It is widely known amongst insurance professionals that California applies one of the broadest standards in the country when examining an insurer's duty to defend its insureds. In my practice, I frequently remind my carrier clients that California law obligates the insurer to bear a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy. If there are any conceivable facts in a demand or lawsuit that could give rise to coverage, a defense is owed, even if the insurer has doubts whether these facts could be proved or established. For 2017, the high bar governing an insurer's duty to defend seems to have reached its peak.
In a recent decision, Tidwell Enterprises, Inc. v. Financial Pacific Insurance Company (2016) 6 Cal.App.5th 100, the California Court of Appeal held that a liability insurer had a duty to defend a chimney contractor in a fire loss claim tendered over a year after the applicable policy period in a general liability policy ended. How is this possible you ask? The Tidwell Court held that due to the contractor's fabrication and installation of a custom chimney termination top that limited airflow and caused the fireplace to run too hot when in use, the chimney and structure could have sustained continuous and progressive damage that occurred during Financial Pacific's policy period and prior to the final fire that ultimately burned down the house.
Financial Pacific issued general liability policies to fireplace contractor Tidwell Enterprises between March 2003 and March 2010. Under the terms set forth in the standard CGL forms in these policies, Financial Pacific agreed 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." The policies defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
In 2006 or 2007, Tidwell worked on the construction of a new home by installing the fireplace. Pursuant to this work, Tidwell was contracted to fabricate and install a custom "termination top" for the fireplace designed by the project architect. On November 11, 2011 (some 20 months after the end of the last policy period for Tidwell's general liability coverage with Financial Pacific), the house was damaged by fire. State Farm, the homeowner's carrier, covered the fire and issued a letter to Tidwell advising that the fire may have been caused by the manufacture, design or installation of the "fireplace, chimney chase, residence structure or involved component parts." Tidwell tendered State Farm's letter to claims professionals at Financial Pacific who, in turn, were provided with a fire investigation report by State Farm's forensic expert during their investigation of the fire loss. State Farm's expert concluded that the fire was caused by the installation of an "unlisted shroud located at the top of the chimney chase." In essence, the shroud prevented the fireplace from drafting properly, which "resulted in the overheating of the fireplace and heat transfer to the surrounding wood framing members." Ultimately, State Farm asserted that this "overheating of the fireplace resulted in the ignition of the surrounding framing members at the sides, top and bottom of the fireplace."
State Farm sued Tidwell for negligence to recover, in subrogation, amounts it paid to the homeowner for the fire loss. State Farm asserted that Tidwell negligently installed the fireplace systems in the subject home and that Tidwell's negligence was the proximate cause of the fire. Tidwell tendered the suit to Financial Pacific wherein Financial Pacific declined coverage on the grounds that no potential for coverage existed with respect to the State Farm suit. Financial Pacific concluded that "the property damage occurred on November 11, 2011 the date of the fire at issue, long after Financial Pacific's policies had expired" and that "for coverage to exist, the property damage must take place during the policy period." Tidwell contested the denial of coverage asserting that "[t]he construction of the fireplace and the continuous burning of fires therein created the potential for continuous and repeated exposure to the same general harmful conditions" and that there could have been occurrences of property damage long before the fire finally manifested itself.
Ultimately, Tidwell initiated a bad faith/declaratory relief action against Financial Pacific seeking a declaration that Tidwell owed a duty to defend due to a continuing occurrences of property damage allegedly caused by Tidwell during the operative policy period more than a year before the final fire. The trial court granted summary judgment in favor of Financial Pacific noting that the final fire occurred after the expiration of the applicable policies and that Tidwell could not "assert alternative causes State Farm 'should have' alleged in order to create coverage issues."
The Court of Appeal overturned the trial court and began its opinion by reiterating the longstanding rule in California regarding an insurer's duty to defend: "An insurer. . .bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy." Seeking to apply this rule as broadly as possible, the Court of Appeal added "[f]acts known to the insurer and extrinsic 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. . .[t]his is so because current pleading rules liberally allow amendment; the third party plaintiff cannot be the arbiter of coverage."
The Tidwell Court also applied what it considered a straightforward application of the applicable policy provisions to conclude that Financial Pacific "would be liable under the policies for any sums Tidwell became legally obligated to pay as damages because of physical injury to tangible property that: (1) occurred during a policy period; and (2) was caused by continuous or repeated exposure to substantially the same general harmful conditions."
Based on the allegations in State Farm's complaint against Tidwell and the facts known to Financial Pacific (including the findings of State Farm's forensic expert), the Court of Appeal concluded that a possibility for coverage existed (and thus a duty to defend) because there was reason to believe Tidwell might have negligently installed a custom top on the chimney that restricted the flow of air in the chimney, which in turn, might have resulted in excessive heat in the chimney every time a fire was burned in the fireplace from the time the house was built, which in turn might have altered the chemical composition of the wood framing at the chimney chase, thereby reducing the temperature at which it would ignite, until eventually, on November 11, 2011, the wood framing did ignite resulting in the fire loss.
Importantly, the Tidwell Court stressed that a court need not find and Tidwell need not prove that the above convoluted series of facts actually happened. Rather, to establish an insurer's duty to defend, Tidwell need only show that under the allegations in the State Farm complaint and the facts known to Financial Pacific, the above facts might have happened.