The manifestation rule in Florida: has death knelled?

• Author: Kelly, Kevin
• Position: Liability insurance for construction defects

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The passion for truth is silenced by answers which have the weight of undisputed authority--Paul Tillich, 1886-1965.

An invasive weed of sorts--the so-called manifestation rule--has taken root over the last decade in the swamp known as Florida insurance law. This rule has been successfully advocated by some insurers to deny liability insurance claims. The focus here is the propriety of using this rule to deny coverage for claims against contractors when hidden, construction-related damages amass over an extended duration. Courts applying the rule have erred. The manifestation rule--restricting liability coverage solely to the insurance policy in effect when hidden damage is discovered--is inimical to the premise of Florida law that insurance policies be given their plain meaning. This article reviews how this unlikeliest of legal doctrines took root in Florida and what its future might hold.

Liability claims are commonly made by contractors when sued for faulty construction. In Florida, the most common, though not exclusive, scenario for such claims is when construction defects cause water leaks. Often, seemingly minor, hidden defects in the skins or "envelopes" of buildings cause equally hidden and slowly progressing water intrusion and resulting rot. Buildings in Florida leak. There are few truer axioms.

Much is at stake. Billions of dollars in property damage can be expected from the next spate of tropical storms to hit Florida. (1) For building owners and their contractors, the risk can be existential. The cost of repairing buildings damaged by water intrusion can rival, or even exceed, the original cost of construction. (2)

Will Florida construction contractors be adequately insured against their prospective liabilities? For many, unfortunately, the answer is no. That is, if the implied manifestation rule is not sooner rooted out. Contractors and their customers, Florida's business property owners, and homeowners are all invested in the answer. Insurers, too, are well aware of the economic risks they face when the next significant hurricane hits. (3) Thus, there is no surprise that Florida courts are familiar terrain to liability insurers and their insured contractors, both keenly interested in divining the line between covered claims for construction-related damage and claims excluded from coverage.

Liability Insurance for Construction-related Damage

Commercial general liability (CGL) insurance protects businesses from myriad risks of claims arising out of business operations, maybe most recognizably the slip-and-fall personal injury claim. (4) Books have been written on the multiple risks covered by CGL policies. Ours is a narrower focus.

Contractors rely on CGL policies to insure against their liability to building owners for property damage caused by faulty work. Since building owners will likely bear at least some of the cost of faulty construction if their contractors have no CGL insurance, they typically require such insurance of their contractors.

Since water intrusion damage can be a particularly costly result of latent construction defects, (5) when a leak is discovered in a building less than 10 years old, alert owners naturally look to their builder (or designer) for a remedy. (6) The cost to fix the leak itself is typically modest. In contrast, fixing other parts of the building, damaged as a consequence of the moisture, is where the significant expense lies. (7) When this occurs, the fortunate contractor has an insurer that acknowledges insured "physical injury" is not limited by a manifestation requirement.

The Plain Language

Deciphering the complex, standard CGL policy can test the patience of a monastic scribe. Many a veteran attorney and jurist have been lost in its labyrinths. Confusion can abound, and this opens opportunities for at least nominally intelligent advocates of the insurer and the insured to attribute opposite meanings to the very same words. The result is often the aptly characterized "policy-interpretation linguistic gymnastics." (8) Such confusion is all the more likely when one of the parties benefits from sowing that confusion.

In welcome contrast, the CGL language at the center of the dispute over the manifestation rule is actually quite plain and mostly standardized. (9) CGL policies insure against liability for "property damage." In turn, covered "property damage" in a CGL policy is "physical injury to tangible property" caused by an "occurrence" during the policy period. (10) That's it. Despite this plain language and despite the absence of any form of the word "manifestation" in the standard CGL policy, somehow, by implication, the manifestation rule sprouted. (11) Some courts, based on flawed logic, have narrowed and complicated the otherwise plain meaning of the word "injury."

The Manifestation Rule

The manifestation rule protects insurers at the expense of their insureds. Under this rule, if accreting damage occurred to a building, but wasn't discovered during an insurer's policy period, that insurer's coverage is not triggered. When the damage occurs, in fact, is rendered irrelevant under the manifestation rule.

Where adopted, the manifestation rule is used primarily to isolate a single applicable CGL policy from among many consecutive CGL policies effective during the years hidden damage occurs. The rule dictates that the policy in effect when the injury is discovered, and that policy alone, covers the resulting claims. The contractor loses the benefit of the additional CGL insurance it purchased for years damage occurred but was undiscovered. Under this rule, "damage," defined in the standard CGL policy as simply "physical injury," is instead implied to mean the more limited "discovered physical injury."

CGL policies are typically one year in length, and often have limits of $1 million per occurrence. Under the manifestation rule, if damage, for example, occurring in each of the six years after construction, is first discovered in year six, coverage is only triggered for the $1 million of coverage under the year-six policy. The contractor's insurers for years one through five are off the hook. In contrast, if "physical injury" means injury-in-fact, as its plain meaning would suggest, each of the year-one through year-six policies are triggered, equating to $6 million in coverage. For a contractor, the difference between $1 million and $6 million in coverage can be the difference between economic survival and bankruptcy.

Florida Is a Hostile Place for an Implied Manifestation Rule

Oddly, all litmus tests indicate Florida soil is inhospitable to a manifestation rule. Long-standing, basic precepts of Florida insurance law and contract construction make this an unlikely place for a court to imply a restrictive condition in a policy.

Standing alone, a manifestation rule doesn't seem particularly harsh. The rule doesn't bristle with inherent inequities. Alone, it doesn't violate basic notions of fairness. Here lies the problem. Insurance policies are contracts, and the manifestation rule is contrary to the wording of the standard CGL contract.

The first widely accepted rule of contract construction, anathema to the manifestation rule, is that parties are free to contract and courts applying Florida law are not to disturb those agreements. (12) Construing the word "injury" as discovered injury changes a fundamental basis of the parties' bargain.

Second, Florida law gives effect to the plain language of insuring agreements, where possible, in lieu of strained definitions. (13) The word "injury" cannot mean "discovered injury" without violating the plain language rule.

Third, if a court could reasonably find an ambiguity in the word "injury," e.g., whether it means injury or discovered injury, such an ambiguity should be construed strictly against the insurer and liberally in favor of the insured. (14)

Fourth, if an ambiguity exists in a contract, it should also be construed strictly against the drafter of the contract. For insurance contracts, that is the insurer. (15)

Fifth, in case the aforesaid rules weren't sufficient to guide a court, an insurance contract, where possible, should be construed "in the broadest possible manner to effect coverage." (16)

In light of these basic rules of contract construction and insurance law, the opinions of some courts that Florida has adopted the manifestation rule are an enigma. Making those opinions still more enigmatic are three additional factors: the conscious exclusion by the insurance industry of manifestation language in the standard CGL policy, the CGL's nature as an "occurrence" policy, and the ease with which insurers could use an alternative explicit manifestation endorsement.

The Insurance Industry Rejected a Manifestation Requirement

Prior to 1966, the predecessor of the standard CGL policy covered "accidents," leading to confusion over whether only "sudden, unexpected, but identifiable events" were covered. (17) Courts were left in doubt whether "accident" also encompassed slowly progressing damages. (18)

In 1966, the insurance industry formed a task force that significantly remodeled the CGL policy. The word "accident," lest it be too restrictive, was substituted in the CGL policy with the word "occurrence." (19) "Occurrence" was further defined not only as an "accident," but also "injurious exposure over an extended period." (20) Thus, the insurance industry quite deliberately expanded coverage to include gradual damages, such as those caused by hidden water leaks.

With this extension of coverage to injuries resulting from long exposure, "the difficulty of determining time of injury was certain to be even greater under the CGL than it had been under predecessor policies." (21) The insurance industry knew this. (22) Yet, upon expanding the scope of the insuring agreement, the insurance industry purposefully chose not to add a discovery restriction to CGL coverage. (23) "The...