This document provides a brief overview of the California Supreme Court's decision in Montrose Chemical Corp. v. Admiral Insurance Co., (1995) 10 Cal.4th 645, otherwise known as "Montrose II". Perhaps the two most notable changes in the law under Montrose II relate to the "known loss" rule and the trigger of coverage. Each of these issues will be discussed briefly below.

A. Known Loss

An insurance contract is simply a contract where one undertakes to indemnify another against a loss, damage or liability arising from a contingent or unknown event. As such, under relevant California statutes, an assured could obtain insurance coverage for any contingent or unknown event, whether past or future. Accordingly, when a loss is "known or apparent" before a policy of insurance was issued, there is no coverage. Prudential-LMI Comp. Ins. v. Superior Court, 51 Cal.3d 674. Prior to Montrose II, this rule which is also known as the "loss-in-progress" rule was the standard. That standard went out the window with Montrose II.

In Montrose II, the California Supreme Court essentially eliminated the loss-in-progress or known loss rule by holding that all that is required to establish an insurable risk is some "contingency." As such, even when subsequent damage might be deemed inevitable, such inevitability does not alter the fact that at the time the contract of insurance was entered into, the event was only a contingency or risk that might or might not occur within the term of a policy. More specifically, Montrose II included an environmental claim. The assured received letters from a governmental agency concerning alleged contamination prior to the inception of certain policies issued to Montrose by Admiral Insurance Company ("Admiral"). Under the "loss in progress" or "known loss" rule, Admiral argued that it had no duty to defend or indemnify Montrose. The California Supreme Court disagreed, holding that Montrose's liability was not a certainty (contingent) at the time that Montrose applied for coverage with Admiral. As such, the claim was insurable at that point.

In Montrose II, the California Supreme Court specifically held:

We therefore hold that, in the context of continuing a progressively deteriorating property damage or bodily injury insurable under a third party CGL policy, as long as there remains uncertainty about damage or injury that may occur during the policy period and the imposition of liability upon the insured, and no legal obligation to pay third party claims has been established, there is a potentially insurable risk ... for which coverage may be sought. Stated differently, the loss-in-progress rule will not defeat coverage for a claimed loss when it had yet to be established, at the time the insurer entered into the contract of insurance with the policyholder, that the insured had a legal obligation to pay damages to a third party in connection with a loss. (Emphasis added).

Under Montrose II, an insurer cannot deny coverage based on a "known loss" assertion absent an actual finding of fault against the assured prior to the policy's inception unless the insurer contractually provides a "known loss" exclusion. The sample Travelers language is directly on point because at paragraph 2(b), the endorsement specifically incorporates almost verbatim, the language utilized by the California Supreme Court concerning when a loss is no longer "contingent." Notably, California courts often provide guidance to insurers in this manner. Under Montrose II, if an insurer seeks to exclude coverage for known losses, the insurer must account for the fact that under California law, a loss will not be considered "known" unless the insured had a legal obligation to pay damages to a third party in connection with the loss prior to the inception of the relevant policy.

The Travelers endorsement provides an excellent example of drafting an endorsement in direct response to this change in the law. The Travelers endorsement specifically states that it does not apply to pending or prior litigation or known losses. Significantly, the endorsement also goes the additional step of stating contractually that the exclusion will apply, regardless of whether ultimate liability has been established, i.e., Travelers has eliminated via contract with its assured, the holding of Montrose II with regard to known losses.

We believe it preferable for the "known loss" endorsement to be a separate and distinct endorsement from the "trigger of coverage" endorsement which will be discussed more fully below. As such, we recommend policy language similar to the language utilized by Travelers with regard to the "known loss" language. It is suggested that the endorsement read as follows:

EXCLUSION - PENDING AND PRIOR LITIGATION AND KNOWN LOSSES

This insurance does not apply to:

1. Damage, loss, cost or expense arising out of any claim, suit, litigation, arbitration, alternative dispute resolution or other judicial or administrative proceeding which has commenced or is pending prior to the effective date of this policy, and also does not apply to any future damages, loss, cost or expense arising out of said pending or prior litigation.
2. Any "bodily injury," "property damage," "personal injury," "advertising injury" or any other injury or damage of which the insured had knowledge prior to the effective date of this policy.
   
   This exclusion applies whether or not:
   
   
   1. Damages continue or progress during the policy period; or
   2. Ultimate liability has been established; or
   3. The final amount of damages, loss, cost or expense has been established.

B. Trigger of Coverage

As with the "known loss" discussion, the California Supreme Court in Montrose II also provided guidance for insurers concerning the trigger of coverage in ongoing progressive damage claims. Prior to Montrose II, one California appellate district had adopted a "manifestation" trigger of coverage, holding that the insurer on the risk at the time the property damage first manifested was essentially on the risk and solely responsible for the entire period of progressive damage. In Montrose II, the California Supreme Court undertook an exhaustive analysis of insuring language and the definition of "occurrence" within standard CGL policies, determining that:

Nothing in the policy language purports to exclude damage or injury of a continuous or progressively deteriorating nature, as long as it occurs during the policy period.

In Montrose II, the court held that in continuing loss property damage claims the trigger of coverage is to be determined by the language of the contract between the parties. Under Admiral's express policy language, a continuous injury trigger of coverage was mandated because the policy did not require that a sudden accidental damage-causing act or event or that the conditions giving rise to the damage or injury themselves occur within the policy period in order to trigger Admiral's coverage. Moreover, the California Supreme Court impliedly suggested that if an insurer wished to restrict coverage under its policies for only those damages which actually manifested during any policy period, the insurer must do so by contract, i.e., if it is a manifestation trigger of coverage that the insurer seeks, the insurer should draft its policy accordingly.

Here, the language presently being utilized by many carriers contractually provides this "manifestation" trigger. Because this endorsement focuses on the "trigger of coverage" and essentially has nothing to do with the insured's knowledge of a claim, we believe it preferable to issue separate endorsements for these separate and distinct issues. Please note that our suggested revision to the language also provides that the policy does not provide coverage for property damagewhich first manifested after the expiration of the policy. This change prevents coverage obligations from arising for latent defects discovered after the policy has expired.

With regard to the separate Montrose II "trigger of coverage" exclusion the following language is suggested:

EXCLUSION - CONTINUING OR ONGOING LOSSES

This insurance does not apply to and the company shall have no obligation or duty to defend the insured for:

1. Damage, loss, cost or expense arising out of any claim, suit, action, demand, litigation, arbitration, alternative dispute resolution or other judicial or administrative proceeding seeking damages, equitable relief, injunctive relief, administrative relief, administrative penalties, or regulatory compliance where:
   
   
   1. Any damages, loss or injury which is the subject of the claim, suit, action, demand, litigation, arbitration, alternative dispute resolution or other judicial or administrative proceeding manifested prior to the inception of this policy or after this policy expired. This exclusion applies whether or not damages continue or progress during the policy period.

If a meaning that a lay person would ascribe to the language of an insurance contract is clear and unambiguous, the court will apply that meaning. As such, every effort should be undertaken to ensure clear, unambiguous and easily-understandable language particularly in drafting exclusions and endorsements.

Again, in Montrose II, the court was compelled to find a duty to defend under the Admiral policies at issue because continued or repeated exposure to injurious conditions constituted an "occurrence" under those policies. There simply was no requirement within Admiral's policies that the initial damage-causing act or event, or the conditions giving rise to the damage or injury, occur within the policy period. With this statement, the California Supreme Court essentially gave insurers preferred language to use when drafting changes to the definition of "occurrence." Such a definition change is an alternate method of achieving a manifestation trigger. Generally, we have not seen insurers utilize this approach, as most insurers have chosen to deal with the holdings of Montrose II via endorsements. However, we have seen limited examples of insurers issuing endorsements such as the following, in addition to a separate "manifestation" endorsement:

"Amended Definitions Endorsement - Occurrence and Duty to Defend"

In consideration of the premium charged, it is understood and agreed that Occurrence as defined in section V is amended to read:

"Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance. "Property damage," "personal injury," "advertising injury" or "bodily injury" which manifested prior to or after the effective dates of this insurance will be deemed to have happened prior to, or after and not during the term of this insurance.

There shall be no obligation of the company to defend any suit or claim against the insured or any additional insured if such suit or claim does not allege an "occurrence" as defined in this endorsement.

The issue of whether to issue two separate endorsements is in part a matter of personal preference. We hope this sample language will prove beneficial in your drafting efforts. If you have any questions or if we may be of any further assistance, please do not hesitate to call. We, of course, urge specific review of all terms and conditions of forms utilized so that the maximum legal protection can be achieved.