Opinion ID: 1258604
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Heading: The Manifestation and Exposure Theories

Text: The first case to discuss a manifestation theory in the first party property context was Snapp v. State Farm Fire & Cas. Co. (1962) 206 Cal. App.2d 827, 831-832 [24 Cal. Rptr. 44] ( Snapp ). The Snapp court was called on to resolve the insurer's contention that its homeowners policy did not cover a loss to the insured residence resulting from the movement of unstable fill. The homeowners policy was written by State Farm for a three-year term commencing in 1956 and consisted of the California Standard Form Fire Insurance Policy and an endorsement extending the coverage to insure against property loss. ( Id. at p. 829.) The loss materialized and thus became ascertainable during State Farm's policy period and continued to progress after the policy term expired. ( Snapp, supra, 206 Cal. App.3d at p. 831.) State Farm first argued that because the instability of the fill made the resulting earth movement inevitable, the loss was not a fortuitous event, and hence not covered under the policy. ( Id. at p. 830.) State Farm relied, in part, on sections 22 and 250, which codify the loss-in-progress rule and provide that an insurance contract indemnifies only against contingent or unknown events (§ 22), and any such contingent or unknown event may be insured against subject to the limitations of the Insurance Code (§ 250). [7] The court rejected this argument, however, and held that although the loss may have been inevitable, such inevitability did 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 the policy. ( Snapp, supra, 206 Cal. App.2d at p. 830, italics in original.) State Farm next asserted that even assuming it was responsible for the loss, its liability became terminable on the date its policy expired and therefore it was not liable for the continuing damage or loss after expiration. ( Snapp, supra, 206 Cal. App.2d at p. 831.) In rejecting State Farm's argument, the Snapp court noted that the question of whether the insurer was liable for the loss was a legal rather than factual issue. ( Ibid. ) The court held, [t]o permit the insurer to terminate its liability while the fortuitous peril which materialized during the term of the policy was still active would not be in accord either with applicable precedents or with the common understanding of the nature and purpose of insurance; it would allow an injustice to be worked upon the insured by defeating the very substance of the protection for which his premiums were paid. ( Ibid. ) Thus the court determined, [o]nce the contingent event insured against has occurred during the period covered, the liability of the carrier becomes contractual rather than potential only, and the sole issue remaining is the extent of its obligation, and it is immaterial that this may not be fully ascertained at the end of the policy period. ( Id. at p. 832.) The court concluded the date of materialization of a loss determines which carrier must provide indemnity for a loss suffered by the insured, and the carrier insuring the risk at the time the damage is first discovered is liable for the entire loss. (206 Cal. App.2d 827, 831-832.) Next, in Sabella v. Wisler (1963) 59 Cal.2d 21, 25 [27 Cal. Rptr. 689, 377 P.2d 889] ( Sabella ), the insurer claimed that damage to the insured's residence was not fortuitous and thus not covered because the damage occurred as a result of the operation of forces inherent in the underlying soil conditions (including uncompacted fill and defective workmanship in the installation of a sewer outflow that ultimately broke). Sabella rejected the insurer's contention that the loss was not fortuitous and hence not a `risk' properly the subject of insurance. ( Id. at p. 34.) Relying on Snapp, supra, 206 Cal. App.2d 827, Sabella held that even if it were inevitable that the damage would have occurred at some time during ownership of the house, the loss was covered because such loss was a contingency or risk at the time the parties entered into the policy. ( Sabella, supra, 59 Cal.2d 21 at p. 34; see also Bartholomew v. Ins. Co. of North America (D.R.I., 1980) 502 F. Supp. 246, affd. sub nom. Bartholomew v. Appalachian Ins. Co., supra, 655 F.2d 27 [insurer on risk at time defect is discovered is responsible for loss]; accord Appalachian Ins. Co. v. Liberty Mut. Ins. Co. (3d Cir.1982) 676 F.2d 56.) The next California case to address the problems arising in progressive property damage cases presented the issue of which carrier should indemnify insureds for a loss that occurred over two separate policy periods. In California Union Ins. Co., supra, 145 Cal. App.3d 462, a third party liability insurance case, the insureds installed a swimming pool during Landmark Insurance Company's policy period. The pipes to the pool (and possibly the pool itself) began to leak during Landmark's policy period and continued to leak during the term of the subsequent insurer, California Union. Repairs which the parties believed corrected the leakage were made during Landmark's policy term. Nonetheless, because the underlying cause of the damage had not been discovered, the repairs were ineffective and additional damage occurred after California Union insured the risk. Because the case involved liability policies, the Court of Appeal relied on three out-of-state liability cases that had apportioned payment between successive insurers when the damage or injury had continued during the separate policy periods. One case involved construction damage ( Gruol Construction Co. v. Insurance Co. of North America, supra, 11 Wn.App. 632 [524 P.2d 427]), and the others involved asbestos-related bodily injury ( Ins. Co. of North America v. Forty-Eight Insulations, supra, 633 F.2d 1212; Keene Corp. v. Ins. Co. of North America, supra, 667 F.2d 1034). The California Union Ins. Co. court determined that it was faced with a one occurrence case, involving continuous, progressive and deteriorating damage, notwithstanding the fact that new damage occurred to the pool after certain repairs had been made ( California Union Ins. Co., supra, 145 Cal. App.3d 462, 468-474), and held both insurers jointly and severally liable for the damages ( id. at p. 476). It reasoned that in a third party liability case involving continuous, progressive and deteriorating damage, the carrier insuring the risk when the damage first becomes apparent remains responsible for indemnifying the loss until the damage is complete, notwithstanding a policy provision which purports to limit coverage to losses occurring within the parameters of the policy term. ( Ibid. ; see Hook, Multiple Policy Period Losses and Liability Under First Party Policies (1985) Tort & Ins. L.J. 393, 395 [hereafter Hook].) In Home Ins. Co., supra, 205 Cal. App.3d 1388, the sole issue was which of two first party insurers is liable for the loss from continuing property damage manifested during successive policy periods. ( Id. at p. 1390.) [8] Home insured the Hotel del Coronado against property damage for the period September 1, 1980, through October 1, 1986. The concrete facade of portions of the structure first began to visibly manifest deterioration in the form of ... `spalling' (cracking and chipping) in or about December of 1980. ( Id. at p. 1391.) The spalling continued after it was first discovered by the insured and became progressively worse over time, extending through the expiration of Home's coverage and the inception of the Landmark policy. Although the damage was initially discovered in the first of the two policy periods, and continued through both policy periods, apparently it was impossible to determine the extent of damage occurring during each period, and thus the amount of coverage owed by each insurer could not be determined. In a subsequent declaratory relief action, the trial court determined that under the manifestation and loss-in-progress rules, Home was solely at risk. ( Id. at p. 1392.) The Court of Appeal affirmed, holding that the date of manifestation determines which carrier must provide indemnity for a loss suffered by its insured. ( Home Ins. Co., supra, 205 Cal. App.3d at p. 1392.) The court rejected Home's reliance on California Union Ins. Co., supra, 145 Cal. App.3d 462, for the proposition that the loss-in-progress rule is inapplicable to claims for continuing and progressive property damage. As the Home Ins. Co. court observed, California Union Ins. Co., supra, had been based on the exposure theory ... commonly used in asbestos bodily injury cases (see Ins. Co. of North America v. Forty-Eight Insulations (6th Cir.1980) 633 F.2d 1212.... Common sense tells us that property damage cases, even those involving continuous damage such as the one before us, differ from asbestos bodily injury cases where injury is immediate, cumulative and exacerbated by repeated exposure. We believe the rationale for apportioning liability in the asbestos cases is not a basis to deviate from settled principles of law. ( Home Ins. Co., supra, 205 Cal. App.3d at pp. 1394-1395.) Thus, the Home Ins. Co. court reasoned, California Union Ins. Co. should not be applied to the property damage case before the court. ( Id. at p. 1395.) Accordingly, the court held that as between two first-party insurers, one of which is on the risk on the date of first manifestation of property damage, and the other on the risk after the date of the first manifestation of damage, the first insurer must pay the entire claim. ( Id. at p. 1393.) Because California Union Ins. Co., supra, 145 Cal. App.3d 462, addressed a third party liability question, its analysis necessarily differed in many respects from the one we undertake here. As one court observed, in first party cases applying the rule finding coverage only on actual occurrence of injury, no damage or injury of any kind has taken place until manifestation; the cause instead lies dormant until it later causes appreciable injury. ( Ins. Co. of North America v. Forty-Eight Insulations, supra, 633 F.2d 1212, 1222, fn. 18.) By contrast, when damages slowly accumulate, the exposure theory should apply. ( Ibid. ) As Hook observes, The issue of continuous and progressive losses has not arisen frequently in the context of first party cases (perhaps because homeowner's policies were [originally drafted] to cover only sudden damage such as fire and windstorm, and not gradual damage such as settlement). (Hook, supra, Tort & Ins. L.J. at p. 398.) Other commentators have warned against confusing first and third party issues. Applying the terminology that has grown up around bodily injury [liability] insurance coverage cases in the context of coverage for property damage implies that the considerations are identical and obscures the real differences between the two types of problems. (Arness & Eliason, Insurance Coverage for Property Damage in Asbestos and Other Toxic Tort Cases (1986) 72 Va.L.Rev. 943, 973, fn. 108.) Accordingly, and because the issue of whether an allocation or exposure theory should apply in the third party property damage liability context is not before the court, we leave its RESOLUTION TO ANOTHER DATE. As stated by the Home Ins. Co. court, the manifestation rule in the first party context promotes certainty in the insurance industry and allows insurers to gauge premiums with greater accuracy. Presumably this should reduce costs for consumers because insurers will be able to set aside proper reserves for well-defined coverages and avoid increasing such reserves to cover potential financial losses caused by uncertainty in the definition of coverage. ( Home Ins. Co., supra, 205 Cal. App.3d at pp. 1395-1396.) Based on the reasoning set forth in Snapp, Sabella and Home Ins. Co., we conclude that in first party progressive property loss cases, when, as in the present case, the loss occurs over several policy periods and is not discovered until several years after it commences, the manifestation rule applies. As stated above, prior to the manifestation of damage, the loss is still a contingency under the policy and the insured has not suffered a compensable loss. ( Snapp, supra, 206 Cal. App.2d at pp. 831-832.) Once the loss is manifested, however, the risk is no longer contingent; rather, an event has occurred that triggers indemnity unless such event is specifically excluded under the policy terms. Correspondingly, in conformity with the loss-in-progress rule, insurers whose policy terms commence after initial manifestation of the loss are not responsible for any potential claim relating to the previously discovered and manifested loss. Under this rule, the reasonable expectations of the insureds are met because they look to their present carrier for coverage. At the same time, the underwriting practices of the insurer can be made predictable because the insurer is not liable for a loss once its contract with the insured ends unless the manifestation of loss occurred during its contract term. ( Id. at p. 832.) One final question must be addressed regarding the application of a manifestation rule of coverage in progressive loss cases: how does the rule relate to our rules of delayed discovery and equitable tolling announced above? We have previously defined the term inception of the loss as that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered. We conclude that the definition of manifestation of the loss must be the same. Under this standard, the date of manifestation and hence the date of inception of the loss will, in many cases, be an issue of fact for the jury to decide. When, however, the evidence supports only one conclusion, summary judgment may be appropriate. For example, when the undisputed evidence establishes that no damage had been discovered before a given date (i.e., no manifestation occurred), then insurers whose policies expired prior to that date could not be liable for the loss and would be entitled to summary judgment. The litigation can then be narrowed to include only the insurers whose policies were in effect when the damage became manifest.