LARKSPUR ISLE CONDOMINIUM OWNERS' ASSN. v. FARMERS INS. GROUP
(1994) 31 Cal.App.4th 106
COUNSEL
Thornton, Taylor, Downs, Becker, Tolson & Doherty, Clarke B. Holland and Michael F. Scully for Defendants and Appellants.
Richard A. Vinson for Plaintiff and Respondent. [31 Cal.App.4th 108]
OPINION
CORRIGAN, J.
Farmers Insurance Group and its member company Truck Insurance Exchange
(collectively Truck) appeal from a judgment on a jury verdict against
Truck and in favor of Larkspur Isle Condominium Owners' Association,
Inc. (LICOA) in an action for breach of a property insurance policy.
Truck contends it had no liability under the policy as a matter of law,
because the loss for which LICOA made its claim manifested itself prior
to the beginning of Truck's policy period. We agree and therefore
reverse the judgment.
Facts
Larkspur Isle is a complex of 186 units, originally built as rental
apartments in the early 1970's and converted to condominiums in the
early 1980's. The parties stipulated that water leakage began in 1972
and that asbestos was used in the original construction. LICOA admitted
during discovery that it believed damage to asbestos-containing ceiling
materials occurred "at various times between 1972 and present."
In May 1981, an attorney for the residents wrote to the developers: "As a
general description of the necessary repair work you are put on notice
that there is water damage throughout the apartment complex caused by
leaking roofs and walls. This damage is so extensive that in certain
units there is visible fungus and mushrooms growing in an obviously
water-soaked environment." Lists of leaks compiled in 1982 included a
unit with "totally soaked floors & walls," a leak in the "cieling
[sic] & part way down the wall" of another unit, a third that was
"totally flooded," and many leaks identified as originating in the
roofs, stucco, and wood of the structures.
In May 1985, LICOA brought suit against the developers and condominium
converters of the project, complaining, inter alia, of defective
construction. Among the damage alleged was: "Moisture penetration and
leakage through the roofs, sidewalls, windows and other exterior surface
areas which has resulted in damage, including mildew, to the structural
components and all other portions of the buildings, the interior
surfaces of the units, and the personal property items within the
individual units ...."
In August 1985, Truck issued LICOA the one-year policy under which LICOA
later made its claim. The policy insured against all "risks of direct
physical loss" subject to stated exclusions. Among these limitations was
a disavowal of coverage for loss caused by rain to the "interior" of
buildings. [31 Cal.App.4th 109]
In 1986 or 1987, fn. 1
LICOA learned potentially hazardous asbestos-containing material was
present in the condominiums' ceilings. Reports in 1987 by LICOA's
asbestos consultant indicated rainwater damage to the ceilings might
result in a release of asbestos; the reports recommended removal of the
asbestos-containing material from damaged ceilings.
LICOA notified Truck of a possible damage claim in September 1987. The
claim was denied in October 1989, and LICOA filed this action in May
1990. Although LICOA initially alleged coverage for a variety of losses,
by the time of trial it sought recovery only for the cost of abating
the asbestos-containing ceiling materials damaged by rainwater leakage
in the second-floor units and making related repairs.
The jury awarded LICOA $497,346 on its breach of contract claim and
found for the defense on a claim for breach of the covenant of good
faith and fair dealing.
Discussion
[1a] In Prudential-LMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674
[274 Cal.Rptr. 387, 798 P.2d 1230] (hereafter Prudential-LMI), the
California Supreme Court adopted the "manifestation rule" for allocating
indemnity between successive first party property insurers for
progressive losses spanning multiple policy periods. (Id. at pp. 693,
699.) Under that rule, liability for a progressive loss falls on the
insurer on the risk at the time the loss manifests, i.e., at "that point
in time when appreciable damage occurs and is or should be known to the
insured, such that a reasonable insured would be aware that his
notification duty under the policy has been triggered." (Id. at p. 699.)
The manifestation rule incorporates the loss-in-progress rule: the
principle "that an insurer cannot insure against a loss that is known or
apparent to the insured." (Id. at p. 695, fn. 7; see Ins. Code, § 22.)
Thus, under the manifestation rule, "insurers whose policy terms
commence after initial manifestation of the loss are not responsible for
any potential claim relating to the previously discovered and
manifested loss." (Prudential-LMI, supra, at p. 699.)
[2a] Both parties acknowledge the manifestation rule stated in
Prudential-LMI governs this case, but they differ on its application.
Truck argues the undisputed facts show the Larkspur Isle condominiums
experienced appreciable water damage before Truck issued its policy, and
LICOA's failure to immediately ascertain the full extent of the loss is
immaterial. [31 Cal.App.4th 110] LICOA, without disputing there
had been observable water damage well before the policy period, argues
damage to the asbestos-containing ceiling materials is severable,
because the previously known water damage was excluded under the policy.
Although damage may have been apparent earlier, LICOA argues, the
claimed loss was not manifest until discovery of damage to the
asbestos-containing material. fn. 2
We agree with Truck the evidence is insufficient to show manifestation
of the loss occurred any later than May 1985, when LICOA filed its
complaint against the developers and others. The water damage was thus a
loss in progress as to Truck's policy, which was issued in August 1985.
[1b] At least two cases decided before Prudential-LMI explain that,
under the manifestation rule, the insurer on the loss at the time of
appreciable damage is responsible for the entire loss, not only that
portion discovered during the policy period. In Snapp v. State Farm Fire
& Cas. Co. (1962) 206 Cal.App.2d 827
[24 Cal.Rptr. 44], the insurer argued its liability terminated on the
expiration of its policy and did not include continuing damage after
that date. The appellate court rejected that view, stating, "Once the
contingent event insured against has occurred during the period covered,
the liability of the carrier becomes contractual rather than potential
only, and the sole issue remaining is the extent of its obligation, and
it is immaterial that this may not be fully ascertained at the end of
the policy period. [Citations.]" (Id. at p. 832, italics at end of
sentence added.) In Home Ins. Co. v. Landmark Ins. Co. (1988) 205 Cal.App.3d 1388,
1392-1393 [253 Cal.Rptr. 277], the court quoted the above discussion
from Snapp and held that "as between two first-party insurers, one of
which is on the risk on the date of the first manifestation of property
damage, and the other on the risk after the date of the first
manifestation of damage, the first insurer must pay the entire claim."
The Supreme Court in Prudential-LMI discussed Snapp and Home Ins. Co. at
length, quoted the above passages, and adopted the manifestation rule
"[b]ased on the reasoning set forth in Snapp, Sabella [v. Wisler (1963) 59 Cal.2d 21
(27 Cal.Rptr. 689, 377 P.2d 889)] and Home Ins. Co.... ."
(Prudential-LMI, supra, 51 Cal.3d at p. 699.) Thus, the Supreme Court's
rule includes the principle that the insurer on the risk at the time of
appreciable damage that is or should be known to the insured is liable
for the entire [31 Cal.App.4th 111] progressive loss, discovered
or undiscovered during the policy period. Insurers who issue policies
after "initial manifestation" of a loss bear no responsibility for
claims "relating to" that loss. (Ibid.; accord, Hoffman v. State Farm
Fire & Casualty Co. (1993) 16 Cal.App.4th 184, 190-191 [19 Cal.Rptr.2d 809] [insurer not liable where loss manifested after policy period ended].)
[2b] As Truck concedes, "[b]uildings can certainly sustain different
losses at different times." One might add it is theoretically possible
for a building to sustain distinct losses at the same time but from
different causes. Nonetheless, water damage to one particular element of
a ceiling, such as the asbestos-containing material sprayed onto the
drywall here, may not be separated out as a distinct loss where it
proceeds from the same progressive destruction as other
earlier-discovered water damage. LICOA points to no evidence the
asbestos-containing material sustained damage from any other cause, or
at any other time, than the other building materials damaged by the
copious leaks reported before 1985 and sued upon in May of that year.
Splitting the loss as LICOA proposes would result in a new loss,
potentially covered by a different insurer, whenever the insured
discovered a new increment of progressive damage. Such a result would
defeat the purposes of certainty, reliability, and efficiency that
motivate the manifestation rule. (See Prudential-LMI, supra, 51 Cal.3d
at p. 699.) fn. 3
LICOA's claim that the loss was not manifested until coverage under
Truck's policy became apparent, and the related assertion that the
nonasbestos damage was excluded under the policy, are also unpersuasive,
for two independent reasons. First, LICOA's theory is legally
incorrect. The occurrence of "appreciable damage" (Prudential-LMI,
supra, 51 Cal.3d at pp. 685, [31 Cal.App.4th 112] 687, 699) does
not depend upon discovery that the damage constitutes a covered loss
under a particular policy. (See Lawrence v. Western Mutual Ins. Co.
(1988) 204 Cal.App.3d 565,
571-573 [251 Cal.Rptr. 319] [inception of loss not delayed to date
insured learned from his attorney damage might be covered under policy;
cited with approval in Prudential-LMI, supra, 51 Cal.3d at pp.
685-686].) Nor is it even logical to compare the known damage before
August 1985 to the coverage limits of Truck's policy, which had not yet
been issued. As Truck notes, LICOA's argument that damage does not
manifest as a "loss" until it is found to be covered under a policy
would allow a property owner to obtain coverage for existing uninsured
damage simply by purchasing a new, broader policy. This, of course, is
exactly what the loss-in-progress rule forbids. fn. 4
Second, even if LICOA's legal premise were correct, the facts here would
offer it no support. LICOA's primary factual theory is apparently that
the water damage discovered before August 1985 was excluded as a loss
caused by rain to the "interior" of the units, but damage to the
asbestos-containing material was covered because the material, some of
which had been painted over, was not a "finish" and was thus also not an
"interior" portion of the buildings. For the purposes of this
discussion, we accept LICOA's definition of "interior." The pre-1985
damage reports and the May 1985 complaint, however, amply demonstrate
water damage was not limited to the interior finishes. Notably, there
were reports of floors and walls that were "totally soaked," and the
complaint refers to water-damaged "structural components" of buildings.
Thus, under LICOA's own legal theory and definitions, the evidence still
shows appreciable damage was apparent before Truck's policy issued. fn. 5
We conclude the evidence was insufficient to support the verdict,
because the loss manifested prior to Truck's policy period and was thus,
as a matter of law, an uninsurable loss in progress as to Truck. This
conclusion requires [31 Cal.App.4th 113] the judgment be reversed
without the possibility of retrial. Given this resolution, we do not
reach the questions of timeliness and policy coverage that the parties
have also briefed.
Disposition
The judgment of the superior court is reversed. Costs to appellants.
White, P. J., and Chin, J., concurred.
FN 1. The exact date is disputed but is not important to our treatment of the issues.
FN 2.
LICOA made a similar argument to the jury and received a requested
special instruction allowing the jury to find different manifestation
dates for "[d]ifferent types of damage" even if the types were "related"
and even if the earlier-discovered damage put LICOA on inquiry notice
of the subsequently discovered damage. Although the propriety of this
instruction is not before us, we note it incorrectly allowed the jury to
separate out individual portions of the same loss, leading to the
legally unsupportable verdict in this case. (See post, p. 111.)
FN 3.
None of the cases LICOA cites for the proposition that different "areas
of damage" can have different manifestation dates supports its position
here. Magnolia Square Homeowners Assn. v. Safeco Ins. Co. (1990) 221 Cal.App.3d 1049
[271 Cal.Rptr. 1], to the extent it is applicable, supports Truck's
position rather than LICOA's. The court held that while separate areas
of damage may exist in some cases, a complaint against a developer and
others for structural defects established the untimeliness of a later
suit against the insurance company, filed beyond the 12-month limit and
seeking indemnity for such defects, even though the plaintiff "may not
have known the full extent of the structural problem" at the time it
filed the initial complaint. (Id. at pp. 1059-1060.) In addition, the
cases make clear distinctions between first party and third party
claims. Chu v. Canadian Indemnity Co. (1990) 224 Cal.App.3d 86,
99 [274 Cal.Rptr. 20], a third party liability insurance case, applied a
different standard for that reason and for the same reason declined to
follow Home Ins. Co. v. Landmark Ins. Co., supra, 205 Cal.App.3d 1388. Winston Square Homeowner's Assn. v. Centex West, Inc. (1989) 213 Cal.App.3d 282
[261 Cal.Rptr. 605] did not involve an insurance claim at all; the
cited portion holds only that the statute of limitations was tolled as
to structural defects causing leakage of water into units while the
defendant developer attempted to remedy them, but not as to defective
land drainage for which no repairs had been attempted. (Id. at pp.
287-289.)
FN 4. Central Nat. Ins. Co. v. Superior Court (1992) 2 Cal.App.4th 926
[3 Cal.Rptr.2d 622], upon which LICOA relies, considered whether
inception of a loss may be delayed, for purposes of the 12-month
limitations period, under a "special purpose, specified peril policy"
(id. at p. 932) until the insured has reason to believe the loss was
caused by one of the specified perils. The court held "the type of
policy" may be considered along with other circumstances in determining
the date of inception, distinguishing Prudential-LMI as involving an
all-risk policy. (Id. at pp. 932-933.) Central National thus has no
application to the case at bar, which, like Prudential-LMI, involves a
broad peril policy.
FN 5.
LICOA asserts more generally that the evidence shows "that all of the
damage discovered by LICOA prior to August 1987 was excluded" under the
policy. This statement is neither explained nor supported with citations
to the record. Our review of the briefing and record fails to reveal in
what respect the asbestos-containing ceiling material was unique, such
that only damage to that particular material would be covered under the
policy.