In Tidwell Enterprises v. Financial Pacific Ins. Co. (No. C078665, filed 11/29/16), a California appeals court held that that even though a house fire occurred after the policy period, there was nonetheless a possibility of coverage because the fire might have been the result of ongoing damage to the wood in the chimney chase during the policy period, due to the exposure of that wood to excessive heat from the chimney every time a fire was burned in the fireplace.
In Tidwell, Financial Pacific provided general liability insurance to a contractor, Tidwell, between 2003 and 2010. In 2006-07, Tidwell participated in the construction of a house by installing a fireplace. The contract included the fabrication and installation of a custom “termination top” for the fireplace. In November 2011, 20 months after the end of the last policy period, the house was damaged by fire. The homeowner was insured by State Farm, which paid the loss under its property coverage.
In the course of investigating, experts concluded that the fire was caused by the installation of the “unlisted shroud located at the top of the chimney chase.” An expert gave his opinion that the unlisted shroud prevented the fireplace from drafting properly, which “resulted in the overheating of the fireplace and heat transfer to the surrounding wood framing members.”
State Farm sued Tidwell in subrogation for negligence and Tidwell tendered the claim to Financial Pacific. However, the insurer denied coverage, stating that “the fire started as a result of the chimney shroud which did not allow free movement of air” but “the property damage occurred on November 11, 2011 the date of the fire at issue, long after Financial Pacific’s policies had expired,” and “for coverage to exist, the property damage must take place during the policy period.”
In the bad faith lawsuit that followed, the trial court granted summary judgment for Financial Pacific, agreeing that the fire had occurred in 2011 and the policy had expired in 2010. But the appeals court reversed. While the claim was still pending the contractor provided Financial Pacific with an expert’s opinion concluding that the repeated exposure of the combustible materials framing the chimney chase to the excessive heat from every fire burned in the fireplace since it was installed “would begin [to] lower the ignition temperatures of that combustible framing to in some cases below 250 degrees. This structure fire would not happen in most cases with the first or a single fire [but] rather would take a number of fires over several years since 2006 to complete pyrolysis and cause ignition.” Thus, the contractor asserted that “successive fires over the course of six years (during five of which Tidwell was insured by Financial Pacific) each caused damage to the chimney system and lowered the point of combustion which eventually resulted in the main fire damage to the Fox home.”
Based on that evidence, the appeals court found a potential for coverage that Financial Pacific had not ruled out in denying coverage. (Citing Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263; Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287; and American States Ins. Co. v. Progressive Casualty Ins. Co. (2009) 180 Cal.App.4th 18, 27 (to prevail on a motion for summary judgment premised on a claim that the insurer had no duty to defend, “the insurer . . . must present undisputed facts that eliminate any possibility of coverage”).)
The Financial Pacific policy was a standard CGL form agreeing 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 policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy further defined “property damage” as “[p]hysical injury to tangible property, including or resulting in loss of use of that property” or “[l]oss of use of tangible property that is not physically injured.”
The appeals court stated: “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 … 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.”
The court went on: “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.”
The Tidwell court distinguished Remmer v. Glens Falls Indem. Co. (1956) 140 Cal.App.2d 84, stating: “As we have also explained, however, it was possible that the November 2011 fire was caused by the repeated exposure of the wood framing the chimney chase to excessive heat resulting from a custom chimney cap installed by Tidwell, which altered the chemical composition of the wood and reduced its ignition point until the wood finally ignited on the date of the fire. And as we have also explained, due to this possible causal relationship between what happened to the wood and Tidwell’s potential legal obligation to pay damages to State Farm for the November 2011 fire, there was a potential for coverage under the language of Financial Pacific’s policies because the excessive heat in the chimney, for which Tidwell may have been responsible, might have caused physical injury to the wood framing the chimney chase and that physical injury might have occurred during one or more policy periods.”
The Tidwell court also rejected the insurer’s citation to Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, for the proposition that “[a] cause of damage is insufficient to create a potential for covered damage,” stating: “[W]e do not find any such proposition in that case. What the Supreme Court explained there was that, for purposes of triggering coverage, there is a distinction between the ‘occurrence’ and the resulting ‘bodily injury or property damage,’ and it is the latter, not the former, that must occur during the policy period for coverage to exist.  This distinction between ‘the causative event — an accident or ‘continuous and repeated exposure to conditions’ — and the resulting ‘bodily injury or property damage’’  is entirely unremarkable and does not refute the reasoning set forth above. Here, an initial causative event constituting an ‘occurrence’ — namely, the repeated exposure of the wood framing the chimney chase to excessive heat in the chimney — may have resulted in property damage over a period of years — namely, the physical degradation of that wood — which in turn may have led ultimately to the fire in November 2011. It is true that the initial occurrence was, by itself, ‘insufficient to create a potential for covered damage,’ but there is nothing in the relevant policy language, or in the case on which Financial Pacific relies, to support the conclusion that the physical injury to the wood that resulted from this initial causal event could not itself have served as a further causal event in the chain of causation between Tidwell’s negligence in installing the custom chimney top and the ultimate fire in November 2011 for which State Farm sought to recover damages from Tidwell. Thus, contrary to Financial Pacific’s assertion, a ‘cause of damage’ may be sufficient ‘to create a potential for covered damage’ if that ‘cause of damage’ constituted physical injury to tangible property that occurred during a policy period, resulted from an ‘occurrence,’ and ultimately led to the insured’s legal obligation to pay damages.”
In addition, the Tidwell court rejected a claim that the insured was impermissibly speculating about damage, and thus failed to demonstrate either a potential for coverage or a triable issue of fact, as prohibited under Hurley Construction Co. v. State Farm Fire & Casualty Co. (1992) 10 Cal.App.4th 533 and Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106:
“The ‘speculation’ Financial Pacific complains of here consists of the opinions of ‘Tidwell’s own ‘experts’ . . . of what may have occurred’ inside the walls of Fox’s house, i.e., the pyrolysis damage to the wood framing the chimney chase from the excessive heat in the chimney. But that is not the sort of speculation forbidden by Hurley and Gunderson. In determining whether ‘a bare ‘potential’ or ‘possibility’ of coverage’ exists, which is all that is necessary to trigger the duty to defend , neither Hurley nor Gunderson bars an insured from ‘speculating’ about how its actions may have led to the damages for which the insured is being sued by means of property damage that could have occurred during a policy period…. Stated another way, all Tidwell did here was offer a viable theory as to how the fire that damaged Fox’s house, for which State Farm was suing Tidwell, might have been the result of physical injury to tangible property that occurred during one or more of Financial Pacific’s policy periods and that resulted from an occurrence, thus potentially triggering coverage and, in turn, a duty to defend. Tidwell did not speculate that State Farm might plead some other claim against Tidwell that would potentially be covered by the Financial Pacific policies. Rather, Tidwell simply hypothesized how the claim that State Farm had already pleaded might be covered. Neither Hurley nor Gunderson precluded Tidwell from doing so.”
The Tidwell court also rejected numerous out-of-state authorities that declined to find coverage under the “degradation” theory espoused by the insured’s expert via pyrolysis, stating “for our purposes it is sufficient to conclude that Financial Pacific failed to eliminate all possibility that the repeated exposure of wood to excessive temperatures chemically alters the wood in such a way that the wood can be deemed physically injured (i.e., damaged) by that exposure.”
All of which was sufficient for the Tidwell court to find that Financial Pacific had a duty to defend Tidwell: “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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