News - January 2006

• No Coverage for Liability Arising From Sale of Real Property
• Insured’s Solicitation of Competitor’s Customers is Not "Advertising"
• Pollution Claims Do Not Fall Within CGL Insuring Agreements
• Recent Legislation: Additional Living Expense, Public Adjusters, Policy Forms and Mediation

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No Coverage for Liability Arising From Sale of Real Property

The California Court of Appeal has upheld a homeowners policy exclusion which barred coverage for bodily injury or property damage arising out of the insured’s sale or transfer of real property.  (Davis v. Farmers Insurance Group (2005) 134 Cal.App.4th 100)

Facts

Daniel and Cynthia Davis obtained a course of construction policy from Fire Insurance Exchange (FIE) for a home they were building.  After completion of construction, the Davises occupied the home and converted the course of construction policy into a homeowners policy (the first policy).  Later, the Davises sold the home to Rick and Kristin Engebretsen.  Following the sale, the Davises cancelled the first policy.

The Davises then bought a new home.  The Davises insured their new home with another homeowners policy obtained through FIE (the second policy).  

Several years later, the Engebretsens sued the Davises for negligence, fraud and breach of contract in connection with the Davises’ sale of the home to the Engebretsens.  The Engebretsens alleged that the Davises had improperly constructed the house; that the Davises knew or should have known about the improper construction; that the improper construction caused mold to grow under the home; and that the mold resulted in property damage to the home and bodily injury to the Engebretsens.

The Davises tendered defense of the lawsuit to FIE under both the first and the second policies.  Both policies contained “sale of property” exclusions which barred coverage for bodily injury or property damage “arising out of the sale or transfer of real property including but not limited to … known or unknown property or structural defects; … [or] … concealment or misrepresentation of any known defects.”  Relying on this exclusion, FIE refused to defend the Davises against the Engebretsens’ lawsuit.

The Davises subsequently sued FIE for breach of contract and bad faith, alleging that FIE had wrongfully refused to defend the Davises in the underlying lawsuit.  The trial court granted summary judgment in favor of FIE.

Holding

The Court of Appeal affirmed, holding that the policies’ “sale of property” exclusions relieved FIE of any duty to defend the Davises against the Engebretsens’ lawsuit.   According to the Court of Appeal, the Engebretsens’ claims against the Davises “arose out of known or unknown defects in the real property after the sale of the real property,” and the subject exclusion “was drafted to encompass the very type of claims alleged against the Davises.” 

It was irrelevant that the Engebretsens had alleged “negligent construction” by the Davises before the sale of the home.  All of the Engebretsens’ claims against the Davises “arose out of” the Davises’ eventual sale of the home to the Engebretsens, thus relieving FIE of any duty to defend the Davises.  

Comment

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Insured’s Solicitation of Competitor's Customers is Not "Advertising"

The Ninth Circuit Court of Appeals has held that an insured’s alleged solicitation of a competitor’s customers is not “advertising” and does not trigger a duty to defend under a CGL policy’s “advertising injury” coverage.  (Hayward v. Centennial Insurance Company (9th Cir. 2005) 430 F.3d 989)

Facts 

Andresen hired an employee from a competitor company.  The competitor sued Andresen and the employee, alleging that the employee had misappropriated the competitor’s confidential customer lists and marketing plans and had then solicited the competitor’s existing and potential customers.  Centennial, Andresen’s CGL insurer, refused to defend, contending that there was no potential for “advertising injury” coverage.

Holding          

Liability coverage for “advertising injury” requires advertising by the insured.  The ordinary meaning of “advertising” includes widespread distribution of promotional materials to the public at large, and does not include one-on-one solicitation of customers. 

The terms “advertising” and “solicitation” are mutually exclusive.  Absent allegations of “advertising,” the insured’s solicitation of his former employer’s customers did not trigger a duty to defend under the “advertising injury” coverage of the Centennial policy.

Comment 

The Ninth Circuit Court of Appeals is consistent with California state courts on the issue of what kind of “advertising” may trigger “advertising injury” liability coverage.  Unless otherwise stated in the policy, “advertising” requires a widespread distribution of promotional material to the public.  Thus, insurers who offer “advertising injury” coverage generally should not be obligated to defend where the complaint merely contains allegations of one-on-one communications and employs words like “solicit” or “solicitation.”

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Pollution Claims Do Not Fall Within CGL Insuring Agreements

The California Court of Appeal recently affirmed a trial court’s ruling that multiple pollution-related activities did not fall within the terms of various CGL insuring agreements. (Lockheed Corporation v. Continental Insurance Company (2005) 134 Cal.App.4th 187)

Facts

The EPA and California’s Water Quality Control Board ordered Lockheed Corporation to investigate and remediate soil and ground water contamination at multiple sites in California.  Moreover, several private parties sued Lockheed for contamination damages.

Lockheed had several nonstandard CGL “manuscript” policies, some of which did not include a “pollution” exclusion.  Lockheed tendered the claims to its CGL insurers and filed a breach of contract and bad faith action against those insurers for failing to fully defend and indemnify Lockheed.  After numerous years of coverage litigation, the trial court entered judgment in favor of the CGL insurers, and Lockheed appealed.

Holding

The California Court of Appeal affirmed the trial court’s ruling and there was no coverage under the manuscript CGL policies.

First, the court held that the CGL insurers had no duty to defend any administrative proceeding which had not ripened into a lawsuit, because any such proceeding did not qualify as an “action,” as that term was used in the manuscript policies.

Second, the court reasoned that under the “accident” trigger of coverage utilized in the insuring agreement in the manuscript CGL policies, Lockheed had the burden of establishing that the pollution damage was caused by a sudden and unexpected event “identifiable in time and place.”  The court found Lockheed was not able to carry its burden of proof on this issue.

Third, the court also determined that the pollution claims were not separately covered under the CGL policies’ “personal injury” coverage because that coverage applied “to injuries other than injuries to property.”

Finally, the court determined that Lockheed had failed to submit sufficient evidence to support a prima facie case for coverage for pollution liability at one of the loss locations.  Therefore, pursuant to Cottle v. Superior Court (1992) 3 Cal.App.4th 1367, the trial court was justified in excluding any evidence submitted by Lockheed concerning its losses for that location.

Comment

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Recent Legislation: Additional Living Expense, Public Adjusters, Policy Forms and Mediation

Additional Living Expense

Where an insured makes a claim for additional living expense, an insurer must provide the insured with a list of items that are “commonly” claimed and that the insurer believes are covered under the policy.  If the Department of Insurance develops its own list, an insurer may use the Department’s list.  (Insurance Code section 2060; effective January 1, 2006)

Where a covered loss occurs in connection with a declared “state of emergency,” any additional living expense coverage must extend for at least 24 months.  However, this extension of time does not alter any monetary limit for additional living expense.  (Insurance Code section 2051.5; effective January 1, 2007)

Public Adjusters

Previously, a public adjuster could not enter into a contract with an insured between 6:00 p.m. and 8:00 a.m.  New legislation prohibits a public adjuster from even making contact with an insured between 6:00 p.m. and 8:00 a.m. if the contact is for purposes of seeking soliciting employment. (Insurance Code section 15027; effective January 1, 2006) 

In addition, a public adjuster must now provide an insured with a separate, detailed written disclosure statement regarding the roles of public adjusters, company adjusters and independent adjusters.  The language of the written disclosure statement is established by statute, and includes an explanation of the insured’s right to cancel the contract. (Insurance Code section 15027; effective January 1, 2006) 

Policy Forms

After a covered loss, an insurer must, within 30 days of the insured’s request, provide the insured with a complete copy of the policy.  However, this requirement does not extend to commercial property policies, commercial liability policies or workers compensation policies. (Insurance Code section 395; effective January 1, 2006)

Mediation

The “pilot” mediation program is now permanent.  The program extends to residential fire claims arising out of a declared “state of emergency,” to residential earthquake claims arising out of a declared “state of emergency,” and to automobile claims involving collision coverage or physical damage coverage. (Insurance Code section 10089.70)

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