A homeowners policy’s “business pursuits / rental” exclusion relieved an insurer of any duty to defend its insured against a personal injury lawsuit brought by a long-term tenant. (Terrell v. State Farm General Ins. Co. (2019) — Cal.App.5th —)
Facts
In 2000, Paul Terrell purchased a home in San Francisco. Initially, Terrell himself lived in the home. He obtained a homeowners policy through State Farm General Insurance Company.
In 2003, Terrell moved out of the property and began renting it to tenants. In January 2004, after conferring with his State Farm agent, Terrell cancelled the homeowners policy and replaced it with a rental dwelling policy. However, later, Terrell told State Farm that he was moving back to the property, and thus he asked State Farm to change his coverage. Accordingly, in January 2005, State Farm cancelled Terrell’s rental dwelling policy and replaced it with another homeowners policy. However, Terrell never moved back to the property. Instead, his existing tenants remained at the property until May 2006.
In June 2006, Terrell rented the property to a new tenant, Pamela Fitzgerald. The lease identified Fitzgerald and her minor daughter, Mary Fitzgerald, as the occupants.
Eight years later, Fitzgerald’s daughter Mary was injured when the front porch of the property collapsed. The Fitzgeralds thus sued Terrell for premises liability. Terrell, in turn, sought a defense under the homeowners policy issued by State Farm. However, State Farm declined to defend Terrell because the homeowners policy excluded coverage for injuries arising out of an insured’s “business pursuits” or “rental” activities.
Terrell sued State Farm for breach of contract and bad faith, alleging that State Farm had incorrectly and unreasonably refused to defend Terrell against the Fitzgeralds’ lawsuit. State Farm moved for summary judgment based on the policy’s business pursuits / rental exclusion. The trial court granted State Farm’s motion. Terrell appealed.
Holding
The Court of Appeal affirmed. The State Farm policy’s business pursuits / rental exclusion barred coverage for bodily injury “arising out of business pursuits of any insured or the rental or holding for rental of any part of any premises by any insured.” The State Farm policy defined a “business” as “a trade, profession or occupation,” and courts generally hold that a “business pursuit” is any regular activity engaged in for profit. Further, while the State Farm policy did not separately define “rental,” the appellate court held that a “rental” simply means “something that is let out for rent.” Here, Terrell’s rental of the property to the Fitzgeralds was both an excluded “business pursuit” and an excluded “rental” of premises.
The appellate court acknowledged that the business pursuits / rental exclusion was subject to an exception for “activities which are ordinarily incident to non-business pursuits.” However, according to the court, the “ordinarily incident” exception applies where the insured’s alleged acts or omissions did not further the interests of the insured’s business and were not directly related to that business. Here, any maintenance activities undertaken by Terrell would have furthered the interests of his rental business or enhanced the value of his rental property. Thus, the “ordinarily incident” exception did not restore coverage.
The appellate court also briefly noted that the business pursuits / rental exclusion contained a separate exception for “the rental or holding for rental of a residence of yours … on an occasional basis for the exclusive use of a residence.” Here, however, Terrell’s rental activities could not be deemed “occasional.” Rather, Terrell had leased the property to the initial tenants from 2003 to 2006, and then had leased the property to the Fitzgeralds from 2006 through 2014. Those were not “occasional” rentals.
Because the Fitzgeralds’ claims against Terrell in the underlying lawsuit were not potentially covered under the State Farm policy, Terrell could not recover against State Farm for either breach of contract or bad faith.
Comment
In this case, the appellate court had little difficulty finding that the claims against the insured fell within the general exclusionary language of the business pursuits / rental exclusion. The court spent most of its time focusing on the exclusion’s exception for “activities which are ordinarily incident to non-business pursuits.” Note that most homeowners insurers have previously deleted the “ordinarily incident” exception from their policies in order to eliminate disputes about the exception’s meaning and application. Here, although the exclusion still contained the exception, the appellate court ultimately held that the exception did not apply.