Where a tenant’s marijuana grow operation causes a fire, a landlord’s insurer cannot deny coverage unless the insurer shows the landlord knew or had control over the “increased hazard” the tenant caused. (Mosley v. Pacific Specialty Insurance Company (2020) 49 Cal.App.5th 417)
Facts
James and Maria Mosley owned a residence and purchased a homeowner insurance policy from Pacific Specialty Insurance Company (PSIC). The Mosleys then rented the residence to Pedro Lopez, who began growing marijuana inside the house. To support his marijuana-growing operation, Lopez re-routed the residence’s electrical system in order to steal power from a main utility line. The re-routed electrical system caused a fuse to blow which, in turn, started a fire that damaged the property. Prior to the fire, the Mosleys did not know that Lopez had been growing marijuana inside the house, nor did they know Lopez had altered the house’s electrical system.
The Mosleys submitted a claim to PSIC for the fire damage. PSIC denied coverage, relying in part on an exclusion that provided as follows: “We do not insure for loss resulting from any manufacturing, production or operation, engaged in: 1. The growing of plants; or 2. The manufacture, production, operation or processing of chemical, biological, animal or plant materials.” The Mosleys then sued PSIC for breach of contract and bad faith.
PSIC filed a motion for summary judgment (or, in the alternative, summary adjudication). PSIC argued that the exclusion for loss caused by growth of plants was permissible pursuant to Insurance Code section 2071 (California’s “standard form” fire insurance policy), which allows an insurer to exclude coverage for a loss caused by an increased hazard that was “within the control or knowledge” of the insureds. Although PSIC’s policy did contain an express exclusion for loss caused by growth of plants, PSIC’s policy did not contain an express exclusion for loss caused by an increased hazard.
In essence, PSIC argued that Lopez’ growth of marijuana had increased the hazard of – and actually caused – a fire and that, because they were the landlords, the Mosleys had “control” over Lopez’ conduct. The trial court accepted PSIC’s argument, and granted summary judgment in favor of PSIC.
Holding
The Court of Appeal reversed the order of summary judgment on the cause of action for breach of contract. As to loss “resulting from” growth of plants, the Court concluded that this language was broad enough to require only a minimal causal relationship between the plants and the fire and that, as such, the fire did in fact result from Lopez’ growth of marijuana.
As to loss caused by an increased hazard that was within the “control or knowledge” of the insureds, the Court noted that PSIC had conceded the Mosleys did not have actual knowledge, prior to the fire, of Lopez’ conduct. In addition, the Court rejected the argument that the Mosleys had control over the property as a matter of law simply by virtue of their status as the landlords.
The Court noted that by, imputing Lopez’ conduct to the Mosleys, PSIC (and the trial court) essentially had made the Mosleys “strictly liable” for Lopez’ conduct, without regard to whether the Mosleys’ had actual “control or knowledge” of Lopez’ conduct. After reviewing numerous appellate cases from other jurisdictions, the Court of Appeal concluded that “an insured increases a hazard ‘within its control’ only if the insured is aware of the hazard or reasonably could have discovered it through exercising ordinary care or diligence.” Therefore, the Court of Appeal held that the trial court needed to determine whether there was evidence the Mosleys did in fact have “control” over the increased hazard.
Although the Court of Appeal concluded that the PSIC was not entitled to summary judgment on the Mosleys’ cause of action for breach of contract, the Court held that PSIC was entitled to summary adjudication on the Mosleys’ cause of action for bad faith. More specifically, the Court concluded that there was a genuine issue about coverage and that, even if PSIC’s denial of coverage might have been incorrect, PSIC’s denial was not unreasonable.
Comment
This is the first reported appellate decision in California involving an exclusion for growth of plants and a resulting fire loss. Insurance Code section 2071 (which establishes certain minimum requirements for any fire insurance policy) does not expressly allow an exclusion for damage caused by growth of plants. However, Insurance Code section 2071 does allow an insurer to include a provision that eliminates coverage for loss occurring “while the hazard is increased by any means within the control or knowledge of the insured.”
Although Insurance Code section 2071 allows an insurer to include an increased hazard provision in its policy, PSIC did not expressly include such a provision in PSIC’s policy. Nonetheless, PSIC essentially argued (and the Court of Appeal seemingly agreed) that the plant exclusion was, in essence, a variation of the statutorily-authorized increased hazard exclusion. While the Court accepted the argument that an increase of hazard might eliminate coverage under certain facts, the Court of Appeal rejected the notion that PSIC had established that the insureds had “control or knowledge” under these facts.
The Court of Appeal’s opinion was not unanimous. One justice wrote a dissenting opinion in which he criticized (among other things) the majority’s holding that “an insured increases a hazard ‘within its control’ only if the insured is aware of the hazard or reasonably could have discovered it through exercising ordinary care or diligence.” More specifically, the dissenting justice noted that this holding blurred the distinction between “control or knowledge,” and essentially required “control and knowledge.”