The California Court of Appeal has ruled that a homeowners insurer properly denied a first-party claim where a contractor’s negligence damaged a plumbing pipe, which then caused corrosion, continuous seepage and leakage and, finally, mold. ( Freedman v. State Farm Ins. Co. (2009) 173 Cal.App.4th 957)
Facts
Bernard and Gail Freedman hired a contractor to remodel a bathroom in their house. While hanging new drywall, the contractor drove a nail through a plumbing pipe. The nail in the pipe apparently caused no leak at the time and went unnoticed until years later, when corrosion around the nail caused a leak and extensive water damage and mold.
The Freedmans submitted a claim to their insurer, State Farm, which had issued a policy that provided “all-risk” coverage for the dwelling, subject to various exclusions. State Farm denied coverage based on various exclusions. Among other things, the policy provided: “We do not insure for any loss to the property described in Coverage A which is caused by one or more of the items below, regardless of whether the loss occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: … [g.] wear, tear, marring, scratching, deterioration, inherent vice, latent defect or mechanical breakdown; … [h.] corrosion, electrolysis or rust.”
In addition, the policy provided: “We do not insure under any coverage for any loss which is caused by one or more of the items below, regardless of whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: … Water Damage, meaning … continuous or repeated seepage or leakage of water or steam from a … plumbing system….”
Finally, the policy provided: “We do not insure for loss described in paragraphs 2., 3. and 4. immediately above regardless of whether one or more of the following: (a) directly or indirectly cause, contribute to or aggravate the loss; or (b) occur before, at the same time, or after the loss or any other cause of the loss: [a.] conduct, act, failure to act, or decision of any person, group, organization or governmental body whether intentional, wrongful, negligent, or without fault; [b.] defect, weakness, inadequacy, fault or unsoundness in … design, specifications, workmanship, construction, grading, compaction … of any property (including land, structures, or improvements of any kind) whether on or off the residence premises….”
The Freedmans filed suit against State Farm, alleging claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence. State Farm answered, and the parties filed cross-motions for summary judgment based on jointly stipulated facts. The superior court denied the Freedmans’ motion and granted State Farm’s motion, and the Freedmans appealed.
Holding
The Court of Appeal affirmed, ruling that the third-party negligence provisions of the Freedmans’ policy clearly excluded third parties’ negligent conduct and defective workmanship whenever they interact with excluded perils (such as corrosion and continuous or repeated seepage or leakage of water). Thus, the Freedmans’ policy excluded contractor-negligence-induced corrosion and contractor-negligence-induced continuous or repeated seepage or leakage of water.
The Freedmans argued that the “seepage or leakage” exclusion was ambiguous, because the exclusion did not specify how long a leak must last in order to be “continuous” or how many times the leak must stop and start in order to be “repeated.” However, the Court concluded that, given the small size of the hole(s) through which the water leaked, and given the extensive amount of water damage, the leak must have lasted a sufficiently long time, or stopped and started sufficiently many times, to count as “continuous” or “repeated” under any reasonable construction of those terms.
In addition, the Freedmans argued that the exclusion applies only to “normal deterioration of the plumbing system,” not to leaks “caused by some force other than deterioration.” The Court disagreed, because the policy excluded “coverage for any loss which is caused by [continuous or repeated seepage or leakage of water from a plumbing system], regardless of whether the event occurs suddenly or gradually, involves isolated or widespread damage, [or] arises from natural or external forces [.]” Therefore, the Court held that the policy expressly excluded continuous or repeated seepage or leakage regardless of whether they are caused by natural forces (such as normal deterioration) or external forces (such as a nail driven through a pipe).
Finally, the Court held there was no coverage for the mold damage. The Court noted that the contractor’s negligence had damaged the pipe, which caused corrosion, which caused seepage and leakage, which caused mold. In short, every link in the chain was an excluded peril.
Comment
This case continues a trend seen in other relatively recent cases involving multiple causes of damage, such as Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747 and De Bruyn v. Superior Court (2008) 158 Cal.App.4th 1213. More specifically, California courts have demonstrated a willingness to limit the predominant cause (“efficient proximate cause”) doctrine “as long as ‘[a] reasonable insured would readily understand from the policy language which perils are covered and which are not.’” In this case, the Court of Appeal ruled that State Farm’s language clearly eliminated coverage for every cause of damage, including contractor negligence.