40 Cal.App.5th 497
Cal. Ct. App.2019Background
- Paul Terrell and Rica Tseng purchased a San Francisco house in 2000, began renting it in 2003, and remained absent from the property while tenants occupied it for many years.
- State Farm issued a rental-dwelling policy in 2004, then replaced it with a homeowners policy in 2005 at appellants’ request, though appellants continued to rent the property.
- From 2006–2014 appellants leased the property to Pamela and Mary Fitzgerald; in 2014 the front porch collapsed and Mary was injured.
- The Fitzgeralds sued appellants for landlord/maintenance liability; State Farm denied defense and indemnity, citing the policy exclusion for losses “arising out of business pursuits ... or the rental ... of any premises.”
- Appellants settled the underlying suit and sued State Farm for breach of contract and bad faith; the trial court granted summary judgment for State Farm, and the court of appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether homeowner policy’s business-pursuits / rental exclusion bars coverage for the Fitzgerald suit | Terrell: loss arose from ordinary homeowner maintenance (nonbusiness) so exclusion should not apply | State Farm: appellants leased for profit over many years; rental/business exclusion applies | Held: Exclusion applies—rental activity was a business pursuit and covered claims arose from it |
| Whether the policy’s exception for “activities ordinarily incident to non‑business pursuits” restores coverage | Terrell: porch maintenance is ordinary homeowner activity and would have been done even if living there, so exception applies | State Farm: maintenance directly furthers the rental business and is necessary to that business; exception inapplicable | Held: Exception does not apply—repairs/maintenance were directly related to and necessary for the rental business |
| Whether insurer had duty to defend and whether denial supported bad‑faith claim | Terrell: State Farm unreasonably denied defense and investigation, so bad faith | State Farm: no duty to defend because exclusion eliminated any potential for coverage | Held: No duty to defend or indemnify; thus no viable bad‑faith claim (summary judgment for insurer) |
Key Cases Cited
- Crane v. State Farm Fire & Casualty Co., 5 Cal.3d 112 (1971) (accident during in‑home paid childcare could be covered because insured acted simultaneously in nonbusiness household role)
- Jiminez v. Fire Ins. Exchange, 184 Cal.App.3d 437 (1986) (acts that enhance commercial value of property are business pursuits excluded from homeowners coverage)
- Morris v. Atlas Assurance Co., 158 Cal.App.3d 8 (1984) (insurer liable for covered accidents unless coverage is expressly excluded)
- Foster‑Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857 (1998) (ambiguities in insurance policies construed against the insurer)
- Powerline Oil Co. v. Superior Court, 37 Cal.4th 377 (2005) (potential for coverage is a legal question reviewed de novo on summary judgment)
- Blue Ridge Ins. Co. v. Newman, 453 So.2d 554 (La. 1984) (repairs necessary to renting property are a necessary incident to the business and excluded)
- Gambell v. Vermont Mut. Ins. Co., 689 A.2d 453 (Vt. 1997) (activities that do not further the insured’s business may fall within ordinarily‑incident exception)