Prudential-LMI Commercial Insurance v. Superior Court
51 Cal. 3d 674, 798 P.2d 1230, 274 Cal. Rptr. 387 (1990)
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Rule of Law:
In a first-party progressive property loss case, the one-year statutory suit limitation period begins when the insured discovers or reasonably should have discovered appreciable damage (delayed discovery rule), is equitably tolled from the time the insured gives notice of the loss until the insurer formally denies the claim, and liability rests solely with the insurer on the risk when the damage manifested (manifestation rule).
Facts:
- Plaintiffs, as trustees of a family trust, constructed an apartment building in 1970-1971.
- The property was insured by four successive property insurers between 1971 and 1986.
- Prudential-LMI Commercial Insurance (Prudential) insured the property under an all-risk policy from October 27, 1977, to October 27, 1980.
- The policy contained a standard provision requiring any lawsuit on a claim to be commenced within 12 months 'after inception of the loss.'
- In November 1985, five years after Prudential's policy had expired, plaintiffs discovered an extensive crack in the building's foundation and floor slab while replacing floor covering.
- In December 1985, plaintiffs notified Prudential and the other past insurers of the loss.
- Prudential began an investigation which concluded that the crack was caused by expansive soil, a peril potentially excluded under the policy's earth movement exclusion.
Procedural Posture:
- Plaintiffs sued Prudential and three other former insurers in California superior court (trial court) for breach of contract, bad faith, and other claims.
- Prudential filed a motion for summary judgment, arguing the action was barred by the policy's one-year suit provision.
- The trial court denied Prudential's motion, finding the existence of triable issues of fact.
- Prudential petitioned the Court of Appeal for a writ of mandate to compel the trial court to grant its motion.
- The Court of Appeal issued a peremptory writ of mandate, reversing the trial court and directing it to grant summary judgment in favor of Prudential.
- The Court of Appeal, while adopting a delayed discovery rule, found plaintiffs' suit was untimely because it was filed more than 12 months after a reasonable person would have been on notice of the damage.
- Both plaintiffs and Prudential petitioned the Supreme Court of California for review.
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Issue:
In a first-party insurance claim for progressive property damage: (1) Does the one-year suit limitation period begin to run only when appreciable damage is or should be known to the insured, rather than when the physical damage first occurs? (2) Is this limitation period equitably tolled from the time the insured provides notice of the loss until the insurer formally denies the claim? (3) Is liability for the entire loss placed solely on the insurer whose policy was in effect when the damage first manifested?
Opinions:
Majority - Lucas, C. J.
Yes. In a first-party progressive property loss case, the one-year suit limitation period begins to run upon the reasonable discovery of appreciable damage, is equitably tolled during the insurer's claims investigation, and liability is assigned to the insurer on the risk at the time of manifestation. (1) The court adopted a 'delayed discovery' rule, defining 'inception of the loss' as the point in time when appreciable damage occurs and is or should be known to the insured. A stricter interpretation would lead to an inequitable forfeiture of coverage for insureds who are blamelessly ignorant of latent property damage. (2) The court held the limitation period is equitably tolled from the time the insured provides timely notice until the insurer formally denies the claim in writing. This prevents the anomaly of requiring an insured to sue before the insurer has completed its investigation and protects the insured's reasonable expectation that the insurer will not use the investigation period to run out the clock on a lawsuit. (3) For first-party property losses, the court adopted a 'manifestation rule,' holding that the insurer on the risk at the time the progressive damage becomes manifest is solely responsible for the entire loss. Before manifestation, the loss is a contingency; after, it becomes a known loss subject to the loss-in-progress rule, precluding liability for subsequent insurers. This approach provides certainty for the insurance industry and meets insureds' expectations.
Analysis:
This decision established a comprehensive framework for handling first-party progressive property damage claims in California, significantly benefiting policyholders. The adoption of the delayed discovery and equitable tolling rules prevents insurers from using the statutory one-year suit provision as a technical trap for unwary insureds dealing with latent damage or lengthy investigations. By adopting the 'manifestation rule' for first-party cases, the court clearly distinguished them from third-party liability claims, which may be subject to different allocation theories like 'continuous exposure.' This ruling created predictability for insurers in setting reserves while protecting the reasonable coverage expectations of insureds.
