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Terrell v. State Farm General Insurance Co.

California Court of Appeals, First District, First Division

September 26, 2019

PAUL TERRELL et al., Plaintiffs and Appellants,
v.
STATE FARM GENERAL INSURANCE COMPANY, Defendant and Respondent.

          San Francisco County Superior Court No. CGC-16-551994. Hon. Richard B. Ulmer Trial Judge

          Emergent LLP, Peter Roldan, for Plaintiffs and Appellants

          Pacific Law Partners, LLP, Sandra E. Stone, Jenny J. Chu, for Defendant and Respondent

          SANCHEZ, J.

         Appellants Paul Terrell and Rica Tseng had been renting their San Francisco home to tenants for eight years when the front porch collapsed, causing injury to a tenant. When the tenants sued, appellants sought defense and indemnification from their insurance provider, respondent State Farm General Insurance Company (State Farm). State Farm denied their claim, however, because appellants’ homeowners insurance policy excluded coverage for injuries arising out of an insured’s business pursuits or the rental of their home. Appellants sued State Farm for breach of contract and bad faith denial of their insurance claim. They appeal from the grant of summary judgment in favor of State Farm, contending that coverage should be restored under an exception for activities that are “ordinarily incident to non-business pursuits.” We conclude that summary judgment was appropriately granted on this record and affirm.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         The facts in this case are not in dispute. Appellants purchased a San Francisco property in 2000 (Property). They initially lived at the Property and obtained a homeowners insurance policy from State Farm. Appellants moved out and began renting the Property in 2003. They contacted their State Farm agent to inquire about appropriate insurance coverage for the Property. At their direction, State Farm cancelled and replaced the homeowners policy with a rental dwelling policy in January 2004. In the winter of 2004, appellants discussed moving back to the Property and asked State Farm to change their coverage. State Farm cancelled the rental dwelling policy in January 2005 and replaced it with the homeowners policy at issue in these proceedings. Appellants, however, did not move back into the Property. Instead, their existing tenants remained in the rental home until May 2006. When those tenants moved out, appellants advertised the Property for rent and signed a lease in June or July 2006 with a new tenant, Pamela Fitzgerald. The lease set the rent at $2, 100 per month and identified Pamela and her then minor daughter, Mary Fitzgerald, as the occupants.

         Eight years later, the porch area in front of the Property’s front door collapsed. Mary, who was standing on the porch at the time, fell through a hole and sustained injuries from the fall. Appellant Paul Terrell contacted State Farm to report the collapse of the front porch area and possible injury to one of the tenants. The State Farm claim representative verified that appellants had been renting out the Property since 2003, but noted that appellants did not have a rental dwelling policy. Mr. Terrell acknowledged that they should have contacted their State Farm agent but did not do so because they thought their situation was temporary and they would move back to the Property.

         In April 2014, the Fitzgeralds sued appellants, alleging “ ‘claims for damages, including bodily injury, against [appellants] arising out of their ownership and maintenance of the home rented to Pamela.’ ” The complaint set forth causes of action for negligence, premises liability, breach of the lease agreement, and breach of the implied warranty of habitability, among other claims. The gravamen of their complaint was that the Property “suffered from numerous uninhabitable conditions” which appellants failed to repair, appellants “failed to... inspect and maintain the landing throughout their tenancy, ” and appellants failed to notify them of the dangerous condition or otherwise protect them against the risk of harm.

         State Farm reviewed a copy of the Fitzgeralds’ complaint and concluded the suit did not seek to recover damages potentially covered by appellants’ homeowners policy. In a letter to appellants denying coverage and declining to provide a defense, [1] State Farm explained that the lawsuit’s claims all arose out of appellants’ rental of the Property and “[t]here are no claims for damages that do not arise out of the landlord/tenant relationship as set forth in the lease agreement.” Citing several exclusions from coverage contained in the policy, including the provision that excludes insurance coverage “for bodily injury or property damage arising out of business pursuits of any insured or the rental or holding for rental of any part of any premises by the insured, ” State Farm maintained it owed no duty to defend appellants in the underlying action.

         Appellants settled the Fitzgerald lawsuit for $43, 000. Appellants’ attorney then contacted State Farm to request reconsideration of their denied claim. Appellants asserted that the rental exclusion in the policy was itself subject to an exception for “ ‘activities which are ordinarily incident to non business pursuits’ ” and therefore State Farm had wrongfully refused to defend and indemnify them. State Farm reaffirmed its denial of appellants’ claim, concluding the “ordinarily incident” exception did not apply to their circumstances. Over the course of these communications, appellants returned in August 2015 to live in the Property.

         Appellants sued State Farm in May 2016, asserting causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing. The complaint alleged that State Farm wrongfully failed to conduct a full investigation into their claims and unreasonably denied them defense and indemnity. State Farm moved for summary judgment, arguing that it had no duty to indemnify or defend appellants because the damages sought in the Fitzgerald lawsuit arose solely from appellants’ excluded business pursuits/rental activity, the “ordinarily incident to non-business pursuits” exception did not apply to restore coverage, and the policy’s “insured location” exclusion separately barred coverage because the Property did not qualify as appellants’ “residence premises.” Appellants argued in opposition that their Property maintenance activities were ordinarily incident to nonbusiness pursuits, State Farm waived the “insured location” exclusion when it paid appellants’ property damage claim, and material factual disputes existed with respect to State Farm’s bad faith in failing to defend and indemnify.

         After a hearing on June 23, 2017, the trial court granted State Farm’s summary judgment motion. The trial court construed the business pursuits/rental exclusion in the policy as having two separate exclusions-one applying to “business pursuits” and the other applying to “rental” activities. It concluded that “the exception for ‘activities which are ordinarily incident to non-business pursuits’ does not apply where the rental exclusion bars coverage.” Since the Fitzgerald lawsuit arose out of the rental of the Property and was excluded from coverage under the homeowners policy, State Farm owed no duty to defend or indemnify appellants. Summary judgment was entered with respect to both the breach of contract and bad faith causes of action.

         II. DISCUSSION

         A. Standards of Review and Rules of Interpretation for ...


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