Missouri High Court Adopts Progressive Loss Doctrine

8/31/2010 - The Missouri Supreme Court recently handed down a decision that could have a substantial impact on Missouri insurance law.  In D.R. Sherry Constr., Ltd. v. American Family Mut. Ins. Co., the Court upheld a judgment for the insured by reaching several potentially significant conclusions. No. SC 90442, 2010 WL 2513794 (Mo. banc 2010).  Most notably, the Court held that in a progressive loss property damage case, a policy is triggered if the cause of the loss was present during the policy period, even if the resulting damage is not apparent until after the policy period.

In August 2003, the insured, D.R. Sherry Construction, Ltd. (“Sherry”), constructed and sold a house after a final inspection revealed no apparent problems.  In the spring of the following year, the home’s purchasers discovered cracks in the foundation and drywall.  Sherry confirmed their existence, and an inspection revealed that the house was unlevel, which was causing recurring cracks in the foundation.  Sherry agreed to repurchase the house in March 2005 when the homeowners threatened suit.  Sherry apparently did not obtain the consent of its liability insurer, American Family, before entering into the repurchase agreement.  After repurchasing the house, Sherry made a claim on the policy at issue, which was denied because it had been canceled in September 2003 and the first damage was not discovered until April 2004.

In November 2005, Sherry filed suit against American Family for breach of contract and vexatious refusal to pay. The trial court, after allowing the jury to determine the scope of coverage, entered judgment for the insured.  The Missouri Court of Appeals subsequently upheld this decision, and the case came before the Missouri Supreme Court.

Most significantly, in making a finding of coverage, the Court employed a cause-based analysis of whether there had been an “occurrence” during the policy period.  American Family acknowledged that structural damage was present during the policy period, but argued that any damage to the property was not apparent until after the policy had been canceled for approximately seven months.  The Court, however, agreed with the trial court that this was irrelevant.  The Court noted an “occurrence” may be the “result of a process.”  Citing two Missouri appellate court cases, the Court concluded the damage to the house’s foundation constituted an “occurrence” because the cause -- i.e., the house being unlevel -- was present during the policy period, though the actual damage was not apparent until after the policy expired. Id., citing Scottsdale Ins. Co. v. Ratliff, 27 S.W.2d 531 (Mo. Ct. App. 1996), and Stark Liquidation v. Florists Mut. Ins. Co., 243 S.W.3d 385 (Mo. Ct. App. 2007).

Ultimately, this decision could prove quite significant, particularly to coverage for construction defect or progressive loss claims in general.  First, the Supreme Court expressly stated that, when an insurance policy is ambiguous and there exists a genuine factual dispute regarding the intent of the parties, the issue of coverage goes to the jury.  This seems to greatly expand the jury’s role in determining the scope of coverage, and, indeed, a departure from prior Missouri Supreme Court precedent.  See Tomnitz v. Employers’ Liability Assur. Corp., 121 S.W.2d 745, 752 (Mo. 1938) (noting that while specific questions as to terms with more than one possible meaning may be submitted to the jury, “[i]t is the exclusive province of the court to construe a written instrument . . . [and] in the end, the court must determine the interpretation of the contract with such light as the verdict may afford on the question submitted to the jury.”).

Second, the Court held that even when the damage was not apparent during the applicable coverage period, a claim may nonetheless be covered by an insurance policy if the cause of the damage was present during the policy period.  This arguably constitutes a stark turn from prior cases that held that the time of an “occurrence” is not when “the wrongful act was committed,” but “when the complaining party was actually damaged.”  Indeed, the decision also strays from the Court’s decision in Tomnitz, discussed above, on the trigger issue as well, because Tomnitz seemed to indicate that in progressive loss cases, courts look to the time of the injury-in-fact and not the time of the cause of the injury. In Tomnitz, the Court held that coverage for silicosis was triggered when the disease was acquired, not when the initial exposure took place.

This decision will change the way carriers analyze their duty to defend and coverage allocation over several policy periods.  There is no question that now, in Missouri, the courts have adopted the progressive loss trigger theory when determining dates of occurrence.

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