Claimants seeking liability insurance coverage for property damage claims sometimes raise interesting questions concerning which insurance policy applies to the claim. For example, suppose a contractor finishes building a house in 2002. In 2004, water damage is discovered during an inspection. An expert concludes that the water intrusion was caused by improper installation of roofing and flashing materials during the original construction in 2002. The homeowner files suit against the contractor. Suppose the contractor had insurance coverage with two different insurance companies in 2002 and 2004. Which policy applies? Is it the policy in place in 2002 when the house was built? Is it the policy in place in 2004 when the water damage was discovered?
This so-called “trigger of coverage” issue is critical to both policyholders and insurance carriers. For both parties, the resolution of this issue may determine whether any coverage exists at all and how much coverage exists. If the policyholder is fully covered for all of the relevant timeframes, the trigger of coverage issue may resolve a dispute between the insurance carriers over which policy must respond to the claim.

Until 2000, North Carolina courts followed a trigger of coverage theory known as the “manifestation rule” to determine whether property damage “occurred” during a liability policy period. Under that theory, property damage “occurs” when it is manifested or discovered. (1) In the hypothetical example above, the policy in place when the water damage was discovered in 2004 would apply under a manifestation trigger of coverage theory.

In 2000, the North Carolina Supreme Court changed course and decided there is no “bright line rule” that property damage occurs at the time of manifestation for purposes of insurance coverage.(2) The court reviewed a situation in which a leak in a pressure vessel had clearly started in June 1992, although it was not discovered until August 1992. The court concluded that “when the date of the injury-in-fact can be known with certainty, the insurance policy or policies on the risk on that date are triggered.”(3)

Two recent North Carolina Court of Appeals decisions have endorsed the “injury-in-fact” trigger of coverage rule, at least for cases in which the date of the injury-in-fact can be determined. See Harleysville Mutual Ins. Co. v. Berkley Ins. Co. of the Carolinas, 2005 WL 756267 (N.C. App., April 5, 2005); Hutchinson v. Nationwide Mutual Fire Ins. Co., 163 N.C. App. 601, 594, S.E.2d 61 (2004).

In the most recent case, Harleysville, the underlying claim concerned property damage resulting from water intrusion in a synthetic stucco exterior finish system. The construction was completed in 1994. Water damage was discovered during an inspection in 1996. Repairs were performed in 1996, but subsequent inspections demonstrated that the water problems remained. A report prepared in 2000 concluded that the water damage was caused by improper installation of the system. Suit was filed against the contractor in 2000. The contractor notified Berkley Insurance, which was on the risk prior to May 1, 1997, and Harleysville, which was on the risk from May 1, 1997 to January 1, 2003. The two insurance carriers sought a judicial determination of which policy applied.

Examining the facts, the court noted that the construction took place in 1993 and 1994. Subsequent repairs were done in 1996, but engineers ultimately concluded that the “overall installation” of the synthetic stucco was defective. The water damage arose from the continual entry of moisture into the home through the synthetic stucco. The court decided that the damage occurred, for insurance purposes, during installation of the stucco. The court was unpersuaded by the evidence of continuing water damage and ruled there was no evidence of damage caused after 1997.(4)

The Harleysville case is similar to the 2004 Hutchinson decision. In Hutchinson, the policyholder was sued for damages allegedly caused by negligent construction of a retaining wall, which allowed continual intrusion of water. The wall was built during the summer of 1999, when the contractor had no insurance coverage. The damage was discovered three days after the defendant insurance carrier’s coverage went into effect. The Court of Appeals noted: “[I]t is clear that the [the contractor’s] actions and inactions at the time the retaining wall was constructed caused the subsequent problems with water entry into the soil… .” The court therefore concluded that the damage to the retaining wall occurred before the contractor was insured.(5)

The North Carolina appellate courts have not yet explicitly adopted the injury-in-fact rule for all purposes. The appellate courts continue to qualify their rulings by saying “where the date of the injury-in-fact can be known with certainty, the insurance policy or polices on the risk on that date are triggered.”(6)

It is unclear whether North Carolina courts would apply the manifestation trigger of coverage theory in cases in which the date of the injury cannot be known with certainty. When the date of the injury can be determined, however, North Carolina courts will look to that date to determine which insurance policy is triggered even if the damage continues into subsequent policy periods.

(1) See West American Ins. Co. v. Tufco Flooring East, 104 N.C. App. 312, 409 S.E.2d 692 (1991).

(2) See Gaston County Dyeing Machine Co. v. Northfield Ins. Co., 351 N.C. 293, 303, 524 S.E.2d 558, 565 (2000).

(3) Id. at 303, 524 S.E.d at 565.

(4) Harleysville, 2005 WL 756267.

(5) 163 N.C. App. 601, 605, 594 S.E.2d 61, 64 (2004).

(6) Harleysville, 2005 WL 756267 (quoting Hutchinson, 163 N.C. App. at 605, 594 S.E.2d at 64).