California Court of Appeal enforces exclusion for losses caused by third-party negligence interacting with an excluded peril
May, 2009
By
Andrew B. Downs
In Freedman v. State Farm Ins. Co. (No. B20267, May 5, 2009), the Court of Appeal held that an exclusion for losses resulting from corrosion or water leakage caused by third-party negligence barred coverage under a homeowners insurance policy even when third-party negligence was an otherwise covered peril and was the efficient proximate cause of the loss.
The policyholders' claim was the result of a contractor driving a nail through a pipe during a remodeling project. Corrosion around the nail eventually caused a leak in the pipe, resulting in extensive water damage. The policy issued by State Farm excluded from coverage losses caused by corrosion and water leakage. The policy also specifically provided that such losses were excluded when third-party negligence caused, contributed to or aggravated the loss.
In spite of this policy language, the policyholders argued that because the contractor's negligence was the efficient proximate cause of the loss, they were entitled to coverage under the policy. But, the Court of Appeal agreed with both State Farm and the trial court, ruling that coverage was properly denied. Applying the California Supreme Court's reasoning in Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, the Court of Appeal found that the policy provisions excluded losses caused by negligent conduct of third parties or defective workmanship when those excluded causes combined with another excluded peril. The Court of Appeal also rejected the policyholders' argument that the third-party negligence provisions were insufficiently clear, finding that a policyholder could readily understand which perils were covered and which were not.
Freedman builds on the foundation of the Julian decision in which the Supreme Court held that an exclusion for a particular cause of loss that applies only when that cause combines with a second excluded cause of loss is enforceable. In Julian, the applicable exclusion was the weather conditions exclusion. Freedman is authority that the same logic applies to the third-party negligence and defective workmanship exclusions.