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City Of San Buenaventura v. The Insurance Company Of The State Of Pennslyvania

(Policies Affording Coverage For Occurrences Taking Place During Policy Periods Did Not Afford Coverage For the City’s Negligent Conduct Taking Place Before the Inception of the Policies)

In City of San Buenaventura v. The Ins. Co. Of The State of Pennsylvania, __ F.3d ___ (9th Cir. June 26, 2013), the United States Ninth Circuit Court of Appeals affirmed the district court’s entry of summary judgment in favor of insurers, the Insurance Company of the State of Pennsylvania (“ICSOP”) and Great Lakes Reinsurance (UK) (PLC) (“Great Lakes”) in connection with a dispute relative to whether to potential coverage was afforded for an underlying lawsuit filed against the City of San Buenaventura (“City”) arising out of the failure to disclose sale and resale requirements for condominiums subject to an affordable housing program.

In 2004, a number of buyers of the condominium units subject to the affordable housing program sued the City, the developer and the developer’s partners. The buyers alleged that they had bought low-income condominiums in 2001 and obtained certificates of compliance, without being told that their condominiums were subject to low-income ceilings. They also allege that they had paid prices higher than the ceilings. The condominium buyers sought two forms reliefs against the City. They sought a declaratory judgment that the City’s affordable housing program restrictions did not apply to their condominiums. In the alternative, if the court found that restrictions did apply to their condominiums, they sought damages and a declaration of which restrictions applied. Their theory of damages was that the City failed to adequately review their sale documentation, issued erroneous certificates of compliance, and negligently failed to tell them about the low-income price ceilings. As a result, they alleged they had suffered damages based on their inability to sell their condominiums at prices above the owe-income ceilings. 

The policies issued by ICSOP and Great Lakes were each excess of a $1.0 million self-insured retention. Approximately three years after the initiation of the buyers’ lawsuit against the City, it tendered the defense of such lawsuit to Great Lakes and ICSOP. The City contended that it had exhausted the $1.0 million self-insured retention applicable to each of the policies issued by Great Lakes and ICSOP. In that regard, Great Lakes insured the City for the period of July 2002 to July 2003 and ICSOP covered the City for the period of July 2003 to July 2004.

Because the City’s alleged negligence in connection with failing to disclose the requirements for the low-income housing program took place in 2001, both Great Lakes and ICSOP denied coverage of the condominium owners’ lawsuit against the City.

Thereafter, the City filed a complaint for breach of contract and bad faith against Great Lakes and ICSOP arguing that they were obligated to defend and indemnify the City against the condominium owners’ lawsuit. Consequently, both insurers filed motion for summary judgment arguing that since their policies afforded coverage for occurrences taking place during their respective policy periods and the City’s alleged negligence took place prior to the inception of either carriers’ policy, potential coverage was not afforded to the City for the underlying condominium’s owners’ lawsuit. The district court agreed and entered summary judgment in favor of Great Lakes and ICSOP. 

In affirming the district court’s entry of summary judgment, the Court of Appeals rejected the City’s argument that the condominium owners’ claims were continuing in nature such that potential coverage was afforded under the Great Lakes and ICSOP policies based on a theory of a continuing occurrence. The Court of Appeals reasoned as follows:

    It is undisputed that the City's alleged negligence occurred in 2001, prior to the policy periods. The City argues that because the condominium buyers continue to suffer under the burden of having overpaid and having their resale prices restrained by a ceiling; the “occurrence” has continued into the policy periods. The core of the argument is an analogy to the California Supreme Court's decision in Montrose Chemical corp. v. Admiral Insurance Co. That decision held that claims for pollutants deposited in the ground prior to the policy period, but continuing to leach into soil and groundwater during the policy period, gave rise to a duty to defend, because continuance of the property damage during the policy period gave rise to coverage.

    The City stretches Montrose Chemicals too far. The insured in Montrose Chemical had deposited chemical wastes prior to the policy period, but wastes were still there and causing more damage during the policy period. Under California law, “property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods.”' State Continental Insurance Co. explains that this kind of long tail on a tort frequently occurs “in the context of environmental damage and toxic exposure litigation.” Continental arose out of the State of California's negligent construction of a waste disposal site in the 1950s that resulted in continuous discharge of industrial wastes many years after the site was closed, and a federally ordered cleanup in 1998.

   The policies in Montrose Chemical covered “property damage . . caused by an occurrence . . .”  Property damage was defined as “physical injury to or destruction of tangible property which occurs during the policy Period . . . .”  The antecedent for “which” in the Montrose Chemical policies is “injury to or destruction of.” Thus under that policy, there was coverage if injury occurred during the policy period, even if the accident that caused it occurred prior to the policy period. As Montrose Chemical explains,

. . . this policy language unambiguously distinguishes between the causative event—an accident or “continuous and repeated exposure to conditions”—and the resulting “bodily injury or property damage.”  It is the latter injury or damage that must “occur” during the policy period, and “which results” from the accident or “continuous and repeated exposure to conditions.”

    By contrast, the Great Lakes policy language promises indemnification for loss caused by property damage “first arising out of an Occurrence during the Policy Period . . . .” That language is materially different from the Montrose Chemical policy language. The Montrose Chemical policies required only damages during the policy period, but the Great Lakes policy requires the occurrence causing the damage to have been during the policy period. Likewise, the ICSOP policy affords coverage for liability incurred because of “property damage arising out of an occurrence during the Policy Period.” Perhaps the underwriters of these two policies had read Montrose Chemical and drafted around it to avoid similar exposure.

    No occurrence is or could be alleged to have occurred during the Great Lakes or ICSOP policy period. The Great Lakes policy defines “occurrence” as “an accidental happening,” which would fit the negligent failure to apply the affordable housing program properly when the condominium purchasers bought their units, but would not fit keeping the program in place. Similarly, the ICSOP policy defines “occurrence” as “an accident . . . which results in . . . property damage neither expected nor intended,” phrasing applicable to the City's claimed errors at the time the condominiums were sold, but not to keeping the affordable housing program in force.

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