GREAT SOUTHWEST FIRE INSURANCE CO v. WATT INDUSTRIES INC

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Court of Appeal, Fourth District, Division 1, California.

GREAT SOUTHWEST FIRE INSURANCE CO., Plaintiff and Respondent, v. WATT INDUSTRIES, INC., et al., Defendants and Appellants.

No. D009371.

Decided: April 22, 1991

Lorber, Grady, Farley & Volk, Bruce W. Lorber and David C. Weber, San Diego, for defendants and appellants. Douglas R. McCorquodale, San Diego, for plaintiff and respondent.

Defendant Watt Industries, Inc. appeals from a summary judgment entered in favor of plaintiff Great Southwest Fire Insurance Company in a declaratory relief action to determine Great Southwest's responsibilities under a liability policy. The trial court ruled in favor of Great Southwest relying primarily on Home Ins. Co. v. Landmark Ins. Co. (1988) 205 Cal.App.3d 1388, 253 Cal.Rptr. 277. Since that time, the Supreme Court decided Prudential–LMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230, approving Home v. Landmark but suggesting a different rule might be applicable in third-party liability cases.

The facts of this case require us to confront the issue nominally left open by Prudential–LMI. We believe that the different policy considerations in third-party cases identified by the Supreme Court counsel against a blanket rule in progressive property damage situations that coverage is limited to the insurer which insured the defendant at the time the damage was first manifest. These policy considerations allow for a broader interpretation of the relevant liability insurance contracts. In this case, we conclude that a liability policy issued by Great Southwest after injury to the subject property was first manifest but before the insured was on notice of potential liability provides coverage. Accordingly, we reverse.

FACTUAL AND PROCEDURAL BACKGROUND

This declaratory relief action grew out of an underlying action, San Vicente County Villas IV Association et al. v. Watt Industries, Inc. et al. (Super.Ct. San Diego County, 1983, No. 503831). In that action, the homeowners' association for a condominium development (the Association) sued Watt, the developer, and others for construction defects. One of Watt's subcontractors was Richcom Development, Inc. which performed rough framing carpentry work and installed siding.

The development was substantially completed in 1978. By 1982, water intrusion problems in several of the units caused the Association to hire an architect to investigate the situation. In his report issued September 10, 1982, the architect found widespread defects in the framing of the roofs and windows and improper installation of the siding, all of which was work performed by Richcom. Watt and the Association received copies of this report but there is no evidence Richcom did. Following the report and continuing into 1983, more unit owners reported new damage resulting from the defects identified in the architect's report.

Between 1977 and 1980, Richcom was insured under a $100,000 general liability policy issued by Fireman's Fund Insurance Company which included coverage for completed operations. In December 1982, Richcom purchased a $300,000 liability policy from Great Southwest. This policy also included completed operations coverage.1 When that policy lapsed in December 1983, Richcom obtained similar coverage through Truck Insurance Exchange which was in effect until November 1984. So far as the record discloses, Richcom was uninsured for completed operations between October 1980 and December 1982.

Although Great Southwest nominally accepted Richcom's defense under a reservation of rights, it ultimately refused to participate in settlement negotiations or other aspects of Richcom's defense. Watt and Richcom entered into a stipulated judgment in the amount of $825,000. Fireman's Fund and Truck each contributed to a partial satisfaction of this judgment. In exchange for a covenant-not-to-execute, Richcom assigned its rights against Great Southwest to Watt. Great Southwest then filed this declaratory relief action against Richcom and Watt asserting a lack of coverage. Watt cross-complained for bad faith.

Great Southwest moved for summary judgment, arguing that the damages alleged were not the result of a contingent or unknown event and were thus not insurable. Watt opposed the motion, claiming Insurance Code sections 22 and 2502 allow a past event to be insured against, and that since both Richcom and Great Southwest were unaware of the damage to the development at the time the policy was issued, the damage was an insurable event.

The court did not directly address Great Southwest's contention. Instead, relying on the then-recent decision in Home Ins. Co. v. Landmark Ins. Co., supra, 205 Cal.App.3d 1388, 253 Cal.Rptr. 277, the court granted the motion because Great Southwest was not yet on the risk or “on the hook” at the time the damage to the property became known or manifested itself.3

DISCUSSION

The issues in this case concern the availability and extent of liability insurance coverage for progressive damage which is first manifest before the policy period begins but which continues during the policy period. The issues arise because the unique context of third-party liability insurance creates the likelihood that damage will be manifest (i.e., observable to the injured party) long before it is known to the insured or the insurer.

1. Insurance Code sections 22 and 250 do not preclude contracting for liability insurance to cover losses known to the victim but not the insured at the time the insurance is purchased.

We quickly dispose of Great Southwest's contention raised in the trial court and reasserted on appeal that Insurance Code sections 22 and 250 somehow precluded Richcom from obtaining liability insurance to cover damage which had already manifest itself. The argument might have merit if Richcom was aware of the problems at San Vicente Villas at the time the policy was purchased. Here, however, Richcom's first notice of its potential liability was when Watt filed its cross-complaint against Richcom in 1984.

Sections 22 and 250 both allow a party to insure against a “contingent or unknown event.” (Emphasis added.) Considerable precedent supports the notion that a loss which has already occurred may be insured against as long as it is unknown to the insured at the time the insurance contract is entered into. As the United States Supreme Court has explained, “No legal obstacle prevents parties, if they so desire, from entering into contracts of insurance to protect against loss that may possibly have already occurred. Marine insurance and antedated fire insurance policies frequently afford protection against risks which, unknown to the parties, have already attached.” (United States v. Patryas (1938) 303 U.S. 341, 345, 58 S.Ct. 551, 554, 82 L.Ed. 883; see also Pendergast v. Globe & Rutgers Fire Ins. Co. (1927) 246 N.Y. 396, 159 N.E. 183, 184; see also 12A Appleman, Insurance Law and Practice (1981) § 7171.)

Similarly in Compagnie des Bauxites v. Insurance Co. of N. Am. (3d Cir.1983) 724 F.2d 369, the Third Circuit Court of Appeals referred to the definition of “fortuitous event” found in section 291, comment a of the Restatement of Contracts (1932) to explain the concept that insurance can only protect against a contingent or unknown event.

“A fortuitous event ․ is an event which so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within the control of third persons; it may even be a past event, such as the loss of a vessel, provided that the fact is unknown to the parties.” (Id. at p. 372, emphasis in original .)

(Accord Insurance Co. of North America v. U.S. Gypsum Co. (4th Cir.1989) 870 F.2d 148, 151; Pillsbury Co. v. Underwriters at Lloyd's, London (D.Minn.1989) 705 F.Supp. 1396, 1399; see also Kilroy Industries v. United Pacific Ins. Co. (C.D.Cal.1985) 608 F.Supp. 847, opining that California courts will adopt the Restatement formulation as applied in Compagnie des Bauxites.)4 Clearly, then, the risk of construction defects at the San Vicente Villas development was an insurable risk for Richcom in December 1982 when it purchased the Great Southwest policy because Richcom was unaware of any defects in the project for which it might be held liable.5

2. Interpreted consistent with the reasonable expectations of the insured, the Great Southwest policy provides coverage for that portion of the progressive damage which occurred during the policy period.

The remaining issue is simply one of interpreting the insurance contract. Did these parties agree to provide coverage for this loss? More particularly, does the insurance policy limit Great Southwest's liability to property damage which was first manifest during the policy period? The policy provides that Great Southwest will indemnify Richcom if Richcom is determined to be liable for “property damage” arising from its completed operations. “Property damage” is then defined to include “physical injury to or destruction of tangible property which occurs during the policy period․” (See ante, fn. 1.)

The facts here establish that the property damage for which Richcom is allegedly liable was first manifest three months before the policy became effective. If the policy had defined “property damage” to include “physical injury to ․ tangible property which is first manifest during the policy period,” it would be easy to conclude there is no coverage. Arguably we might employ similar analysis if the policy limited coverage to property damage caused by an “occurrence” during the policy period (see Remmer v.. Glens Falls Indem. Co. (1956) 140 Cal.App.2d 84, 85–86, 295 P.2d 19; City of Laguna Beach v. Mead Reinsurance Corp. (1990) 226 Cal.App.3d 822, 826, 276 Cal.Rptr. 438)6 because the occurrence causing continuous damage is deemed to be the first manifestation of such damage. (Remmer, supra, 140 Cal.App.2d at p. 88, 295 P.2d 19.) Here, however, the policy only limits coverage to damage which “occurs” during the policy period. Because the property damage was of an ongoing and continuous nature, one could reasonably conclude that damage continued to “occur” after it was first manifest and thus during the policy period. 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.) Richcom could reasonably read this policy to provide coverage for that portion of the ongoing damage to the San Vicente Villas development which occurred during the policy period.7

Other language in the policy leads to a similar conclusion. The policy contains a two-pronged definition of property damage. (See ante, fn. 1.) The first prong, at issue here, applies to cases of “physical injury to or destruction of tangible property․” The second prong is only activated where there is “loss of use of tangible property which has not been physically injured or destroyed․” Recovery under the second prong is further limited to situations in which the loss of use “is caused by an occurrence during the policy period.” Obviously if the first prong was similarly limited, there would have been no need to include a special limitation applicable only to the second prong.

Insurance industry commentators support the view that liability coverage is not limited to a single policy in force at the time of manifestation of damage. The Comprehensive General Liability (GCL) policy—the standard form used by the insurance industry before 19868 and at issue in this case—was extensively revised by the National Bureau of Casualty Underwriters in 1966.9 These revisions changed the standard policy from an “accident”-based to an “occurrence”-based format. Contemporaneous with the introduction of the new form, several insurance industry commentators addressed the question of coverage under the GCL for progressive personal injury or property damage resulting from exposure over an extended period to a degenerative substance or condition. These authorities observed that the critical inquiry for coverage purposes is when the damage “occurs.” As Norman Nachtman of the National Bureau of Casualty Underwriters (the drafters of the GCL) explained, this inquiry “serves to identify the time of loss for application of coverage in these cases, viz., the injury must take place during the policy period. This means that in exposure-type cases, cases involving cumulative type injuries, more than one policy contract may come into play in determining coverage and its extent under each policy.” (Nachtman, The New Policy Provisions for General Liability Insurance (1965) 18 The CPCU Annals 196, 200, emphasis added.) A monograph prepared a year later by the Defense Research Institute similarly concluded:

“Although most injuries occur simultaneously with the exposure, there are many instances in which injuries take place over an extended period before they become evident․ [¶] In some exposure cases involving cumulative injuries, it is possible that more than one policy will afford coverage, each to apply to bodily injury or property damage occurring during the policy period.” (Obrist, New Comprehensive General Liability Insurance Policy (1966) at p. 6, emphasis added.)

If the drafters of the CGL policy and those insurance authorities advising the industry regarding its interpretation contemplated that successive policies could provide coverage for progressive continuing damage, it is impossible to brand as “unreasonable” the identical interpretive argument made by an insured in whose favor the contract is to be construed.

Moreover, recent discussions of the issue reach similar conclusions. In a comprehensive review of coverage issues related to property damage caused by asbestos, one set of commentators, while eschewing a blanket rule, recognizes there is a category of property damage cases “analogous to the progressive bodily injury situation” in which a continuous trigger multi-policy approach is warranted. (Arness & Eliason, op. cit. supra, 72 Va.L.Rev. at p. 973.) In such cases, “new property may be affected with each passing day, while the damage to already affected property, and the associated costs of remedy, may increase steadily as well.” (Ibid.) Such is clearly the case here, where new damage in new locations continued to be manifested long after the first damage was discovered.

Great Southwest responds that such reasoning is inconsistent with the Supreme Court's decision in Prudential–LMI Com. Insurance v. Superior Court, supra, 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230. There, an apartment building owned by the insured sustained property damage of a continuing progressive nature. The insured sued four successive companies which insured the building during a 15–year period. One of them, Prudential, provided coverage for a three-year period ending five years before the damage was first manifest. Deciding in favor of Prudential and against the insured, the Supreme Court held that only the “carrier insuring the property at the time of manifestation of property damage is ․ responsible for indemnification․” (Id. at pp. 678–679, 274 Cal.Rptr. 387, 798 P.2d 1230.) Because it was not “on the risk” at the time of manifestation, Great Southwest contends its policy does not provide coverage for Richcom's liability.

Great Southwest's argument ignores some very pointed suggestions in Prudential that a different rule applies where third-party liability insurance is concerned.10 At the outset of its opinion the Supreme Court was careful to limit its decision “to the first party progressive loss cases in the context of a homeowner's insurance policy,” noting “there are substantial analytical differences between first party property policies and third party liability policies.” (51 Cal.3d at p. 679, 274 Cal.Rptr. 387, 798 P .2d 1230.) On no less than three later occasions, the court emphasized that its holding did not extend to third-party cases. (Id. at pp. 694, 697, fn. 8 and 698, 274 Cal.Rptr. 387, 798 P.2d 1230.)

Had the Prudential–LMI decision been based on particular policy language, we might arguably draw some inferences due to the similarity or differences in the Great Southwest policy. The Supreme Court's opinion, however, does not quote and appears not to find critical the specific policy language regarding the scope of coverage, (Compare Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 407, 257 Cal.Rptr. 292, 770 P.2d 704.) Instead the decision reflects our high court's broadbased judgment that in first-party cases, coverage should be limited to the insurer “on the risk” at the time the property damage was first manifest.

As the facts of this case make clear, however, quite different considerations underlie third-party liability insurance. Addressing the analogous issue of post-manifestation coverage in a first-party context, the court in Prudential–LMI explained that as a general proposition, “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.” (51 Cal.3d at p. 699, 274 Cal.Rptr. 387, 798 P.2d 1230.) As we have explained, however, the loss-in-progress rule assumes the insured knows of the manifested damage. (See ante, pp. 251–252.) Where liability insurance is concerned, the insured will rarely learn of the damage at the time of manifestation. As long as the insured has no knowledge of a potential claim at the time the policy is purchased, no argument can be made that the risk cannot be insured against.

Moreover, other policy factors are implicated as well. In first-party insurance contracts, the insurance is purchased solely for the benefit of the insured. If the insured fails to purchase insurance in a sufficient amount during a particular policy period, the insured is the one to suffer. In the case of liability insurance, however, the principal beneficiary of the policy is often the innocent third-party victim who had no control over the terms or amount of the insurance purchased and would go uncompensated in the absence of coverage.

By its terms, Prudential–LMI does not create an overreaching “manifestation” rule applicable to third-party liability policies and displacing the more general rule that in disputes between insurer and insured, the insurance policy must be interpreted in light of the insured's reasonable expectations of coverage. As between the liability insurer and insured, assuming the CGL policy language present in this case, each insurer is liable for that portion of the damage which “occurs” during the policy period. In addition, the rule articulated in Snapp v. State Farm Fire & Cas. Co. (1962) 206 Cal.App.2d 827, 24 Cal.Rptr. 44 requires that for policy reasons, the insurer providing coverage when the progressive damage is first manifest is liable for all continuing damage even if it “occurs” after the policy period expires. (See also California Union Ins. Co. v. Landmark Ins. Co. (1983) 145 Cal.App.3d 462, 476, 193 Cal.Rptr. 461.) In successive post-manifestation policy periods then, there is the potential for overlapping joint coverage obligations by both the manifestation carrier and the applicable post-manifestation carrier.

DISPOSITION

The summary judgment is reversed. The parties are to bear their respective costs for this appeal.

The majority concludes the parties to the insurance policy at issue in this case intended coverage for a loss manifested three months before the purchase of the policy. I disagree. I do not believe this policy provides liability coverage for property damage that was manifested and discoverable before the policy period began. By analogy to the rule that determines coverage for progressive property damage in the first party property insurance context (Prudential–LMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230), I would hold that manifestation of damage is the benchmark by which coverage is measured in the third party context as well.

The pertinent facts here, it will be recalled, are that the existence and cause of property damage at the site (water intrusion) were discovered by the contractor Watt and the property owner (homeowners' association) some three months before the insured, Richcom, bought its Great Southwest policy. At the time of discovery, it happened that Richcom was uninsured for liability for completed operations. Richcom was no longer on the site as a subcontractor or owner and apparently was not told of the existence of the damage it had allegedly caused until some later time. At a still later time, Richcom assigned any rights that it had against its insurer, Great Southwest, to Watt, thus giving this action the form of an insured-insurer dispute where the rights of an innocent injured third party claimant (e.g., the homeowners' association) are not directly involved. Accordingly, this matter should be treated as a simple coverage dispute that is subject to the rules applicable to any third party liability insurance policy.

In Fireman's Fund Ins. Co. v. Aetna Casualty & Surety Co. (1990) 223 Cal.App.3d 1621, 273 Cal.Rptr. 431, this court recently noted that although there are important distinctions between property damage insurance and liability insurance (such as causation analysis in third party liability insurance), Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 257 Cal.Rptr. 292, 770 P .2d 704 does not hold or suggest “that all legal principles developed in first party cases are inapplicable in third party cases .” (Fireman's Fund, supra, 223 Cal.App.3d at p. 1628, 273 Cal.Rptr. 431, emphasis in original.) Instead, the distinction between the two types of insurance should make a difference only when there is particular legal significance to that distinction in the particular context in which they are being analyzed. (Id. at pp. 1626–1627, 273 Cal.Rptr. 431.) My study of these issues does not suggest any reason property damage should be treated differently where different types of policies are concerned, as I will explain.

The majority has found in the Supreme Court's opinion in Prudential–LMI Com. Insurance v. Superior Court, supra, 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230, several “pointed suggestions” (maj.opn., p. 254) that a different rule than manifestation applies in third party liability cases.1 However, what the Supreme Court actually said there was:

“[W]e emphasize that our holding is limited in application to the first party progressive property loss cases in the context of a homeowner's insurance policy. As we recognized in Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 405–408, [257 Cal.Rptr. 292, 770 P.2d 704], there are substantial analytical differences between first party property policies and third party liability policies. (Ibid.) Accordingly, we intimate no view as to the application of our decision in either the third party liability or commercial liability (including toxic tort) context.” (Prudential–LMI, supra, 51 Cal.3d at p. 679, 274 Cal.Rptr. 387, 798 P.2d 1230.)

Later in its opinion, the court in Prudential–LMI, supra, 51 Cal.3d at p. 698, 274 Cal.Rptr. 387, 798 P.2d 1230, reiterated: “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.” (Ibid.)

Taking the Supreme Court at its word, the issue of the applicability of a manifestation rule to liability policies covering property damage is an entirely open one. Nevertheless, legal thinking in this area is directed to “keep in mind the important distinction that must be made in a causation analysis between first party property damage cases and third party liability cases [citing Garvey, supra, 48 Cal.3d 395 at p. 406, 257 Cal.Rptr. 292, 770 P .2d 704].” (Prudential–LMI, supra, 51 Cal.3d at p. 694, 274 Cal.Rptr. 387, 798 P.2d 1230.) We are not concerned with causation here. Therefore, consistent with the analysis of Fireman's Fund Ins. Co. v. Aetna Casualty & Surety Co., supra, 223 Cal.App.3d 1621, 1628, 273 Cal.Rptr. 431, I assume that since third party coverage disputes have many similar features to first party coverage disputes, fairness and consistency point toward similar rules in both contexts, unless some strong policy reason indicates otherwise.

The majority has cited several policy reasons to justify differential treatment of these two types of insurance policies. (Maj.opn, pp. 254–255, ante.) I do not find its reasoning persuasive. First, application of the loss-in-progress rule2 requires a determination of whether Insurance Code sections 22 and 250 (see text at maj. opn., p. 251, fn. 2, ante ) permit an objective test to be applied in determining whether an event is “contingent or unknown” so as to be insurable.3 Without addressing that nebulous issue here, it is enough to observe this standard form policy bears no indication on its face the parties intended to contract for coverage for a preexisting but unknown loss, such as is standard practice in the rather specialized field of maritime insurance and antedated fire policies. (See United States v. Patryas (1938) 303 U.S. 341, 345, 58 S.Ct. 551, 553, 82 L.Ed. 883, cited by the maj. at p. 252, ante.)4 Instead, standard liability coverage for “property damage” which “occurs during the policy period” was bought.

Secondly, because Watt is pursuing this action as an assignee of the original insured, Richcom, the innocent injured third party claimant (the homeowners' association) is not an active presence in this lawsuit. We should not be too solicitous to protect an absent party in deciding the case before us.

Next, while providing overlapping coverage is highly desirous from the insured's point of view, that goal can only be accomplished if the respective policy provisions permit such a disposition of the facts. To decide if that result is proper here, analysis of these liability policy provisions should proceed according to the well-accepted test for determining the scope of coverage with regard to “occurrences,” as stated in Remmer v. Glens Falls Indem. Co. (1956) 140 Cal.App.2d 84, 88, 295 P.2d 19:

“The general rule is that the time of the occurrence of an accident within the meaning of an indemnity policy is not the time the wrongful act was committed, but the time when the complaining party was actually damaged. [Citations.]”

A commentator has suggested a useful approach for determining property damage coverage questions in this third party context:

“The key coverage question when damage to property is alleged under an occurrence policy thus comes down to the definition of property damage itself: for there to be coverage there must be an occurrence, and for there to be an occurrence there must be property damage as defined in the policy.” (Arness & Eliason, Insurance Coverage for “Property Damage” in Asbestos and other Toxic Tort Cases (1986) Va.L.Rev. 943, 951, emphasis added; hereafter Arness & Eliason.)

Thus, we must turn to the policy terms. This was not a claims-made type of liability policy, but occurrence-based. (See maj. opn., p. 250, fn. 1, ante, for policy definitions.) Most importantly, the policy provides for liability coverage of completed operations for property damage “caused by an occurrence,” such as “physical injury to or destruction of tangible property which occurs during the policy period․” (Emphasis added.) Loss of use of property is covered “provided such loss of use is caused by an occurrence during the policy period.” (Maj.opn., pp. 250–251, fn.1, ante.) An “occurrence” is then defined in the standard sense as an “accident” which could include continuous or repeated exposure to conditions of an ongoing nature.

The majority, in error I believe, omits discussion of the basic provision in the policy granting coverage for property damage “caused by an occurrence․” (Maj. opn., pp. 250–251, fn. 1, ante; see discussion at pp. 252–253.) It has also inexplicably declined to interpret the policy term “occurs” in light of the defined term “occurrence.” (See maj. opn., p. 253, ante, at fn. 6.)5 In my view, one cannot usefully discuss when a loss “occurs” for coverage purposes without acknowledging some beginning and potential ending point of the loss. Common sense tells us that even an ongoing process has to start somewhere, and there must be legal consequences to that determination. Here, the loss started and was discoverable by the homeowners' association (the “complaining party” or claimant here) under the Remmer, supra, 140 Cal.App.2d 84, 88, 295 P.2d 19 test some three months before Great Southwest's policy period began. It was then a manifested loss.

Following this basic approach, and adopting the analysis of the majority opinion (asking what the reasonable expectations of the insured were under these circumstances), the question should be framed: “Would a reasonable insured expect liability coverage under these policy terms for property damage that was discoverable before the policy period began?” Any reasonable expectations must be subject to the principle that all insurance requires some degree of risk transfer. (See California Physicians' Service v. Garrison (1946) 28 Cal.2d 790, 804, 172 P.2d 4.) “The concept of insurance is that the parties, in effect, wager against the occurrence or non-occurrence of a specified event; the carrier insures against a risk, not a certainty. Thus a homeowner could not insure his house against flood damage when the rising waters were already in his front yard. [Citation.]” (Bartholomew v. Appalachian Ins. Co. (1st Cir.1981) 655 F.2d 27, 29 (a liability insurance case).) An insurance treatise author observes: “Generally, a policy of liability insurance does not cover an accident occurring before its issuance, even though the loss occurs in the interval between the application for the policy and its issuance.” (6B Appleman, Insurance Law and Practice (rev. ed.1979) § 4265, at p. 97.) In our case, insurance was purchased when the loss was ascertainable and was no longer contingent.

My application of the property damage test suggested above (see Arness & Eliason at p. 951), leads me to conclude there was simply no “occurrence” of “property damage” as defined by this policy, within the term of the policy. Under the rule set forth in Remmer v. Glens Fall Indem. Co., supra, 140 Cal.App.2d 84, 88, 295 P.2d 19, an “occurrence” happens when the complaining party was actually damaged. The homeowners' association here certainly had sustained damage by the time the architect's report identified Richcom as the culprit, some three months before Richcom bought this policy. Later claims on Richcom could not extend this ascertainable date of “occurrence,” since this was not a “claims-made” type of policy.

In conclusion, I believe the majority cannot have it both ways by broadly interpreting the policy term “occurs” to cover already manifested damage, while also relying on the rule announced in Snapp v. State Farm Fire & Cas. Co. (1962) 206 Cal.App.2d 827, 24 Cal.Rptr. 44 that a carrier on the risk at manifestation must continue to pay on a contractual theory for damage postdating the expiration date of its policy. Rational policy interpretation rules do not go so far. It would not have been reasonable for this insured to expect liability coverage for property damage which had already been manifested, and thus constituted an “occurrence” within the meaning of the policy, before the policy ever went into effect. Thus, even though this property damage was of an ongoing nature and continually “occurred” both before and after the policy period began, its inception or manifestation date should control. I dissent.

FOOTNOTES

1.  At oral argument, the parties pointed to the “completed operations” portion of the policy as the operative provision: “The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of ․ B. property damage ․ to which this insurance applies caused by an occurrence, if the ․ property damage is included within the completed operations hazard․”Several of the relevant terms are then defined in the “Definitions” section of the policy. “Completed operations hazard” includes “bodily injury and property damage arising out of operations or reliance upon a representation or warranty made at any time with respect thereto, ․” with numerous conditions. “Property damage” means “(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting thereform [sic], or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.” “Occurrence” is defined as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.”

2.  All statutory references are to the Insurance Code unless otherwise specified.Section 22 provides: “Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.”Section 250 provides: “Except as provided in this article, any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against, subject to the provisions of this code.”

3.  The oral order at the hearing and the formal order were issued, respectively, December 5 and 21, 1988. The notice of appeal was filed January 17, 1989. A judgment was then belatedly filed (but never entered) March 2, 1989. We construe the premature notice of appeal of the order granting summary judgment as a valid notice of appeal of the actual judgment. (Cal. Rules of Court, rule 2(c).)

4.  In its petition for rehearing, Great Southwest refers to Government Code section 68081 and argues that rehearing is mandated because our opinion cites cases not previously addressed by the parties. Section 68081 provides that an appellate court may not decide a case “based upon an issue which was not proposed or briefed by any party․” Even before the enactment of the section this court as a matter of policy sought supplemental briefing wherever it appeared an issue not raised by the parties might be material. Since its enactment, we have liberally construed the statute's terms to the end that due process requirements are satisfied and the quality of this court's decision making is improved.We nonetheless reject Great Southwest's suggestion that an appellate court may not refer to a case which was not cited by at least one of the parties in its briefs. Section 68081 speaks to issues “not proposed or briefed” by the parties. The issue here, raised by Great Southwest, is whether Insurance Code sections 22 and 250 prohibited Richcom from obtaining liability insurance to cover manifested but unknown (to Richcom) property damage. Section 68081 does not require an appellate court to seek the comment of the parties on every case or authority it proposes to cite in an opinion.

5.  A related but more difficult question arises when the insured is or should be aware of an ongoing progressive loss at the time the policy is purchased, but the extent and timing of the loss is uncertain. Some courts rely on a variant of the fortuity doctrine known as the “loss in progress” rule to suggest that where damage has begun to occur, no part of the loss may be insured against. (See, e.g., Summers v. Harris (5th Cir.1978) 573 F.2d 869, 872; Presley v. National Flood Insurers Association (E.D.Mo.1975) 399 F.Supp. 1242.) Other courts, however, observe that the fortuity doctrine only precludes a party from insuring against a loss that has occurred or is certain to occur within the term of the policy. (See, e.g., Sabella v. Wisler (1963) 59 Cal.2d 21, 34, 27 Cal.Rptr. 689, 377 P.2d 889; Standard Structural Steel v. Bethlehem Steel Corp. (D.Conn.1984) 597 F.Supp. 164, 193; Essex House v. St. Paul Fire & Marine Insurance Co. (S.D.Ohio 1975) 404 F.Supp. 978, 988–990; Avis v. Hartford Fire Insurance Company (1973) 283 N.C. 142, 195 S.E.2d 545, 548.) Assuming the insured has not concealed relevant information from the insurer, the risk that additional damage will occur as a result of a “loss in progress” can be actuarially evaluated and assigned a proper premium as well as any other contingent event. (See, e.g., Insurance Co. of North America v. U.S. Gypsum Co., supra, 870 F.2d 148, 151–153; see also Export S.S. Corporation v. American Ins. Co. (2d Cir.1939) 106 F .2d 9.)

6.  While one set of authors suggests this is a typical formulation (see Arness & Eliason, Insurance Coverage for “Property Damage” in Asbestos and Other Toxic Tort Cases (1986) 72 Va.L.Rev. 943, 947), it is not the policy language before us in this case. Obviously we would find the dissent more persuasive if it were. (See dis. opn., post, p. –––– (“[I] conclude there was simply no ‘occurrence’ of ‘property damage’ ․ within the term of the policy.”)

7.  The policy does not define “occurs.” As noted earlier, the term “occurrence” is used elsewhere in the policy and is defined as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” (Ante, fn. 1.)Although we have suggested there might not be coverage if the policy had been limited to damage caused by an “occurrence” during the policy period, the relevant term in this policy—“occurs”—cannot be defined by reference to the definition of “occurrence.” This is because “occurrence” connotes a one-time event while the word “occurs” is capable of no such limited construction. It is impossible to say a reasonable insured would understand that damage which “occurs” during the policy period can only mean damage which “first occurs” during the policy period.

8.  In 1986, the GCL was revised and renamed the Commercial General Liability policy. The most significant change included in the 1986 revisions was the addition of a “claims made” version of the standard policy as an alternative to the traditional “occurrence”-type formulation. (See Insurance Handbook for Reporters (Allstate Ins. Group, 2d ed.1985) pp. 168, 170.)

9.  Less extensive revisions in 1973 did not change the critical language of the policy at issue in this case. The major changes in 1973 included a limitation of “property damage” to cases of “physical injury” to tangible property and an expansion of coverage for loss of use where there is no physical injury to property. (See Arness & Eliason, op. cit. supra, 72 Va. L.Rev. at pp. 946–947, 962–963.)

10.  We recognize that in Fireman's Fund Ins. Co. v. Aetna Casualty & Surety Co. (1990) 223 Cal.App.3d 1621, 273 Cal.Rptr. 431, this court took the position that the distinction between first and third-party cases was not legally relevant for the purposes of deciding whether a “manifestation” rule applied. (Id. at pp. 1626–1627.) Fireman's Fund, however, was decided over a month before the Supreme Court filed its Prudential–LMI decision on which we rely for our conclusions. Indeed, Fireman's Fund incorrectly suggested the manifestation rule of Home v. Landmark should be limited to actions between insurers (223 Cal.App.3d at p. 1628, 273 Cal.Rptr. 431), an argument implicitly rejected in Prudential–LMI.

1.  In Prudential–LMI, supra, 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230, the Supreme Court approved and restated in detail the rule developed by this court (speaking through the author of this majority opinion) in Home Ins. Co. v. Landmark Ins. Co. (1988) 205 Cal.App.3d 1388, 253 Cal.Rptr. 277: “[A]s 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, 253 Cal.Rptr. 277.) The Supreme Court further stated in Prudential–LMI, supra, 51 Cal.3d at p. 698, 274 Cal.Rptr. 387, 798 P.2d 1230, that [first party] insurers whose policy terms commenced after initial manifestation of the loss would not be subject to claims for previously discovered and manifested loss.

2.  In Prudential–LMI, supra, 51 Cal.3d at page 695, footnote 7, 274 Cal.Rptr. 387, 798 P.2d 1230, the Supreme Court explained that the loss-in-progress rule “codifies a fundamental principle of insurance law that an insurer cannot insure against a loss that is known or apparent to the insured. [Citation.]”

3.  It is, however, clear that subjective knowledge of damage to property sought to be insured can bar the formation of a valid insurance contract. (Vyn v. Northwest Casualty Co. (1956) 47 Cal .2d 89, 94, 301 P.2d 869, interpreting §§ 22 & 250.) In Vyn, the Supreme Court was presented with facts involving a liability case in which the loss was no longer contingent and was known to the insured at the time the first premiums on the policy were paid. The court concluded no contract of insurance could be formed under those facts. (Id.)Moreover, at least one court has found a theoretical impediment to coverage of already defective property where the insured claims no knowledge of the defects: “We would agree that ordinarily one cannot insure a res that has already been destroyed. Also, where some quick process of destruction is under way at the moment, even insurance innocently bought and issued should not cover. For this there may be a number of reasons. Such transactions would be an open door to fraud. Further, we assume the law is not inclined to authorize bets on success of a fire department.” (General Insurance Company of America v. Lapidus (9th Cir.1963) 325 F.2d 287, 290, fns. omitted.)

4.  Also note there are distinctive rules applicable to marine insurance which allow an insurer to defend against coverage for even good faith concealment of information by an insured. (Keeton & Widiss, Insurance Law (West 1988) § 5.8(e), at p. 578.) This suggests the scope of coverage of maritime insurance for preexisting damage is not as broad as the majority assumes and hence does not seem to support a finding of coverage here.

5.  As a matter of document construction, contracts such as insurance policies are normally read as a whole, each part helping to explain the other. (Civ.Code, § 1641.)

HUFFMAN, J., dissented and filed opinion.