Daily Development for Monday, November 29, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

Thanks to the indefatigable H.E. Peterson for the tip on this one:

INSURANCE; STATUTE OF LIMITATIONS; LIMITATIONS; CONTRACTUAL LIMITS: Provisions in property insurance policy limiting period during which suit can be brought to two years from occurrence of injury is valid not only to shorten limitations period but also to alter the event from which the limitations period is measured by eliminating application of the "discovery rule."

Caln Village Associates v. the Home Indemnity Company, http://www.paed.uscourts.gov/opinions/99D0951P.HTM, (E.D. Penn. 11/23/99)

Owners of a shopping center completed in 1991 observed some cracks in the foundation within one year of completion of construction. The owners included this problem included on "punch lists" of completion items under discussion with contractor for some time, and eventually it became a major item in their discussions. The parties described the problem as a "settlement problem," but eventually it was diagnosed as related to inadequately cured slag used as fill beneath the foundation. This material chemically altered its nature and, as altered, was subject to expansion, which not only caused cracks in the foundation but also problems with window sills, doors, and even breaking glass.

In Spring of 1994, the contractor had diagnosed the problem as a problem with the slag. But as of July, 1994, the contractor wrote to the owners and to indicate its tentative diagnosis. The contractor advised the owners not to bring in experts to evaluate the problem and propose a solution. The contractor did, however, advise the owners "that it was extremely important to put the various subcontractors and insurance company [sic] on notice of the problem."

By December of 1994, however, with problems getting worse, the owners did bring in expert consultants, and brought in more consultants the following spring. The consultants concluded that the only practical solution was removing the fill from beneath the foundation and replacing it - obviously an extremely expensive "fix," and one which would likely interrupt shopping center operations.

The owners sued the contractor for negligence and related claims in April of 1996, and six months later added various insurance companies that had insured the property against property damage during the relevant period.

The insurers based their defense upon the fact that the owners had brought their lawsuit against the insurers too late. All three policies contained a suit limitation clause which states that no legal action could be brought unless the action was "brought within 2 years after the date on which the direct physical loss or damage occurred."

The owners defended on the grounds that the two year limitation was unreasonable, that if it was enforceable, the insurers were required to show prejudice from delay in order to invoke it, and that in any event two years had not run from the time the problem was "discovered" within the meaning of the "discovery rule" commonly applied to statutes of limitations.

The District Court here granted summary judgment to the insurers.

In response to the claim that the provision was unreasonable, the court simply invoked a statute in Pennsylvania holding that contractual limitations on suit that narrow the statute of limitations that would otherwise apply are perfectly valid so long as they are not "manifestly unreasonable." As Pennsylvania law places a one year statute of limitations on some claims against fire insurers, the court concluded that the two year limit contained in the provisions at issue here were not "manifestly unreasonable" by Pennsylvania standards, even though they cut the time for suit in half.

As to the question of whether the insurers had to demonstrate that they were prejudiced by the delay, the court acknowledged some uncertainty in Pennsylvania authority. Prior authority had held definitely that an insurer had to show prejudice in order to defend on the basis of late notification of a claim, and the court noted some Pennsylvania authority extending the concept to limitations provisions. But other, more recent, authority declined to extend the doctrine to limitations provisions, and the court concludes, without analyzing policy considerations, that this is now Pennsylvania law. No prejudice need by shown.

The next issue was whether indeed two years had run since the an "occurrence" within the meaning of the policies. The owners argued that the injury they were suffering was ongoing and manifested in a variety of ways. Consequently, as applied to their situation, the term "occurrence" was ambiguous, and they were entitled to a generous construction.

The court agreed to the extent that it acknowledged that until it was clear that something in the foundation was causing the problems, rather than simply settlement, there could have been no "occurrence" of an injury. Nevertheless, in the court's view it was not necessary for the owners to receive an exact report from their engineering consultants in order for there to have been an occurrence of an injury:

"ertainly by July 28, 1994, when Caln Village learned that the problems at Caln Village were consistent with the expansion of un-cured slag, a reasonable person would have been on notice that the problems at Caln Village were not due to normal settling but the result of an injury due to expanding un-cured slag. For the same reason, even if a jury could draw an inference from the record that Caln Village was not put on notice by the persistent and progressive nature of the problems because it believed that the problems were due to normal settling, the last possible day on which the limitations period could begin is July 28, 1994. Again, by July 28, 1994, it is uncontroverted that Caln Village was on notice that the problems at the shopping center were not due to normal settling but the result of an injury due to expanding un-cured slag. By then Caln Village not only had knowledge of the problems and the extent of the problems but also the possible cause of the problem and thus was on notice of the injury such that the limitations period began to run. Based upon the evidence presented, a reasonable jury could not find otherwise."

The court went on to find that the "discovery rule" that might apply in Pennsylvania absent contractual definitions of the running of a limitations provision did not apply here. But it also held that if the discovery rule did apply, the above analysis demonstrated that the problem had been "discovered" by July of 1994.

Comment 1: Obviously there are important counseling lessons here for attornies advising clients when dealing with construction defects. Some such defects are covered by property insurance, but the insurance policies frequently contain limitations that severely truncate the running of the statute of limitations.

It is most important to note that these provisions are separate and apart from the notice provisions. You may have notified the insurer. The owners in this case undoubtedly did so - having been specifically advised by their contractor. But that is not enough to satisfy the limitations restriction. You must file suit, often much earlier than one might otherwise deem necessary.

Undoubtedly what was going on here was the normal pre litigation wrangling with the contractors who were the real targets of the owner's ire. The attornies involved simply failed to recognize that a substantial claim might be lost if this wrangling extended for too long.

Comment 2: Missing a statute of limitations is a virtual "pat hand" when it comes to malpractice claims. Should the same rule apply to these special limitations for claims against insurers? It's a tough standard, but that's why we make the big bucks. Right? (The editor acknowledges that here a malpractice claim might not succeed until it is shown that the claims against the contractor don't pan out.)

Comment 3: The editor is hostile to overreaching provisions in form insurance policies, and would apply a prejudice requirement to invoke a limitation on suit. After all, the insurer (presumably) has been named and evidence can be preserved. What's the big rush?

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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