Insurance Coverage & Bad Faith Newsletter - Spring 2023

Poonam Dua v. Stillwater Insurance Company

(Insurer Obligated to Defend Lawsuit Based on Frivolous Legal Theory, Notwithstanding That Indemnity Coverage Likely Not Provided by Homeowner’s Policy)

(June 2023) - In Dua v. Stillwater Ins. Co., 91 Cal.App.5th 127 (May 5, 2023), the California Second District Court of Appeal reversed the trial court’s entry of summary judgment in favor of Stillwater Insurance Company (“Stillwater”) based on “animal liability” exclusions and found that Stillwater was obligated to defend the insured, Poonam Dua (“Dua”), against an underlying lawsuit alleging damages sustained as a result of pit bull dogs attacking the plaintiff’s dogs. The dispute arose out of an underlying lawsuit alleging that Dua had a duty to prevent her boyfriend’s dogs from attacking the plaintiff’s dogs. The underlying complaint alleged that the attack occurred on a public street while the insured’s boyfriend was walking the dogs. Dua was not present when the attack occurred. Dua tendered the defense of the underlying lawsuit to Stillwater. In response, based solely on the allegations in the underlying complaint alone, Stillwater denied a duty to defend Dua against the lawsuit due to the application of animal liability exclusions in the Stillwater policy. The Court of Appeal referred to the animal liability exclusions as follows:

The policy made three references to an “animal liability exclusion.” First, the policy contained a separate page entitled “Animal Liability Exclusion” (Exclusion 1), which states: “This insurance does not apply to any occurrence or damages caused by any animal, at any time, at any premises insured hereunder, or caused by, arising out of, or in any way related to any animal owned by or in the care, custody, or control of the insured, or any member of the insured's family or household. Animal liability coverage is provided if a specific premium is charged and shown on the Declaration page for this coverage. …” On the bottom left of this page is written: “ANIMAL EXCL 05 14.”

Second, the policy contains another page that adds the following exclusion to “SECTION II—EXCLUSIONS, E. Coverage E—Personal Liability And Coverage F—Medical Payments to Others” of the policy as a new “Paragraph 9,” providing: “9. ‘Bodily Injury’ or ‘Property Damage’ caused by an occurrence or damage by any animal at any time on any premises insured hereunder. This exclusion applies to damages caused by, arising out of, or in any way related to any animal owned by or in the care, custody, or control of the insured, or any member of the insured's family or household. Coverage may be provided if a specific premium has been charged and shown on the Declaration Page for this coverage. . . All other terms and conditions of this policy are unchanged. …” (Exclusion 2.)

Relevant to Exclusions 1 and 2, there is no indication of an animal liability premium on the “Declaration” page, and it is undisputed that Dua did not purchase such coverage.

A third exclusion (Exclusion 3) restates Exclusion 1, except that it is expressly conditioned on the printing of a state-specific endorsement form number on the policy. Exclusion 3 is contained on a document titled, “HOMEOWNERS 6 — UNIT OWNERS FORM[,] POLICY ENDORSEMENTS.” The document begins by stating, “IMPORTANT NOTICE—ANIMAL LIABILITY EXCLUSION—” and then provides: “This endorsement and its policy conditions only apply if the appliable state endorsement form number below is listed in the back of your policy declarations.” The number that follows for California is “Animal Excl 04 11.” This number is not on the back of the policy's “Declarations” page. Only animal exclusion “05 14” is listed in the Declarations page under the title of “Amendment Provision,” which is the number printed on Exclusion 1.

Based on Stillwater’s denial of the duty to defend against the underlying lawsuit, Dua settled the lawsuit and filed a complaint for breach of contract and bad faith against Stillwater. The Court of Appeal described the settlement and resulting Dua lawsuit against Stillwater as follows:

Dua filed suit against Stillwater in September 2018. She alleged claims for breach of contract and for breach of the covenant of good faith and fair dealing. The basis for these claims were allegations that Stillwater failed to conduct an adequate investigation into the claims against Dua in the Peroffs' lawsuit and Stillwater's failure to defend Dua in the action and pay for her settlement because it “unreasonably and narrowly” interpreted the policy. Dua asserted that had Stillwater conducted a reasonable investigation of the Peroffs' claims, it would have discovered the following facts: (1) she was not married to Taylor; (2) Taylor did not live with her nor was he staying with her at the time of the dog attack; (3) the attack did not occur on her premises; and (4) at the time of the dog attack, the dogs were leashed and under the care, custody, and control of Taylor.

In response to the Dua lawsuit, Stillwater filed a motion for summary judgment. The trial court agreed with Stillwater and granted its motion. The trial court reasoned that since Dua’s liability for the underlying lawsuit could be established only on facts that would trigger Exclusion 1 in the Stillwater policy, no duty to defend was owed under such policy to Dua. In reversing the trial court’s decision, the Court of Appeal reasoned as follows:

When Dua sought Stillwater's defense against the Peroffs' lawsuit, she informed Stillwater that she did not own the dogs and that the dogs were in the care, custody, and control of her boyfriend when the dog attack occurred because Taylor was walking the dogs. Stillwater responded with a letter stating there was no coverage, citing Exclusion 2. Stillwater ignored the facts provided by Dua suggesting that the policy's animal exclusions did not apply because she did not own the dogs, nor were they in her care, custody, or control. The duty to defend exists where extrinsic facts, both disputed and undisputed, that the insurer knows or becomes aware of from any source at the time of the inception of the third party lawsuit or at the time of tender, suggest there may be coverage. (Hartford Casualty, supra, 59 Cal.4th at p. 287.) “Thus, ‘if any facts … known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer's duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage.’” There is no evidence that Stillwater took any measures to investigate or otherwise negate the facts suggesting that an animal liability exclusion may not apply and there was potential coverage, and therefore it had a duty to defend Dua.

Stillwater argues that the trial court was correct in finding it had no duty to defend as a matter of law. It argues that if Dua lacked ownership, care, custody, or control of the dogs, then there is no possibility that Dua could be held liable under the Peroffs' complaint. It also argues that if Dua did have ownership, care, custody, or control of the dogs, then there would be no coverage under the policy because Exclusion 1 would apply. Following this reasoning, which was the reasoning of the trial court, Stillwater argues there was no possibility of coverage under the policy.

We disagree. Stillwater conflates the possibility of Dua's liability with Stillwater's duty to defend. Even if Dua cannot be found legally liable under the Peroffs' complaint as pleaded, and is therefore not entitled to indemnity coverage under the policy, Stillwater may still be required to defend her. The Peroffs' claims, when evaluated in light of the facts presented by Dua to Stillwater when she tendered the claim, may have been frivolous and unmeritorious, but did not come within the animal liability exclusion. They thus created at least a possibility of coverage and the duty to defend. (Horace Mann, supra, 4 Cal.4th at p. 1086 [“An insured buys liability insurance in large part to secure a defense against all claims potentially within policy coverage, even frivolous claims unjustly brought”].) The duty to defend is broader than the duty to indemnify. (Horace Mann, at p. 1081; Gray, supra, 65 Cal.2d at p. 278.) An insurer can be excused from the duty to defend “only when ‘“the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.”’” (Hartford Casualty, supra, 59 Cal.4th at p. 288.) Stillwater has not established that there was no conceivable theory to bring the third party complaint within the possibility of coverage, and the facts Dua provided to Stillwater suggested that there may be coverage.

In summary, the Court of Appeal held that Stillwater broadly applied the animal liability exclusions in its policy and disregarded the possibility that Dua could have been found liable on an admittedly tenuous legal theory based on the duty to prevent her boyfriend, while visiting her home, from exposing members of the public to her boyfriend’s dangerous dogs. Based on the alleged facts in the underlying complaint supporting such theory, the animal liability exclusions in the Stillwater policy, when narrowly applied (as required by California law), would not have barred a duty to defend Dua against an otherwise frivolous lawsuit.

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