My insured electrical contractor had commercial general liability (CGL) policies written on an occurrence basis covering the time between January 1, 2019, to January 1, 2022. Coverage was provided by two different carriers. Company A provided coverage for a total of two years: January 1, 2019, to January 1, 2020, and January 1, 2020, to January 1, 2021. On January 1, 2021, the CGL was placed with Company B covering the January 1, 2021, to January 1, 2022, policy period.
During Company A's coverage period, the insured performed electrical work on the building. All work began and was completed during the period Company A provided coverage.
On or about October 15, 2021, the building on which the contractor worked was damaged by fire – during Company B's coverage period. It was determined the fire was the result of the electrical contractor's work.
Again, both policies were written on an occurrence basis. Which policy should respond to the loss?
...Response by Chris Boggs, Big 'I' Executive Director Risk Management and Education:
The answer is in one way simple and in another way very complex.
Let's begin with the simple answer. When coverage is written on an “occurrence" basis, the policy in effect when the injury or damage “occurs" pays the claim. But again, this is the simple part.
The reality of “occurrence" is not this simple. In fact, defining when an injury occurs is often a function of the jurisdiction and the type of loss. Four different theories can be applied to define when the injury or damage “occurred." The one ultimately applied by the court if a function of the jurisdiction, the type of incident and the facts of the case.
Depending on the jurisdiction, the incident and the facts, the court may apply either the:
- Injury-in-Fact Theory (the Actual Injury Theory);
- Manifestation Theory;
- Exposure Theory; or the
- Continuous Injury Theory (“Triple" Trigger Theory).
For sake of this discussion, the exposure theory and the continuous injury theory do not apply. These two theories are generally relegated to pollution injury or damage or long-term health injuries (i.e., asbestosis). The subject case will likely apply either the injury-in-fact theory or the manifestation theory.
Injury-In-Fact (Actual Injury)
In simplest terms, the injury-in-fact theory holds that the “occurrence" is the point at which property damage or bodily injury is first caused is the date of the occurrence regardless of manifestation. This requires proving when the injury or damage was first suffered. In the above case, for example, if it can be proven the damage occurred or began to occur upon installation, that is when the injury “actually" occurred – even if the fire doesn't occur for several years.
A caveat of or requirement for the injury-in-fact theory is the need for a direct line from the injury or damage back to the date of the original “damage."
However, if there was a superseding event, this could change the date of the injury-in-fact or make it difficult to determine such date(s). Assume, for sake of the discussion, the same electrical contractor or another contractor was called back to do some additional work sometime in 2021 – if damage was caused by this work, might be the actual injury date.
There are other examples of superseding events that may disrupt the direct line from the initial injury or damage to the ultimate result. Such examples may include faulty insulation protecting the wiring; a defect in the wires; or other issues not related to the work. If there is such a superseding event, the injury-in-fact date may be the same as the manifestation date because of the inability to clarify the specific date of the injury or damage.
Another example might be the drywall contractor that misses the stud and drives the drywall nail (or screw) into the water pipe. The pipe may not leak immediately, in fact it may not leak for several months because of the time it takes the nail (or screw) to rust away and allow the water to begin leaking. Presuming no superseding event, the day the nail was driven into the water pipe is the date of actual injury – the injury-in-fact – because that is the date that property damage first occurred.
If the state applies the injury-in-fact theory and there is a direct line with no superseding events between the initial damage and the fire, the “occurrence" is the date(s) of the work, and the policy in effect at that time pays the claim.
In the subject case, the likelihood that electrical work done months ago would result in fire today without some superseding event is low. Improperly done electrical work generally results in injury or damage rather quickly. Unlike the drywall example, it is rather unlikely the electrical contractor caused property damage in one year that led to a fire several months later.
States that apply the manifestation theory hold that the date when the injury or damage is or should be evident or is discovered is the date of occurrence. In the subject case, the date of the fire is the date of the “occurrence." In a manifestation theory state, Company B would be called upon the pay the claim.
To return to the drywall contractor example, in a manifestation theory state, the policy in effect when the water damage becomes evident responds.
In this subject case, the operations of the insured (an electrical contractor) tend to lead to the application of the manifestation theory. Part of the reasoning (beyond the previous discussion on superseding events) involves faulty workmanship findings. In many states, faulty workmanship itself is not an occurrence, but any property damage that results may constitute an occurrence.
Faulty wiring or other inadequacies (the wiring was not adequate for the load) may have led to the fire. But the faulty workmanship would not be the occurrence if discovered before actual injury or damage. However, if the fire resulted because of that work, the trigger is the fire because that's when the damage triggering the policy occurred.
Simple Yet Not Simple
When coverage is provided on an “occurrence" basis, it is simple to say, “The policy in effect when the injury or damage 'occurs' pays the claim." And if the act and injury are relatively close in time and place, deciphering which policy responds is simple; but when the work, the property damage and the ultimate injury or damage are separate by time – the answer is NOT simple.
For example, if the grocery store clerk spills some liquid on the floor causing a customer to slip and fall, the act and the injury are close in time and place. Defining the “occurrence" is easy in this circumstance. However, as in the subject case, defining “occurrence" is not simple because the ultimate assignment of “occurrence" is based on the jurisdiction and the facts (specifically when damage actually occurred).
Defining the “occurrence" so the occurrence policy can respond requires research when there is a significant gap in time between the action and the injury or damage.
Yes, while an “occurrence" form extends coverage when/if an injury or damage “occurs" during the policy period, we must still define when did it “occur." Research the common law of the applicable state and the facts of the injury or damage before assuming an answer. In the subject case, the claim should be turned in to both carriers and let them sort it out (but it's likely the policy in effect when the fire occurred).
Last updated: January 18, 2022.