Insurance Law
| Publication year | 2017 |
| Author | By Stephen Raucher and Michael Sohigian |
By Stephen Raucher and Michael Sohigian
Although the California Supreme Court did not issue an opinion on insurance issues in 2017, the Courts of Appeal were busy. And while insurance companies scored a number of victories, particularly in giving effect to exclusions, on balance policyholders came out ahead in 2017, with courts requiring that carriers provide a defense in a number of construction-related contexts, as well as circumscribing the genuine dispute doctrine as a basis for combatting bad faith and making it more difficult for insurance companies to rescind policies in the face of ambiguous application questions.
Tidwell Enterprises, Inc. v. Financial Pacific Ins. Co., Inc.,1 was actually reported in the last days of 2016. Tidwell Enterprises installed a fireplace in a home damaged in a fire after Tidwell's policy period. The homeowner's insurer subrogated against Tidwell for negligence in installing the fireplace proximately causing the fire, and Tidwell tendered that claim to its insurer, Financial Pacific. Financial Pacific hired an expert to inspect the fire scene, and he concluded a custom "termination top" Tidwell had fabricated and installed created a fire hazard by restricting chimney air flow. This increased the operating temperature of the flue vent sections and the fireplace. The expert could not rule out the installation of the "termination top" as a cause of the fire. But the insurer rejected Tidwell's tender because the fire occurred 20 months after the policy period ended.
Tidwell sued Financial Pacific for declaratory relief, breach of contract, and bad faith. The commercial general liability ("CGL") policy Financial Pacific issued to Tidwell contained the standard provisions requiring the insurer to pay sums that Tidwell became "legally obligated to pay as damages because of ... 'property damage'" caused by an "occurrence" if the property damage occurred during the policy period.2 The policy likewise contained the standard definition of "occurrence": "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."3 The trial court granted summary judgment for the insurer, finding no duty to defend because there was no potential for coverage, since Financial Pacific's claim was for a fire that happened on November 11, 2011, and Tidwell's policy lapsed March 1, 2010. Tidwell appealed.
The issue on appeal was: What was the occurrence causing property damage? Financial Pacific argued it was the fire, which was outside the policy period. Tidwell argued it was chemical decomposition of the wood framing around the fireplace, a process called pyrolysis, that happened each time a fire was set during the policy period. The Court of Appeal agreed with the policyholder, and reversed the summary judgment.
The Court noted the evidence supported an inference that Tidwell might have negligently installed the termination top that restricted the chimney air flow, resulting in pyrolysis every time a fire was lit. This would have reduced the temperature at which the wood framing ignited, until eventually the fire occurred. Under this theory, the property damage would be the alteration of the chemical composition of the wood, and the reduction of its ignition point, caused by the chimney's excessive heat, for which Tidwell was responsible.
The Court did not conclude that had happened, but "because this might have happened, there was a potential for liability under the policies, and Financial Pacific had a duty to defend."4
The carrier argued coverage was determined by the damage for which the third party sues, e.g., the fire, and whether that damage occurred during a policy period. The Court disagreed, noting that even if the damage alleged in a third party complaint occurred outside the policy period, the possibility that the alleged damage was caused by property damage resulting from an occurrence during the policy period can create a potential for coverage. "[A] cause of damage may be sufficient to create a potential for covered damage if that cause of damage constituted physical injury to tangible property that occurred during a policy period, resulted from an occurrence, and ultimately led to the insured's legal obligation to pay damages."5
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Fourth District holds failure of tiles due to excess moisture disclosed by pre-installation testing not an accident triggering CGL coverageNavigators Specialty Ins. Co. v. Moorefield Construction, Inc.,6 was, like Tidwell, also reported in December 2016. Navigators insured a general contractor, Moorefield, that built a Best Buy store in Visalia. After the project was completed, the flooring failed, and the building's owner sued Moorefield and the developer, which then cross-complained against Moorefield, for breach of the construction contract and negligence. Moorefield tendered both claims to Navigators, which accepted with a reservation of rights.
Discovery showed the most likely cause of the flooring failure was installing flooring tiles on a concrete slab which had emitted excess moisture-and Moorefield knew about the excess moisture from results of moisture vapor emission tests. The flooring installer even had Moorefield sign a letter releasing the installer from any warranty claims "due to the high moisture of the above-mentioned job," and providing the installer would "not be held responsible for any moisture related problems."7
Navigators paid the $1,000,000 policy limits to settle the claims against Moorefield, and then sued for a declaration of no duty to defend or indemnify, contending the flooring failure was not a covered occurrence because it was not the result of an accident. After a bench trial, the court found the cause of the flooring failure was excessive moisture, and there was no covered occurrence because Moorefield had directed the flooring subcontractor to install even though it knew the moisture levels were too high. Moorefield appealed, and the Court of Appeal affirmed.
As in Tidwell, Navigators' policy defined "occurrence" as "an accident."8 "An accident does not occur," the Court observed, "when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage."9 While "[a]n accident may exist if any aspect in the causal series of events leading to the injury or damage was unintended by the insured and a matter of fortuity," the Court noted, "[w]here the insured intended all of the acts that resulted in the victim's injury, the event may not be deemed an 'accident' merely because the insured did not intend to cause injury."10
The Court concluded Moorefield's act causing damage was deliberate, and not an accident. And, since there was no "additional, unexpected, independent, and unforeseen happening [that] occur[ed] that produce[d] the damage," the Court concluded there was no potential for coverage under Navigators' policy.11
Moorefield's project manager and its president testified that test results showing excessive moisture were common, but they had never seen them lead to failure of the flooring. The project manager testified he discussed the moisture rate with the developer and Best Buy, and they made the decision to lay the flooring based on a cost-benefit analysis that it would be better to complete the building so the store could open for the holidays.
The Court rejected the possibility that a mistaken belief by Moorefield could have created the potential for coverage. First, the Court highlighted the testimony of Moorefield's project manager that the decision to install the flooring was based on a cost-benefit analysis rather than on a belief that moisture emission could not cause the flooring to fail. The Court reasoned that, even if Moorefield "sincerely believed there was little or no risk to installing the [flooring], . they were mistaken. An insured's mistake of fact or law does not transform an intentional act into an accident."12
The case drew the Building Industry Legal Defense Foundation as an amicus curiae, which argued that "a construction defect always should be deemed an 'occurrence' within the meaning of CGL policies, even when the contractor intentionally performs the work with the 'knowledge that work may create a risk of further events that could lead to harm'" because "the harm is nevertheless fortuitous and unintended, and the result of an 'accident.'"13 BILD argued for a rule that would place on the insurer the burden to "prove that the policyholder/contractor expected or intended its workmanship to be defective and cause property damage, [to avoid a finding that] the faulty workmanship was accidental and thus, an 'occurrence.'"14
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The Court declined to create such a rule, but emphasized that it was not deciding "whether all construction defects are 'occurrences' under a standard CGL policy," but only whether Moorefield's conduct on which the tendered claim was based "constituted an accident under California law."15 The Court contrasted Moorefield's conduct with "a case in which a contractor engaged in conduct only later discovered or revealed to constitute a construction defect"; unlike that case, "Moorefield knew about and intended to perform defective work with the hope or mistaken belief the defect would not cause property damage. Although there was no evidence that Moorefield intended to cause property damage, under California law, '[t]he insured's subjective intent is irrelevant.'"16
Virtually every construction defect claim arises from an intentional act, be it hammering a nail or laying flooring tile, so a strict "intentional act rule" could practically eliminate insurance coverage for the construction industry. The reality may be less dire, however. Even if Moorefield believed the defect would not...
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