In a recent decision, on November 29, 2016, in Tidwell Enterprises v. Financial Pacific Ins. Co., the California Court of Appeal examined when duty to defend arises under a general liability policy. In Tidwell, the damage the insured was sued over occurred after the policy had lapsed, but extrinsic evidence suggests continuous and progressive damage occurring during the policy period may have ultimately caused the loss. Tidwell is a good illustration of the difficulty insurers have obtaining summary judgment ending a bad faith lawsuit before trial in a duty to defend case.
In reversing the lower court’s decision to grant the insurer’s motion for summary judgment, the Court of Appeal relied on the general principle that “an insurer…bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy.” The Court held that summary judgment in the insurer’s favor was improper because extrinsic evidence suggested the possibility of coverage, and the insurer had failed to present undisputed facts eliminating that possibility.
In 2006 or 2007 Tidwell Enterprises (Tidwell) installed a fireplace in a newly constructed home. At the time of the installation, Tidwell was insured by Financial Pacific and remained insured under various but similar policies until March 2010. In November 2011, more than a year after the policy had lapsed, a fire allegedly originating in the fireplace, and damaged the home. The homeowner’s insurer, State Farm General Insurance Company (State Farm), sent Tidwell a letter notifying them of an impending subrogation action by State Farm. Tidwell immediately forwarded the correspondence to Financial Pacific. The insurance company denied Tidwell’s claim on the basis that its coverage had lapsed by the time the damage identified in State Farm’s complaint occurred.
Tidwell subsequently retained an expert who determined that the damage was caused by “repeated exposure of the combustible materials framing the chimney chase . . . from every fire burned in the fireplace since it was installed.” Based on the expert’s finding, Tidwell argued that repeated fires, some of which occurred when the policy was active, caused damage to the chimney, and lowered the point of the wood’s combustion, eventually resulting in the 2011 fire.
In granting Financial Pacific’s motion for summary judgment, the trial court found that the insurance policy had lapsed prior to the fire that damaged the Fox home, and held that plaintiffs may not assert alternative causes to create coverage issues that were not alleged in the third-party complaint.
The Court of Appeal interpreted the policy language as stating that Financial Pacific would be liable under the policies for physical injury to tangible property caused by Tidwell that (1) occurred during a policy period; and (2) was caused by continuous or repeated exposure to substantially the same general harmful conditions. The Court also relied on the following established principles: a third-party plaintiff cannot be the arbiter of coverage, and any doubts as to whether the facts establish a duty to defend must be resolved in the insured’s favor. More specifically, “facts known to the insurer and extrinsic evidence to the third-party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy.” In reversing the judgment in favor of Tidwell, the Court noted that Financial Pacific failed to eliminate all possibility that the repeated exposure of the wood to high temperatures altered the wood in such a way as to cause damage. More generally, “to prevail on a motion for summary judgment premised on a claim that the insurer had no duty to defend, the insurer must present undisputed facts that eliminate any possibility of coverage.” (American States Ins. Co. v. Progressive Casualty Ins. Co. (2009) 180 Cal.App.4th 18, 27.)
Tidwell illustrates that, in a duty to defend case under California law, insurers who deny a defense while ignoring extrinsic facts outside the complaint which support coverage, are subject to bad faith claims.