The Montrose court invited carriers to change their coverage if the carrier was at odds with the Court's ruling. Since that time, carriers have been issuing so called "Montrose" endorsements to limit the effect of the Court's holding. Unfortunately, there is no standard Montrose endorsement. Therefore, special care must be taken to understand the impact of each endorsement. It should also be noted that no court has interpreted any of these wordings so that this and every other analysis of policy wording are subject to a future court's ruling.

Montrose endorsements start from the proposition that the carrier wants to limit their involvement to cases that are not already reported to other carriers or to not cover cases where the loss is already known to the insured. In order to accomplish this, carriers state that in continuous loss cases, the policy will not respond if the loss is in progress or is known to some party. This is where the individual wording has different effects.

Many carriers use language such as: "We shall not cover any continuous losses where the damage 'first began' or 'first occurred' or 'first happened' prior to the inception of the policy period." We view this language as problematic since under the analysis of Montrose, any continuing loss cases first begin when the negligent act takes place. In construction cases, that could very well mean that there is no coverage for any continuous damage cases, since the alleged negligent construction always takes place before the policy period.

We prefer language that uses the expression "first manifested." "Manifested" under California law means when the claimant or plaintiff first discovers damage and has some idea that the damage was caused by a negligent act. In other words, discovering a crack in the stucco is not enough to result in manifestation. The claimant must have some idea that the crack was caused by some negligent act. The use of the term manifestation or sometimes 'diagnosis' fulfils the reasonable carrier interest covering only those problems that have not turned into lawsuits and other formal claims prior to the inception date of the policy.

Another term used in Montrose policies excludes continuous losses if the claims are "known" or "unknown" and if they began prior to the inception of the policy period. Known and unknown are two separate concepts in this context. If the term 'known' is used, the insured must have had actual knowledge of the claim. This term is insured friendly in that it does not matter when the claimant knows about a claim. The cut-off date is when the insured knew about the claim. Since this is usually later than the knowledge by the claimant, more claims could be included within the relevant policy.

The term "unknown" is more problematic. If the exclusion does not say "unknown by the insured" and just says "unknown," effectively there could be no coverage for continuous loss cases. This is because no one knows about negligent construction until after it manifests. This is the nature of a continuous loss case. If the policy restricts coverage to any damage that occurs prior to the inception date of the policy, even if the damage is "unknown" to anyone, there would be no coverage under the policy.

"Insured friendly" means that coverage is provided for the largest number of claims. To be clearer, from the insured's perspective, the following lists the most insured friendly Montrose language, in order (from best to worst):

1. No Montrose Endorsement.
2. Restricts coverage to those cases where claims have not been made or a suit filed.
3. Denies coverage to those cases where the insured has notice
4. Denies coverage to those claims where the claimant has notice or the damage has manifested.
5. Denies coverage to those claims where the damage has begun, commenced or started prior to the inception date of the policy.

Another major issue is whether a Montrose endorsement restricts the trigger of coverage after the policy period expires. The Montrose case did not deal with this issue, but many carrier have put in restrictive language to limit cases that first manifest after the policy period.

Again, this letter has touched upon some of the major issues. Special care should be taken to review each endorsement with coverage counsel to ensure the mutual expectations of the insured are met. Please feel free to contact us at (310) 398-5697 if you would like additional information.