James MARA, et al., Plaintiffs and Appellants, v. FIRE INSURANCE EXCHANGE, et al., Defendants and Respondents.
This case presents another insurance coverage question involving the concept of a “continuing” loss: progressive incremental damage to property which begins before it is discoverable, is “manifest” at some point in time, and continues thereafter. (See generally, e.g., Home Ins. Co. v. Landmark Ins. Co. (1988) 205 Cal.App.3d 1388, 253 Cal.Rptr. 277.) The principal issue before us is whether an insurance policy in effect during the period after the damage begins but before it is manifest provides coverage. We conclude that under the well-established principles which govern the interpretation of insurance contracts, the policy in this case can be reasonably interpreted to provide protection to the insureds for at least a portion of the loss they suffered.
FACTUAL AND PROCEDURAL BACKGROUND
In 1985, plaintiffs James and Ann Mara unsuccessfully applied for a home loan. The refusal was based on the lender's concern with cracks in the driveway, garage floor and walls of the residence. Later investigation disclosed the cracks were caused by settlement of the house due in part to the negligence of the builder in utilizing improperly compacted fill soils underneath the foundation.
Beginning in 1977 and continuing until 1986, the Maras were insured under homeowners policies issued by defendants Fire Insurance Exchange and Mid–Century Insurance Company (collectively referred to as the Farmers Group or Farmers 1 ). Through 1981 the Maras were insured under a Farmers “Sixth Edition” policy providing coverage for claims based on third party negligence. From 1982 until 1986, Farmers issued the Maras two successive policies (labeled “Second Edition” and “Third Edition”) each excluding coverage for third party negligence.
The Maras filed a claim which was denied by Farmers based on a lack of coverage. This bad faith action followed. The Maras contended that third party negligence was the “efficient proximate cause” of the settlement loss they suffered. (See Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 412, 257 Cal.Rptr. 292, 770 P.2d 704.) They claimed the “Sixth Edition” policy provides coverage for at least that portion of the continuing progressive loss to their residence which occurred between 1977 and 1982. In a court trial, the judge found that the damage to the Maras' home was first manifest in November 1985 at the time the loan refusal put them on notice that something was wrong. The court concluded, “[T]here was no coverage under any of the policies in effect at any point in time,” presumably based on its stated view that the loss must be manifest during the policy period in order for the policy to provide coverage.
The facts of this case frame rather precisely the question whether an insurance policy in effect after progressive damage begins but before it becomes reasonably apparent provides coverage when the loss is later discovered. The parties recognize this issue was expressly left open by our decision in Home v. Landmark. 2 (205 Cal.App.3d at p. 1392, 253 Cal.Rptr. 277.)
At the outset we note that the general issue with which we deal—sometimes referred to as a “trigger of coverage” question—has been addressed by some courts almost without reference to the language of the relevant insurance policies. These courts have been known to debate the wisdom of the “manifestation” theory, the “injury in fact” theory and variants of the “exposure” theory as though they supplanted or at least operated independently of the contracts of insurance. (See, e.g., Hancock Laboratories, Inc. v. Admiral Ins. (9th Cir.1986) 777 F.2d 520, 523–525; Keene Corp. v. Ins. Co. of North America (D.C.Cir.1981) 667 F.2d 1034, 1042–1046.) Although the contract language may be quoted in a portion of the opinion, the rule of decision—often correct as to result—sometimes appears to be based more on public policy notions of how insurance coverage should be written.3 We accept that our decision in Home v. Landmark could be subject to this stylistic criticism.
Other courts, correctly we think, have observed that the insurance contract must serve as the initial focal point of any coverage inquiry. (See, e.g., Harbor Ins. Co. v. Central National Ins. Co. (1985) 165 Cal.App.3d 1029, 1034–1035, 211 Cal.Rptr. 902; Travelers Ins. Co. v. National Union Fire Ins. Co. (1989) 207 Cal.App.3d 1390, 1395, 1396–1397, 255 Cal.Rptr. 727; Dow Chemical Co. v. Associated Indem. Corp. (E.D.Mich.1989) 724 F.Supp. 474, 479; see also Insurance Co. of North America v. Sam Harris Constr. Co. (1978) 22 Cal.3d 409, 412, 149 Cal.Rptr. 292, 583 P.2d 1335.) Assuming statutory and decisional law does not mandate the inclusion of certain provisions or prohibit the parties from contracting to insure against a particular risk, “global” theories regarding coverage in continuous loss cases are of questionable value because the proper resolution of each case is tied to the individual policy language. (See Garriott Crop Dusting Co. v. Superior Court (1990) 221 Cal.App.3d 783, 270 Cal.Rptr. 678.)
We therefore begin by referring to the relevant portions of the policy. (See Stein v. International Ins. Co. (1990) 217 Cal.App.3d 609, 613, 266 Cal.Rptr. 72.) The Maras' Sixth Edition policy is divided into two “Divisions.” Division I extends coverage for real and personal property loss; Division II is the comprehensive personal liability section. In a section entitled “General Conditions Applicable to the Entire Policy,” the policy contains a paragraph labeled “Policy Term” which provides: “This policy applies only to loss under Division I or occurrences or accidents under Division II which happen during the policy term.” The question, then, is whether a loss for which the Maras seek reimbursement “happen[ed]” between 1977 and 1982, the policy period for the Sixth Edition policy.
Under well-established principles, an insurance policy will be interpreted consistent with the reasonable expectations of the insured. (E.g., Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 267, 54 Cal.Rptr. 104, 419 P.2d 168.) Any ambiguous language will be construed in favor of the insured and against the insurer. (E.g., Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 437, 296 P.2d 801.) Here, reminiscent of the metaphysical debate concerning the falling tree in an unoccupied forest, Farmers argues that a “loss” within the meaning of the policy does not “happen” until it becomes apparent. In effect, Farmers contends that the concept of “loss” necessarily implies manifestation. As in the case of the argument that the falling tree makes no sound until someone is there to hear it, Farmers' position is theoretically defensible. The argument, however, ignores the fact that an insured's reading of a homeowners policy is not normally characterized by metaphysical contemplation. As we have noted, it is the reasonable expectations of the insured which govern.
No one can dispute that settlement was “happening” during the Sixth Edition policy period. The Maras observed minor cracks in the driveway and garage floor as early as 1976 when they purchased the house but did not suspect what the cracks portended. A reasonable person could conclude the Maras had suffered and were suffering losses which had not yet become apparent. (See, e.g., American Home Products Corp. v. Liberty Mutual Ins. (2d Cir.1984) 748 F.2d 760, 764.) Had Farmers wished to exclude coverage for unmanifested continuing loss, it would have been a simple matter to provide that in the case of progressive damage, the damage must be reasonably discoverable during the policy period for coverage to apply. Under the circumstances here, the policy language can be reasonably read to provide the Maras with coverage for at least that portion of the continuing damage which occurred between 1977 and 1982. Consistent with the principles which govern the interpretation of insurance contracts, that reading must control.
Farmers also contends that even if the Sixth Edition policy can be read to provide coverage for some portion of the Maras' loss, recovery is barred because the Maras failed to comply with the one year statute of limitations provided for in the policy and authorized by Insurance Code section 2071. The portion of the policy relied on by Farmers provides: “Suit. No suit or action on this policy for the recovery of any claim shall be sustainable in any court ․ unless commenced within twelve months next after inception of the loss.” Farmers concedes, however, that this provision “acts to bar any claim made more than twelve months after the damage becomes apparent.” (Emphasis added; see Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal.App.3d 565, 572, 251 Cal.Rptr. 319.) The Maras do not contend and our conclusions are not based on an argument that the loss became apparent before November 1985. As we have explained, the problem here is that the Sixth Edition policy does not limit coverage to a loss which manifests itself during the policy period; i.e., losses can “happen” before they are reasonably discoverable. Because the Maras submitted a claim to Farmers in March 1986—less than five months after the loss became apparent—there is no question on these facts that the terms of the policy were complied with.4
Finally, Farmers suggests that the judgment in its favor may be sustained on the alternative ground that builder negligence, although a concurrent cause of the Maras' loss, was not the “efficient proximate cause” within the meaning of Garvey v. State Farm Fire & Casualty Co., supra, 48 Cal.3d 395, 257 Cal.Rptr. 292, 770 P.2d 704. Our reading of the trial court's ruling makes it clear the court did not reach the factual issue of causation. Its conclusion on the coverage question was based on its interpretation of the written policy, a legal determination we have concluded was in error. (See, e.g., Harbor Ins. Co. v. Central National Ins. Co., supra, 165 Cal.App.3d at p. 1035, fn. 4, 211 Cal.Rptr. 902.) Following remand, the trial court should take evidence on and determine the factual question of “efficient proximate cause.” 5
1. Farmers Group, Inc. was originally named as a defendant in this action but was dismissed in the trial court pursuant to stipulation. Because each of the insurance policies issued to the Maras is identified as a ‘Farmers Group’ policy, we continue to refer to defendants by this collective designation.
2. In Home, we dealt with successive policies issued by different insurers, one of which covered an entirely post-manifestation period. Here, of course, we have successive but different policies issued by the same insurer, one of which covered an entirely pre-manifestation period.The two insurers in Home paid the insured's claim and sued each other in a declaratory relief action to determine proper apportionment. Emphasizing it was “not a case for all purposes” (205 Cal.App.3d at p. 1394, fn. 3, 253 Cal.Rptr. 277), we explained that the facts “d[id] not allow us to consider the interesting question whether it is possible for the insured to have a covered loss when the loss is not reasonably observable by the insured during the period of the policy under which the insured seeks payment.” (Id. at p. 1392, 253 Cal.Rptr. 277.)
3. The inclination to do so is understandable in view of the recognized fact that consumer insurance policies are classic contracts of adhesion. (See generally Ponder v. Blue Cross of Southern California (1983) 145 Cal.App.3d 709, 719–720, 193 Cal.Rptr. 632.) The successive versions of the policy in this case give testimony to the fact that exclusionary language is simply rewritten until judicial interpretation of that language is consistent with the intent of the insurer.
4. A different question might be presented had the Farmers' policy contained a provision limiting coverage to losses for which the insured submitted claims within one year of the termination of the policy period.
5. The parties neither briefed nor argued here or in the trial court the issue of proper apportionment of coverage responsibility. (See, e.g., Ins. Co. North America v. Forty–Eight Insulations (6th Cir.1980) 633 F.2d 1212, 1224–1226; Keene Corp. v. Ins. Co. of North America, supra, 667 F.2d at pp. 1047–1050.) That issue should be among the questions considered on remand.
WIENER, Associate Justice.
KREMER, P.J., and NARES, J., concur.