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Insurer Has Duty to Defend Insured Fireplace Contractor Against Suit Involving Potential "Pyrolysis" Occurring During Policy Period, Even Though Resulting Fire Did Not Occur Until After Policy Period

A commercial general liability insurer had a duty to defend its insured, a fireplace contractor, against a third-party suit involving potential "pyrolysis" damage occurring during the policy period, even though the resulting fire itself did not occur until after the policy period. (Tidwell Enterprises, Inc. v. Financial Pacific Insurance Co., Inc. (2016) 6 Cal.App.5th 100)

Facts

Tidwell Enterprises, Inc. was a fireplace contractor. In 2006 or 2007, Tidwell installed a fireplace in a house that was being built for Kendall Fox. At the time Tidwell installed the fireplace, and up until March 2010, Tidwell was the named insured on a commercial general liability policy issued by Financial Pacific Insurance Company, Inc.

In November 2011 (20 months after expiration of Tidwell's last policy through Financial Pacific), Fox's house was damaged by fire.  At the time of the fire, Fox had a homeowners policy through State Farm General Insurance Company. State Farm thus paid for the fire damage to Fox's house.

State Farm then filed a subrogation action against Tidwell. In its complaint, State Farm alleged that Tidwell had negligently installed the fireplace system in Fox's house, and that Tidwell's negligence was a proximate cause of the November 2011 fire.

Tidwell tendered defense of the lawsuit to its general liability insurer, Financial Pacific. However, Financial Pacific declined to defend Tidwell on the ground that the fire damage did not occur "during the [Financial Pacific] policy period." Financial Pacific reasoned that Tidwell's last policy through Financial Pacific expired in March 2010, and the fire damage to the house did not occur until November 2011.

Tidwell challenged Financial Pacific's denial of a defense, arguing that Tidwell had potentially caused continuous and progressive heat damage to the house during the Financial Pacific policy period, even though the fire itself did not occur until after the policy period. Specifically, Tidwell's expert opined that: (1) Tidwell had negligently installed a chimney cap which restricted air flow in the fireplace system; (2) the restricted air flow caused the fireplace to overheat every time a fire burned in the fireplace after the house was built; (3) the continuous overheating of the fireplace caused a chemical change known as "pyrolysis" to occur to the surrounding wood framing members; (4) the pyrolysis lowered the ignition point of the wood framing members; and (5) the lowered ignition point of the wood framing members culminated in the November 2011 fire to Fox's house.

Despite the opinion of Tidwell's expert, Financial Pacific again declined to defend Tidwell against State Farm's lawsuit. According to Financial Pacific, State Farm as subrogee of Fox was only seeking damages due to the November 2011 fire itself, which occurred after expiration of Financial Pacific's last policy.

Tidwell subsequently sued Financial Pacific for breach of contract and bad faith, alleging that Financial Pacific had improperly refused to defend Tidwell against State Farm's subrogation action. Financial Pacific successfully moved for summary judgment on the ground that State Farm was not seeking damages against Tidwell because of property damage that occurred during Financial Pacific's policy period. Tidwell appealed.

Holding

The Court of Appeal reversed the summary judgment that had been entered in favor of Financial Pacific and against Tidwell. According to the appellate court, Financial Pacific had not established that it had no duty to defend Tidwell against State Farm's subrogation action. The appellate court reasoned that the alleged pyrolysis to the surrounding framing members appeared to constitute "property damage" as defined in the Financial Pacific policy, and that such property damage potentially occurred "during the [Financial Pacific] policy period." That was sufficient to trigger Financial Pacific's duty to defend Tidwell against State Farm's lawsuit. It was irrelevant that the actual fire itself did not occur until after expiration of the Financial Pacific policy.

Financial Pacific argued that State Farm was not suing Tidwell for any damage to the wood framing members that may have occurred before the November 2011 fire, but rather was only suing Tidwell for damage to the rest of the house that occurred during the November 2011 fire. The appellate disagreed, essentially holding that Financial Pacific's duty to defend Tidwell was triggered by ongoing pyrolysis damage during the policy period which resulted in an actual fire after the policy period.

According to the appellate court, "[b]ecause Financial Pacific did not eliminate all possibility of coverage in the State Farm action, Financial Pacific was not entitled to summary judgment on the ground that it did not owe Tidwell a duty of defense." (Although the appellate court did not expressly state as much, the denial of Financial Pacific's motion for summary judgment on the duty to defend issue presumably establishes a "possibility" of coverage and, hence, a duty to defend on the part of Financial Pacific.)

Comment

The Tidwell case involved a situation where the insured's negligence allegedly caused progressive and hidden property damage (i.e., pyrolysis) during the policy period, which then led to sudden and obvious property damage (a house fire) after the policy period. On such facts, the California appellate court found that the insurer had a duty to defend the insured.

Note that the Tidwell case appears to be at odds with some out-of-state cases in which courts have declined to impose a duty to defend or indemnify in similar circumstances. (See, e.g., Greenlee v. Sherman (N.Y.App.Div. 1989) 536 N.Y.S.2d 877 and Truck Ins. Exchange v. O'Mailia (2015) 378 Mont. 231.) The courts in these other cases have suggested that pyrolysis is not property damage, but merely a condition that increases the risk of property damage. These courts have thus declined to find coverage when pyrolysis during the policy period leads to an actual fire after the policy period.

The Tidwell case is likely to generate some controversy. Notably, the insurer in the case has requested that the California Supreme Court either accept the matter for review or order depublication of the Court of Appeal's opinion.

 

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