Insurance Coverage: Stacking

Did you ever wonder why insurance companies own or have mortgages on most of the tall buildings in the country-and some of the shorter ones too? One reason is that they have a lot of cash on hand waiting for people to die. Another is that they use language in their policies that many people cannot understand and therefore do not pursue their policy claims.

One of the most confusing aspects of insurance is coverage, i.e. whether a policy covers a particular claim. As often as not, the policy language offers little assistance because it is couched in terms of exclusions, exceptions, exceptions to exclusions and other examples of "creative writing."

Whether a policy covers a particular claim may fall within two general categories of insurance coverage: `'claims made" or `'occurrence" policies.

Professional liability (malpractice) insurance coverage is usually on a "claims made" basis. The policy in effect when the claim is first made provides coverage for that claim. When the alleged malpractice was committed is of no consequence.

On the other hand, most other property and casualty insurance is on an "occurrence" basis. That means that the policy in effect when the accident or injury ("occurrence") takes place covers the resulting claim.

In a construction context, determining when an "occurrence" occurs may be highly significant. Most policy language makes it clear that an occurrence does not take place when construction work is defectively performed. Instead, it would be when an injury is sustained. For example, if the contractor left out a beam during construction, the policy that is in effect when some innocent plaintiff falls through the unsupported floor would provide coverage-if the policy otherwise applies.

Suppose, however, that the contractor's defective work resulted in a condition that became progressively worse over time and would not produce an injury until several years after the work had been completed. In that situation, would the "occurrence" be only when the injury becomes known or during the entire period of time while the work was deteriorating? A number of courts have considered this issue and the majority rule appears to be all of the insurance policies in effect during the period of time while the deterioration progressed covered the loss.

One of the leading studies of this issue was made in the case of Gruol Construction Co. v. Insurance Company of North America, 524 P.2d 427 (Wash. App. 1974). In that case the owner had sued the general contractor for damage to his building caused by dry rot which resulted from dirt having been piled against the box sills of the building during construction backfilling operations . After careful analysis the Washington court ruled that all of the contractor's insurance policies in effect during the total time period of the progress of deterioration provided coverage for the dry rot condition The principle is significant in establishing which policy or policies provided coverage. The combination of several policies may also be critical if the dollar amount of the loss is in excess of the maximum dollar liability limits of one or more of the policies involved. The theory of awarding coverage under several policies in effect during a progressively deteriorating condition has become known as "stacking." The critical coverage question is to determine when the damage occurred. Occurrence is not necessarily when a defective condition is discovered or when an injury is sustained.

The stacking theory has also been applied to impose liability on insurance carriers whose policies were in effect during progressive deterioration of a roof deck, swimming pool, landslide conditions, earth sinkage, and gas line leakage.

Insurance coverage questions are not easy. Since policy language is drafted by the companies and policies are sold on a "take it or leave it" basis, courts strive to interpret policy language in favor of the insureds If there is any doubt, the insured should insist that their policies provide all the coverage they need and let the insurance company prove otherwise. Denial of coverage may be risky to insurance companies since punitive damages may be assessed against them under the laws of many states (including Colorado) for bad faith refusal to pay claims.