Nailing Down Occurrence Triggers for Property Damage in the Wake of Redevelopment--Why a Distinction Should Be Made Between First and Third Party Policies

• Author: David T. Grand, Jr.
• Pages: 605-629

Page 605

The author would like to thank Professor Shelby McKenzie for his assistance and guidance in the drafting of this comment. The author would also like thank his wife Reyna and daughter Maestri Elizabeth for their inspiration and selfless support throughout the drafting of this Comment as well as the entire law school experience.

I Introduction: The Aftermath of Disaster-Louisiana's Current Rebuilding Crisis

Devastation, destruction, and a new way of life were introduced to the residents of the Gulf Coast on August 29, 2005 with the arrival of Hurricane Katrina. Unfortunately for Louisiana, the road to recovery after the devastation of Katrina was tragically interrupted almost one month later in the form of another category three hurricane named Rita. The amount of damage caused by Hurricane Katrina alone is staggering, with an impacted area of 90,000 square miles--an area larger than Great Britain.¹ As of March 8, 2006, over $36.9 billion had already been appropriated for response and recovery efforts in the Gulf Coast, with even more funds being requested.²

Louisiana has focused its use of such resources on rebuilding the state in an attempt to bring back the many residents and businesses that had to take to higher ground.³ Such a rebuilding effort has been dubbed by some as "the biggest redevelopment effort in history."⁴ However, with such a mass effort of rebuilding, the concern turns to the scores of contractors who are flocking to the Gulf Coast in an attempt to get a bite at the FEMA apple.⁵ Page 606

The number of citations issued to contractors for "shoddy work" and failure to obtain requisite state licenses has increased from 237 in the year leading up to Katrina to over 460 since.⁶ In addition, consumer complaints against contractors and fines levied against them have also dramatically increased.⁷ It seems inevitable that these rebuilding efforts will be plagued by a multitude of construction defect claims, some arising at the outset of construction while others may go unnoticed for years. Thus, it becomes necessary to explore Louisiana's remedy for such defects in the context of insurance coverage and determine whether this remedy is up for the long and arduous task it will be confronted with for years to come. The time is now to provide illumination on an area of insurance law in Louisiana that heretofore has been masked in a gray fog.

This Comment examines the jurisprudential response to construction defects resulting in property damage in the context of insurance coverage. The question that must be clearly answered up front with property damage claims is whether there was an "occurrence"⁸ that "triggered"⁹ coverage for the claimed "property damage."¹⁰ What is typically at issue is whether insurance coverage is triggered when the damage is discovered or when Page 607 damage results from exposure to this "shoddy work," which may occur years prior to its discovery.¹¹

Courts have utilized different trigger theories in an attempt to interpret insurance policy language to determine whether damage occurred at the exposure to a harmful condition, such as the first time it rained on a leaky roof, or whether damage occurred when the resultant rotten framing was discovered by the property owner. The problem with the use of such theories, as Louisiana jurisprudence demonstrates, is the lack of consistency regarding when and why one particular theory is used over the other. Thus, the determination of which insurer must provide coverage for potentially millions of dollars worth of post-Katrina rebuilding efforts is at the mercy of a court simply employing one theory over the other. Rather than bearing the resultant risk and uncertainty, it is likely that insurers will pass this uncertainty on to insureds in the form of increased premiums.

It must be mentioned at the outset, however, that the employment of any trigger theory to determine when the "property damage" occurred is only the beginning of the analysis. Although beyond the scope of this Comment, an in-depth analysis must also be undertaken to determine whether there are applicable exclusions in the policy that ultimately exclude coverage.¹² This Comment Page 608 focuses solely on when property damage is deemed to have occurred according to common law trigger theories by attempting to interpret policy language. And, although inspired in part by the potential property damages resulting from hurricane rebuilding efforts, the forthcoming analysis of the proper employment of trigger theories is equally relevant in any context concerning other types of damage, whether property or personal injury.

This Comment explores the trigger theories that have developed in Louisiana and contrasts them with those of other jurisdictions. The outcome of this comparison is the author's recommendation that one theory does not fit all insurance policies, but instead different trigger theories should be utilized depending on the type of insurance. For first party insurance coverage,¹³ the most equitable and economically viable theory is based on when the damage is discovered or manifested. In contrast, for third party insurance coverage,¹⁴ the coverage trigger should depend on when the actual injury took place, or in the alternative, if damage is progressive,¹⁵ then coverage should be triggered in a continuous manner from its inception to discovery.

II Background to Trigger Theories and Louisiana's Application of them

In order to properly understand the development of the manifestation and exposure theories in Louisiana, one must first be Page 609 aware of the different trigger theories that have emerged in other jurisdictions. Part A will provide a brief explanation of the four most common theories. Thereafter, Parts B and C will demonstrate how the manifestation and exposure theories, respectively, were developed in Louisiana. Part D will conclude with an examination of the current status of Louisiana law regarding such theories.

A Introduction to Trigger Theories

When confronting the issue of when insurance coverage should be triggered, the courts have not been without guidance. In fact, numerous theories have surfaced to help the court answer this question. The most common theories include: (1) the manifestation theory; (2) the exposure theory; (3) the injury-in-fact theory; and (4) the continuous injury theory.¹⁶

The manifestation theory provides that insurance coverage is triggered when the injury or damage is discovered or becomes apparent during a policy period.¹⁷ The policy in effect when this discovery is made is responsible for providing coverage.¹⁸ As a result, under this theory, even if the damage was caused by a delictual act that took place under a prior policy, the policy in effect at the time the damage is discovered is nevertheless responsible for coverage.

At the other end of the spectrum, the exposure theory provides that the policy in effect when the property was exposed to the harm must provide coverage.¹⁹ This theory assumes that damage occurs simultaneously with exposure.²⁰ Therefore, even if the damage is not discovered until years later when a different policy is in place, the policy in effect when the property is damaged is responsible for coverage.

The other two theories, the injury-in-fact theory and the continuous injury theory, fill the gap between the manifestation and exposure theories. For instance, the injury-in-fact theory Page 610 provides that the policy in effect when the damage actually occurred is responsible for coverage, regardless of when the exposure or manifestation occurred.²¹ This theory, however, requires a difficult factual finding as to when the injury, in reality, occurred. Consequently, technical or scientific evidence is usually required.²² On the other hand, the continuous injury trigger encompasses both the manifestation and exposure theories by providing that all policies in effect either at the time of exposure, during any later periods of continuing exposure, or at the time of manifestation are responsible to provide coverage.²³ Under this theory, if multiple policies are implicated, each policy is allocated a portion of the loss.²⁴

B Louisiana's Development of the Manifestation Theory

In Oceanonics, Inc. v. Petroleum Distributing Co.,²⁵ the Louisiana Supreme Court first recognized the substantial change in policy language under an occurrence-based policy as opposed to earlier accident-based policies.²⁶ The court found that the policy in question did not provide coverage since the occurrence-based policy limited coverage to property damage occurring during the policy period.²⁷ Therefore, it excluded damage that occurred after the policy period even though the damage resulted from a delictual act committed during the policy period.²⁸ In doing so, the court reasoned that such exclusion was not against public policy since an Page 611 insured could secure coverage for claims arising from prior delictual acts by purchasing completed operations and products liability coverage.²⁹

Although the court did not refer to the manifestation theory in its...