When buying business insurance or filing business insurance claims, most people are familiar with (and avoid) the “known prior claims or damage” exclusion, which bars coverage for damage or injury that began before the policy period began if the policyholder knew or should have known about it. But what about the “continuous or progressive injury or damage” exclusion?
This is a relatively new exclusion that even more severely reduces coverage for long-tail claims. In the last four years, it has been upheld by courts in several states, and most recently by the Supreme Court of South Dakota. The best defense against it is to make sure it’s not in the policy. So what exactly is it?
The continuous or progressive injury or damage exclusion is a recent, non-standard, manuscripted exclusion. All versions eliminate coverage for property damage and bodily injury that begins before the inception of the policy in question but continues into its coverage period. It is similar to the known prior claims or damage exclusion, except the policyholder’s knowledge of the damage or injury is not required. As such, it limits coverage in a way that is a serious trap for the unwary, as the South Dakota case illustrates.
A case where the earth moved—three years later
On April 16, the Supreme Court of South Dakota held in AMCO Insurance Co. v. Employers Mut. Cas. Co, that a known continuous or progressive injury or damage exclusion applied to eliminate coverage under a commercial general liability (CGL) policy for a subcontractor that had performed defective work at a school building project.
In 2002, Swift Contractors hired subcontractor/policyholder Thomas & Sons to do excavation and soil compaction work for an addition to a school. The project was completed in 2004. Shortly thereafter, the building’s floor started to shift, and cracks began to appear on interior masonry walls. After years of monitoring, a geotechnical investigation completed in 2010 attributed the settling to negligent work performed by Thomas & Sons.
The school district brought suit against Thomas & Sons. In turn, Thomas & Sons’ current CGL insurance company, Employers Mutual, asserted that it had no duty to defend because Thomas & Sons’ policy contained a continuous or progressive injury or damage exclusion, and damage had indisputably occurred before the policy’s inception date. Prior to that time, Thomas & Sons had CGL coverage with AMCO, which had agreed to defend the company. AMCO brought suit against Employers Mutual, seeking a determination that Employers Mutual shared with AMCO a joint obligation to defend Thomas & Sons.
AMCO primarily argued that the Employers Mutual’s continuous or progressive injury or damage exclusion should be void for being against public policy, pointing to a Colorado statute reaching that conclusion. The case ultimately worked its way to the South Dakota Supreme Court, which decided that the exclusion was clear and unambiguous and was not void for being against public policy.
four Effects on coverage for long-tail claims
- If each of a policyholder’s policies in the series of its policies in effect when an instance of continuous or progressive property damage occurred contains a continuous or progressive injury or damage exclusion, only one policy—the one in effect when the property damage first started—would cover it. By contrast, with a series of standard CGL policies lacking the exclusion, all of those consecutive policies would cover the liability under a continuous trigger analysis. That will usually make the full policy limits of all those policies available. A series of four $1 million policies could cover as much as a $4 million liability, instead of a mere $1 million in coverage when the continuous or progressive injury or damage exclusion is used.
- To wipe out the insurance company’s duty to defend, the exclusion requires only that there be an allegation that the loss at issue occurred before the policy took effect. That provides an opening for insurance companies to deny defense coverage, even though the duty to defend is otherwise generally broad.
- The increasing use of this exclusion in recent years probably requires that the insurance specification section of construction contract documents explicitly ban its use. Even then, owners and general contractors will only know whether their subcontractors have complied with that prohibition if they actually read every policy, because certificates of insurance are unlikely to mention the exclusion’s presence in a subcontractors’ policy.
- The public policy argument that lost in South Dakota could prevail in other states, because the courts in most states regularly make insurance coverage decisions on the basis of public policy. The effect of the exclusion is to radically diminish coverage in a way that most policyholders do not—and cannot—realize, even when the wording of the exclusion itself is drawn to their attention. Therefore, it is highly doubtful that this trap for the average insurance consumer should be allowed.