When a loss arguably spans more than one policy period (the time period while a particular policy is in effect), the rule of law known as trigger of coverage, along with any policy provision addressing the issue, determines when a loss is considered to have occurred, and thus which policy or policies cover a particular loss. Trigger of coverage is often a disputed issue in progressive loss cases in the third party context (for instance, environmental and asbestos exposure), but there are far fewer decisions on this issue in the first party property insurance context. In a recent first party case, the Seventh Circuit adopted the continuous trigger theory set forth in a Wisconsin Court of Appeals’ third party case. Miller v. Safeco Ins. Co. of America, 2012 U.S. App. LEXIS 12940 (7th Cir. June 25, 2012). The Seventh Circuit also determined that the insurer acted in bad faith in denying the claim despite the trial court finding issues of fact as to whether coverage existed, and despite the fact that there was no Wisconsin trigger law on point in the first party context.

In Miller, Safeco issued a policy on June 30, 2005, which went into effect the next day, the date of closing on the Millers’ purchase of the home. The policy was not delivered to the Millers until the end of July. On July 5, the Millers discovered severe leaking on three of the home’s exterior walls, and an expert determined that there were numerous construction deficiencies that existed long before the Millers purchased the home. The Millers submitted a claim to Safeco four months later, and Safeco denied the claim after requesting a coverage opinion from outside counsel. The denial was based on the fact that the loss was a preexisting condition and therefore occurred before the policy became effective. It appears that the denial letter did not cite policy exclusions, but it is not clear from the opinion if this is accurate, and the briefing is not available.

The Millers filed a suit in federal court based on diversity. The district court granted the Millers’ motion for summary judgment, holding that Safeco could not rely on any exclusions in the policy because the policy was not delivered to the Millers until after the damage was discovered. The district court found that there were questions of fact as to whether the policy covered the loss. After a bench trial, the court found that the policy covered the loss, and awarded over $480,000 in damages, and after another bench trial on the Millers’ bad faith claim, determined that Safeco lacked a reasonable basis for denial of the claim and demonstrated a “reckless disregard for its lack of reasonable basis.”

Safeco appealed the coverage and bad faith decisions to the Seventh Circuit. Safeco first argued that the loss caused by a construction defect was not fortuitous because a property policy is not a promise to pay for loss or damage that is almost certain to happen. Despite a Wisconsin Supreme Court case stating that “a defect in the design and construction of insured property is inherent,” and not covered by a first party policy (Kraemer Bros., Inc. v. U.S. Fire ins. Co., 89 Wis. 2d 555 (1979)), the Seventh Circuit disagreed, finding that fortuity simply means “unexpected,” and “accidental.” Miller v. Safeco at *7.

Safeco also argued that the continuous trigger theory was inappropriate for first party policies, and cited cases applying the manifestation trigger, which is the trigger rule that has been used by most courts in first party property cases. The Seventh Circuit disagreed with Safeco, found that the continuous trigger theory applied, and also determined that the argument was moot because even if manifestation was the proper trigger, the damage did not manifest until the Safeco policy incepted.

Safeco further argued that the district court erred in creating coverage through estoppel by finding that Safeco could not rely on the exclusions in the policy because the policy was not delivered until after the damages were discovered. The Seventh Circuit affirmed the district court’s decision, stating that estoppel was not the basis for the decision, rather, the exclusions were simply not part of the agreement until the policy was delivered. This begs the question of how the insureds could rely on an agreement and sue based on breach of contract if the agreement was not in place until the time of delivery. 

With respect to bad faith, Safeco did not appeal the district court’s factual findings that Safeco ‘s review of the Millers’ claim was “cursory at best,” but only appealed based on the following points being “fairly debatable”:

  • Safeco should have been allowed to rely on policy exclusions despite delivery of the policy after damages were discovered
  • Damage preexisted the policy period, implicating trigger issues
  • The Millers’ 4-month delay in notifying Safeco of the claim violated the policy’s prompt notice provision

The Seventh Circuit disagreed with all points raised by Safeco, and found that Safecos’ denial of the claim rested on rather “dubious justifications.” Importantly, the Seventh Circuit stated,

Safeco never showed where it ever actually relied on the exclusions. Safeco cluttered the claim file with language from the exclusions but that didn’t mean it reasonably investigated or considered their applicability. Indeed, the court considered it rather iniquitous for Safeco . . . to rely upon bases that were not fairly considered or reasonably asserted as reasons for denying the claim. Given that Safeco does not show where the district court erred in debunking its reasons for denying the Millers’ claim, we have no basis for finding the coverage issue fairly debatable.

Id. at *16.

Although this decision appears to be contrary to the weight of authority on the issues presented, it demonstrates that insurers can benefit from ensuring and documenting delivery of a policy, a thorough investigation of a reported loss, documentation of the investigation in the claim file, and if denial is appropriate, a carefully reasoned denial letter. On a complicated claim such as the one in Miller, insurers can benefit from having a denial letter drafted or reviewed by counsel.