Commercial general liability policies commonly cover liability for damages “because of” bodily injury or property damage that happens during the policy period. A key is that the coverage does not extend to liability “for,” “due to” or “resulting from” property damage. Rather, the coverage is for liability because of property damage or bodily injury that takes place while the policy is in effect.
This distinction may explain what otherwise might appear to be a counter-intuitive result in the California Court of Appeal’s recent ruling in Tidwell Enterprises, Inc. v. Financial Pacific Ins. Co. (2016) 6 Cal App. 5th 100. That case involved a subrogation action by a homeowner’s insurer (State Farm) that paid a fire damage claim after a fire occurred in 2011. State Farm then sought subrogation from the contractor (Tidwell) that installed the fireplace in the house between 2006 and 2007. In the normal course, Tidwell would have tendered the claim to its CGL insurer with coverage in place in 2011 and there would have been no coverage issue. Instead, however, Tidwell tendered its defense to its CGL insurer (Financial Pacific) that was last on the risk in 2010, i.e., Financial Pacific’s coverage expired before the fire happened.
How, then, could the 2010 occurrence-based policy provide potential coverage for 2011 fire damage? While construction defect and environmental claims commonly trigger coverage under multiple CGL policies, one might assume that a fire loss is a “boom” event akin to a car crash or a landslide and not a continuous and progressive damage situation. Indeed, Financial Pacific denied the claim on the straightforward ground that State Farm’s subrogation claim was for damages to the house caused by the 2011 fire, not for anything that happened in 2010 or earlier. The opinion suggests it was also clear that State Farm’s claim was to recoup money paid only for property damaged by the fire.
The trial court agreed with Financial Pacific and granted summary judgment against Tidwell in the coverage action. The trial court accepted Financial Pacific’s contention that “coverage under Financial Pacific’s policies applies to ‘property damage’ during the policy period covered by an occurrence . . . and did not provide coverage for injury sustained after the expiration of the policy period as the result of a condition created during the policy period.”
The Court of Appeal reversed and found a duty to defend. Here’s where the Court found that Financial Pacific’s argument broke down: it had no answer to Tidwell’s point that it had evidence that its work in 2006-2007 possibly damaged the wood framing the chimney chase (the structure through which the chimney pipe runs) and lowered the ignition point of that wood such that it could ignite at the temperature routinely found in the chimney. Tidwell’s work may have caused the wood to degrade, i.e., sustain damage, beginning in 2006-2007. True, State Farm did not pay for damages to that wood and was not seeking subrogation for any damage to that wood. But, State Farm arguably was seeking to recover damages “because of” injury to that wood in that the degraded wood may have been the direct cause of the fire. The Court considered the strength of the connection between the wood damage, the fire and the resulting property damage that State Farm covered. The Court held: “[t]he degradation of the wood by repeated exposure to high heat could readily be characterized as a ‘physical and material alteration’ to the wood and the lowering of the ignition point of the wood could easily be characterized as ‘detriment’ resulting from the physical alteration of the wood.” With that, the Court found it “easy” to reject Financial Pacific’s argument that a 2010 CGL policy does not apply to 2011 fire damage, at least as to the duty to defend. The standard there, of course, is whether there is any potentially or possibly covered liability and, on the record in hand, State Farm could not eliminate that possibility according to the Court.
An interesting question is how far this “because of coverage” argument goes. What if, for example, a person steps on a degraded wood floor in 2017, slips and sustains bodily injury. Could that trigger coverage under the 2014 to 2016 policies if the wood was degrading at that time as a result of the insured’s work such that the bodily injury was “because of” property damage to the wood? Can bodily injury ever be deemed to occur “because of” property damage?
Another example: a manufacturer supplies components for a bridge in 2014 that gradually corrodes and collapses on a car in 2017. Could the 2015 coverage be triggered for the damage to the car or its passengers? At what point does the nexus between the property damage during the policy period and the subsequent injury after the coverage expires become too attenuated to be deemed “because of” the prior property damage?
These questions may run contrary to the customary notion of “date of loss” for CGL claims. Pipe ruptures, fires, crashes, collapses and explosions all would ordinarily seem to result in damages traceable to a single day, hour and minute. Coverage ordinarily would be limited to a single policy period. In the Tidwell case, the house caught fire and burned on November 11, 2011. State Farm did not pay money for damages to the degrading wood around the chimney. Perhaps nobody at Financial Pacific, off the risk since 2010, could have imagined that the insurer might provide coverage for the property damaged by the fire.
The lesson here would seem to be that coverage for liability “because of” property damage or bodily injury requires an analysis of every link in the chain of events that ultimately results in the damages at issue. At some point, a court may conclude that the connection between some damage in Year One, perhaps at a microscopic level, is simply too remote to be deemed to cause damage in Year Two. The Tidwell case shows that CGL insurers must look beyond the immediate cause of the injury.
On the one hand, Tidwell could be deemed a unique situation related to “pyrolysis” or the decomposition of material over time due to heat. This situation could be limited to chimney fires. The usual fire claim would not involve a continuous and progressive property damage claim. Critically, the Court also was dealing solely with the question of the duty to defend. The Court was looking to the allegations in the case, broadly construed, and the extrinsic evidence Tidwell presented about the possible source of the fire. Hence, the holding should not be overstated.
On the other hand, Tidwell may prompt further investigation into coverage for “boom” events to determine whether the injury may actually be traceable back to some other damage that existed before the date of the accident.
David A. Tartaglio is a partner with Musick, Peeler & Garrett in its Los Angeles office. His full bio and contact information can be found at: http://www.musickpeeler.com/professional/David_Tartaglio/