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
In several prior cases, California appellate courts had ruled that a home buyer’s misrepresentation claims against a seller were not covered under the seller’s homeowners policy, typically because there was no “occurrence” and/or no “bodily injury” or “property damage” within the meaning of the insuring clause. In the Davis case, the Court of Appeal seemed to accept the notion that the buyers’ claims against the sellers fell within the scope of the insuring clause, but ruled that the “sale of property” exclusion applied to defeat any potential for coverage.