In ACE American Ins. Co. v. Exide Technologies, Inc. and The Wattles Co., No. 1:16-CV-1600-MHC (N.D. Ga. Sept. 20, 2017), the Federal District Court for the Northern District of Georgia applied a continuous trigger theory to an all risk property policy and declined to allocate damage, resulting in a single first-party property carrier being responsible for several years of damage. This case demonstrates that courts in some jurisdictions may require that policy language specifically state any intended coverage limitations — including those related to trigger of coverage and allocation of damages.
Over Many Years, Sulfuric Acid Mist Damaged Exide’s Warehouse’s Roof and Walls
Exide, a battery manufacturer, leased a warehouse from 1981 to 2009, in which it allowed sulfuric acid mist to be released. The mist condensed on the walls and ceiling, eventually damaging the roof, walls, and other components of the building. In March 2013, Wattles, Exide’s landlord, sued Exide for negligence and breach of its obligations under the lease. Exide sued for bankruptcy protection in 2015, but the parties subsequently entered a stipulation allowing the case to proceed to allow Wattles to recover a final judgment from Exide’s insurance coverage. The case proceeded and resulted in a judgment in excess of $2 million.
ACE Issued Exide an All Risks Property Damage Policy From 2006 to 2007
Exide had several insurance policies over the relevant time period, including an ACE 2006-2007 All Risks Property Damage and Business Interruption Policy. The policy insured against “all risks of direct physical loss of or damage occurring during the Term of Insurance” and defined “occurrence” as “all loss or damage arising out of the same event.” Although it had exclusions for corrosion, ordinary wear and tear, and gradual deterioration, it did not have an exclusion for pollution.
Two days before the conclusion of the trial between Exide and Wattles, ACE filed a declaratory judgment action seeking reformation on the basis that the policy was intended to include a pollution exclusion and a declaration of no coverage.
The Efficient Proximate Cause Doctrine Overrides Exclusions for Corrosion, Wear and Tear or Gradual Deterioration
The court concluded that ACE failed to provide “clear, unequivocal and decisive” evidence that the pollution exclusion was omitted due to mutual mistake of the parties. Accordingly, it then evaluated whether coverage for the claimed damage was barred by the “Ordinary Wear and Tear,” “Corrosion,” and “Gradual Deterioration” Exclusions. Wattles argued that the exclusions were inapplicable based on the efficient proximate cause doctrine. The court agreed.
The doctrine of efficient proximate cause provides that “where a risk specifically insured against sets other causes in motion in an unbroken sequence between the insured risk and the ultimate loss … the insured risk is regarded as the proximate cause of the entire loss, even if the last step in the chain of causation was an excepted risk.” (Quoting Burgess v. Allstate Ins. Co., 334 F. Supp.3d 1351, 1360 (N.D. Ga. 2003) (quoting TNT Speed & Sport Ctr., Inc. v. Am. States Ins. Co., 114 F.3d 731, 733 (8th Cir. 1997).)
ACE contended that any direct damage to the property was caused by excluded causes such as corrosion, wear and tear, and gradual deterioration rather than the release of sulfuric acid mist. The court disagreed, finding ACE’s argument circular. The court found that Exide’s contamination (or pollution) of the building was an insured risk, and held that the doctrine of efficient proximate cause rendered the exclusions inapplicable because the release of the sulfuric acid mist set in motion the process that resulted in the physical damage to the property.
A Continuous Trigger Applies Rather Than a Manifestation Trigger
The parties also disputed whether a continuous or manifestation trigger of coverage would apply. “With a continuous trigger, all liability policies in effect from the exposure to manifestation provide coverage and are responsible for the loss.” (Quoting Arrow Exterminators, Inc. v. Zurich Am. Ins. Co., 136 F. Supp. 2d 1340, 1346 (N.D. Ga. 2001).) In contrast, with a manifestation trigger, only the policies in effect “when damage occurs and is discovered; that is ‘manifests’ itself as readily obvious” are responsible for the loss. “’[A]bsent a specific provision in the insurance contract saying that an ‘occurrence’ requires discovery or manifestation’ a manifestation trigger does not apply.”
The ACE policy insured against “all risks of direct physical loss of or damage occurring during the Term of Insurance” and defined “occurrence” as “all loss or damage arising out of the same event.” Following the reasoning of Arrow Exterminators, which construed a general liability policy, the court held that because “the Policy does not state that an ‘occurrence’ requires manifestation or discovery, the continuous trigger rule applied.”
As ACE argued, the court’s holding is inconsistent with the holdings of many courts that have interpreted trigger of coverage under first-party policies, and found that the manifestation trigger rule applies, while continuous trigger applies to third-party liability policies. See e.g., John Q. Hammons Hotels, Inc. v. Factory Mut. Ins. Co., No. 01-3654 CV S SOW, 2003 WL 24216814, at *7 (W.D. Mo. Aug. 14, 2003), aff’d, 109 F. App’x 844 (8th Cir. 2004) (“[T]here are no first-party property insurance cases adopting the continuous-injury-trigger used in certain third-party liability insurance cases. In first-party property insurance claims, the manifestation trigger rule applies.”). The court, however, noted that ACE failed to cite Georgia law to support this proposition, so interpreted the policy based on its plain language. The court also noted that because the policy had a Tenants and Neighbors Liability provision, it is both a first-party property and third-party liability insurance policy.
ACE’s Liability Is Not Limited to Its Time on the Risk
Rather than having joint and several liability for all of the Exide judgment, ACE contended its liability should be limited to a pro rata portion based on its degree of the risk during the 2006-2007 period in which the policy was in effect. The court, however, found that “there is nothing in the ACE Policy that requires the pro rata allocation of a coverage judgment; as noted above, the policy coverage ‘all risks or direct physical loss of or damage occurring during the Term of Insurance,’ including ‘all loss or damage arising out of the same event.’” Further, ACE was unable to support its argument with Georgia law where the question of how a judgment should be allocated among various insurers remains unsettled. The Court therefore rejected a pro rata allocation, holding that “the plain language of the ACE Policy controls” and noting that, “If ACE had intended to limit its liability through a pro rata allocation of damages, it could have included this language in the ACE Policy.”
Lesson Learned: The Importance of Specific Language
Because the court held that ACE did not explicitly include language in its policy to limit its liability through a manifestation trigger or a pro rata allocation, it was responsible for a judgment in excess of $2 million. More critically, ACE failed to incorporate a pollution exclusion that it intended to include in the policy, which likely would have excluded the claim in its entirety. The court’s decision demonstrates how courts might find coverage an insurer otherwise intended to exclude or limit when a policy does not include language expressly limiting liability based on a manifestation trigger or a pro rata allocation of damages.