that they are “not … entitled to coverage”); Travelers Casualty & Surety Co. v. Dormitory Authority, supra, 732 F.Supp.2d at 361 (considering letters and other undisputed extrinsic evidence of remediation efforts in holding that, because contractor “became aware prior to the beginning of the policy period that damage to the [f]looring [s]ystem had occurred or had begun to occur, [it] cannot seek coverage for the [f]looring [f]ailure under the terms of the Ohio [c]asualty [p]olicy”).

However, the Connecticut Supreme Court rejected the use of extrinsic evidence, concluding it would be “inconsistent with our well established four corners approach in assessing an insurer’s duty to defend. Netherlands, 95 A.3d at 1055, n. 30 (citing Capstone Building Corp. v. American Motorists Ins. Co., 308 Conn. 760, 67 A.3d 961 (2013)). Having concluded that extrinsic evidence could not be used to determine whether the known injury or damage exclusion applied, the court measured Netherland’s duty to defend against the allegations of the underlying complaint. Although the court acknowledged the complaint allegations “arguably permit a reasonable inference that Lombardo knew of the property damage in the law library prior to the inception of its policies with Netherlands,” the court held that Netherlands was obligated to defend given the well-established maxim that, “[i]f an allegation of the complaint falls even possibly within the coverage, then the insurance company must defend the insured.” Netherlands, 95 A.3d at 1055-56. The court stated:

Although paragraph 43 of the underlying complaint avers that the “defendants were given notice of these [water intrusion] problems and frequently visited the [law] library to ascertain the nature and extent of the problem,” those allegations do not specify exactly when Lombardo received notice, other than to state that the water problems began “[d]uring the months and years” following the project’s completion and the state’s occupancy in January, 1996, and that forensic engineers were retained in the “2000s.” Similarly, the underlying complaint does not state when exactly those engineers’ reports were provided to Lombardo, only that they were at some point. Insofar as Netherlands was not Lombardo’s only insurer during the eight years of the 2000s leading up to the state’s filing of the underlying action, and because we construe insurance policies to afford coverage whenever possible, we conclude that the trial court properly determined that the facts alleged in the underlying complaint do not preclude coverage for purposes of the duty to defend.

In a jurisdiction which allows extrinsic evidence in determining an insurer’s duty to defend, the result in this case may well have been different.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

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