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Tidwell Enterprises, Inc. v. Financial Pacific Insurance Company, Inc.

In Tidwell Enterprises, Inc. v. Financial Pacific Ins. Co., Inc., _________ Cal.App.5th _______ (November 29, 2016), the California Third District Court of Appeal held that a duty to defend was triggered under a general liability policy issued to a contractor in connection with a fire which took place ten months after the expiration of the last policy issued by Financial Pacific Insurance Company (“Financial Pacific”) to the contractor. The Court of Appeal found that repeated exposure to heat within a fireplace causing degradation of surrounding wood timbers which ultimately resulted in a fire took place after the expiration of the Financial Pacific policies triggered potential coverage under such policies because Financial Pacific could not rule out potential ongoing damage sustained by surrounding wood members during its policy periods.

The parties’ dispute arose out of a fire which destroyed a home after the expiration of the last Financial Pacific policy issued to contractor, Greg Tidwell, Tidwell Enterprises, Inc., and Tidwell Enterprises Fireplace Division (collectively, “Tidwell”). The fire took place on November 11, 2011 and the last policy issued to Tidwell by Financial Pacific expired in early 2011. The homeowner’s insurer, State Farm, paid for the fire damage sustained by the home. Thereafter, it filed a subrogation lawsuit against Tidwell to recover the cost of repairing the home. Tidwell tendered the defense of the State Farm subrogation action to Financial Pacific. In response, Financial Pacific denied coverage of the State Farm lawsuit based on the absence of property damage taking place during the Financial Pacific policy periods. In response, Tidwell’s attorney sent letters to Financial Pacific arguing that the “construction of the fire place and the continuous burning of fires therein created the potential for continuous and repeated exposure to the same general harmful conditions. The policy definition of “occurrence” does not rule out the possibility that damage could have been occurring prior to the final fire that burned the house.” Tidwell’s counsel referred to an expert’s report opining that the installation of the termination top (above the fireplace) could have led to continuous progressive damage as a result of such fire in the fireplace burning too hot which fits squarely within the definition of an “occurrence.” As such, Tidwell’s counsel argued that Financial Pacific could not, at this point in the case, based on the allegations and expert’s report conclude that there was no continuous and progressive property damage occurring during the policy period. Hence, Financial Pacific was obligated to defend Tidwell against the State Farm subrogation action.

Thereafter, Tidwell filed a complaint for breach of contract and bad faith against Financial Pacific based on its denial of the duty to defend Tidwell against the State Farm subrogation action. The trial court agreed with Financial Pacific’s position that the damage alleged in the State Farm subrogation action related to the fire and entered summary judgment in favor of Financial Pacific.

In reversing the trial court’s decision, the Court of Appeal reasoned as follows:

On appeal, Tidwell essentially contends that Financial Pacific did not eliminate any possibility of coverage in the State Farm action because the undisputed facts show that Financial Pacific was aware of evidence that the November 2011 fire for which State Farm sued Tidwell may have been "simply the culmination of an integrated process of continuing and progressive property damage . . . without which the House Fire would never have occurred" and some of that property damage could have occurred during the periods when Financial Pacific's policies were in effect. Financial Pacific, on the other hand, contends there was no possibility of coverage because State Farm sought to recover from Tidwell only "for the fire damage post-dating Financial Pacific's coverage" and not for any earlier damage that might have been done to the wood framing the chimney chase as a result of the pyrolysis process. As we will explain, we conclude Tidwell has the better argument. Even though State Farm did not seek to recover from Tidwell damages directly attributable to physical injury to the Fox house that predated the November 2011 fire, there was a possibility that the damages State Farm did seek to recover occurred because of earlier physical injury to the house for which Tidwell was responsible, and thus there was a possibility that the damages State Farm sought fell within the coverage provided by the terms of the general liability policies Financial Pacific issued to Tidwell. Because there was a potential for liability under the policies, Financial Pacific owed Tidwell a duty of defense.

We reach this conclusion via a straightforward application of the applicable policy provisions. It is undisputed that under the policies at issue here, 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." The policies further defined "property damage" as "[p]hysical injury to tangible property, including or resulting in loss of use of that property" or "Loss of use of tangible property that is not physically injured."

When the foregoing provisions are read together, it can be seen 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. Thus, if Tidwell's negligence resulted in a repeated exposure of tangible property to substantially the same general harmful conditions (an occurrence), and that repeated exposure to those conditions resulted in physical injury to that property (property damage) during a policy period, and Tidwell became legally obligated to pay damages because of that negligence, then coverage would, at least potentially, exist under the Financial Pacific policies.

With this understanding of the policy language, it is apparent there was possibility of coverage here based on the allegations of State Farm's complaint and the facts known to Financial Pacific. This is so because, based on the allegations and the known facts, there was reason to believe Tidwell might have negligently installed a custom top on the chimney in the Fox house 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 (through the process of pyrolysis) might have altered the chemical composition of the wood framing the chimney chase, thereby reducing the temperature at which it would ignite, until eventually, on November 11, 2011, the wood framing the chimney chase did ignite, which in turn resulted in the fire that damaged Fox's house, for which State Farm was obligated to indemnify Fox as Fox's insurer. If that is what happened, then Financial Pacific would potentially be liable under its policies to pay any sums Tidwell became legally obligated to pay State Farm as damages because the repeated exposure of the wood framing the chimney chase to the excessive heat in the chimney, for which Tidwell was responsible, may have caused physical injury to the wood (by altering its chemical composition and reducing its ignition point) during one or more policy periods, and that physical injury would have caused Tidwell's legal obligation to pay damages for the fire that resulted (at least in part) from the damaged wood.

Of course, we need not and do not conclude that this is what happened; we conclude only that under the allegations of State Farm's complaint and the facts known to Financial Pacific this is what might have happened. And because this might have happened, there was a potential for liability under the policies, and Financial Pacific had a duty to defend.


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