Insurance contract terms can push its coverage off a cliff

When it comes to construction contracts, the "big three" are scope, time and price. Or, in other words, what it is you are supposed to do, when you are required to do it, and the price you are going to charge. However, nearly as important are the insurance provisions of construction contracts. In Guastello v. AIG Specialty Insurance Company, 61 Cal.App.5th 97 (2021), a case involving the failure of a retaining wall that caused a massive $700,000 in damages, the 4th District Court of Appeal discussed the differences between "claims-made" versus "occurrence-based" insurance policies.

The Guastello Case

In 2003 and 2004, subcontractor C.W. Poss Inc. built various retaining walls at the Pointe Monarch housing development in Dana Point, California. Poss performed all of the related excavation, ground and grading work. In 2006, Thomas Guastello purchased a home in the development, and in January 2010, a retaining wall close to his property suffered a massive failure causing over $700,000 in damages.

In 2013, Guastello sued Poss and others claiming that, among other things, Poss negligently designed and installed the retaining wall. Poss tendered the claim to its commercial general liability insurance carrier, AIG Specialty Insurance Company, but AIG took the position that it had no duty to defend and indemnify Poss because the damage occurred in January 2010, outside of the policy's coverage period from February 1, 2003 to December 3, 2004.

In 2015, Guastello filed a request for default judgement against Poss. In support of his request, he attached the affidavit of a geotechnical engineer, Steven E. Strickler, who opined that the retaining wall had collapsed due to improper drainage, soil compaction, and substandard material provided by Poss. The trial court entered a default judgement against Poss in the amount of $701,133.17.

In 2017, Guastello filed a lawsuit against AIG alleging three causes of action for enforcement of the default judgment, breach of the covenant of good faith and fair dealing, and declaratory relief. In response, AIG filed a motion for summary judgment arguing that the damage caused by the failed retaining wall did not occur until after expiration of the policy's coverage period. The trial court agreed, finding that Guastello "did not experience property damage until well past the expiration of the policy."

Guastello appealed.

The Appeal

On appeal, Guastello argued that there were triable issues of material fact as to whether the property damage, an "occurrence" under the policy, took place during the coverage period.

The 4th District Court of Appeal, explaining the difference between "claims-made" and "occurrence-based" insurance policies, stated "A "claims-made" policy provides coverage only if the claim is made during the policy period. An "occurrence" policy provides coverage for damages that occur during the policy period, even if the claim is made after the policy has expired." "[I]t is well established that the time of the relevant 'occurrence' or 'accident' is not when the wrongful act was committed but when the complaining party was actually damaged." It is also a 'settled ruled ... when continuous or progressively deteriorating damage or injury first manifests itself' the insurer 'remains obligated to indemnify the insured for the entirety of the ensuing damage or injury."

Analyzing the commercial general liability insurance provided by AIG, the Court of Appeal noted:

1. The policy provided that AIG "will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies."

2. The policy further provided that it only applies to "property damage" if that damage is caused by an "occurrence" and the occurrence takes place during the policy's effective dates.

3. The policy further defined "occurrence as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions" and that where "continuing or repeated exposure" is at issue "property damage" shall be deemed one "occurrence" and shall be deemed to occur when such "'property damage' first commenced.'"

In other words, the commercial general liability insurance policy issued by AIG was an occurrence-based rather than claims-made insurance policy.

And, here, held the Court of Appeal, the declaration of Guastello's expert created a triable issue of material fact, that is, it was "Guastello's theory of the case that the latent damages to his property were present in 2004 (due to Poss' alleged negligence), the damages were continuous and progressive, and the damages were not manifested or revealed until the catastrophic collapse of the retaining wall in 2010" and that "this is a contested issue of material fact."

Conclusion

Guastello highlights the important difference between "claims-made" and "occurrence-based" insurance policies and in situations where there is "progressive" property damage, while a claim may not be covered under a claims-made policy if a claim is brought after the coverage period, a claim may be covered under an occurrence-based policy if property damage first manifested during the coverage period.