Court Finds Application of Standard Fire Insurance Policy a Question of Fact, Raising a Genuine Dispute Over Coverage

In Mosley v. Pacific Specialty Ins. Co. (No. E071287, filed 5/26/20), a California appeals court found triable issues of fact whether a fire loss was permissibly excluded under the requirements for the statutory standard fire insurance policy, but affirmed summary adjudication of the insureds’ bad faith claim, finding a genuine dispute whether the loss was covered.

In Mosely, the tenant in a rental home owned by the policyholders rerouted power lines in order to steal electricity for a marijuana growing operation and the illegal lines caused a fire, damaging the home. Pacific Specialty Insurance Company (PSIC) insured the premises under a standard HO-3 homeowners policy. PSIC denied coverage for the claim, citing a provision in the policy that excluded losses “resulting from any manufacturing, production or operation, engaged in . . . [t]he growing of plants.”

Section 2070 of the California Insurance Code requires all fire insurance policies to be on the “standard form,” which is set forth in section 2071. In the subsequent bad faith lawsuit, the policyholders asserted that PSIC’s refusal to cover the fire loss violated Insurance Code section 2070, because the policy provided less coverage than required by section 2071. PSIC countered, arguing that section 2071 allows exclusions for liability that occur from a hazard “increased by any means within the control or knowledge of the insured,” and the tenant’s conduct was within the policyholders’ control or knowledge, so the policy provided substantially equivalent coverage to what section 2071 requires. The trial court agreed with PSIC and granted summary adjudication on the policyholders’ claims for breach of contract and bad faith, entering judgment for the insurer.

The appeals court reversed on the breach of contract claim but affirmed summary adjudication of the bad faith claim. First, the court noted that “resulting from” has been considered equivalent to “arising out of,” which is given a broad interpretation, to conclude that the fire “resulted from” the marijuana growing operation.

The court then took up the argument that the provision excluding loss for damages caused by the growing operation rendered the policy void because it provided less coverage than Insurance Code section 2070 mandates. The court said that under section 2070, “a [fire] policy that does not conform to section 2071’s standard provisions must provide total fire coverage that is at least ‘substantially equivalent’ to coverage provided by the standard form” in section 2071. (Quoting Century-National Ins. Co. v. Garcia (2011) 51 Cal.4th 564, 567.)

The answer turned on a provision in section 2071 providing that an insurer “shall not be liable for loss occurring … while the hazard is increased by any means within the control or knowledge of the insured.” The Mosley court reviewed extensive out-of-state authorities addressing the question and stated:

“We interpret these authorities to stand for the proposition that an insured increases a hazard ‘within its control’ only if the insured is aware of the hazard or reasonably could have discovered it through exercising ordinary care or diligence. PSIC does not cite, and we cannot locate, any authority that suggests a landlord-insured is strictly liable for a hazard created by the insured’s tenant even if the insured is unaware of the hazard. It is undisputed the Mosleys did not know about Lopez’s marijuana growing operation or his altering the property’s electrical system. There is likewise no evidence as to whether the Mosleys could have discovered Lopez’s marijuana growing operation ‘by exercising ordinary care or diligence.’ On this record, we believe whether Lopez’s conduct was ‘within the control’ of the Mosleys is a fact issue for the jury to decide because the record is silent as to what, if anything, the Mosleys reasonably could have done to prevent or discover Lopez’s marijuana growing operation.”

While finding triable issues of fact on the breach of contract claim, the Mosley court affirmed summary adjudication of the bad faith claim based on the genuine dispute doctrine. The court stated the rule that an insurer does not act in bad faith when it mistakenly withholds policy benefits, if the mistake is reasonable or is based on a legitimate dispute as to the insurer’s liability. And an insurer which denies benefits reasonably, but incorrectly, will be liable only for damages flowing from the breach of contract, i.e., the policy benefits. (Citing Century Surety Co. v. Polisso (2006) 139 Cal.App.4th 922 and Morris v. Paul Revere Life Ins. Co. (2003) 109 Cal.App.4th 966.) The Mosley court stated:

“We conclude PSIC acted reasonably in denying the Mosleys coverage. As our discussion above shows, there is no clear, controlling California law that establishes whether PSIC properly denied coverage—an issue that turns on whether Lopez’s conduct was within the Mosleys’ control, which remains to be determined. Under the unique circumstances presented and the lack of guiding California precedent, we think PSIC reasonably interpreted Paragraph E as permissibly excluding coverage for the damage Lopez caused. On this record, PSIC cannot be liable for bad faith.”

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May 27, 2020