Occurrence-Based Insurance Policies and Claims-Made Insurance Policies – There’s a Crucial Difference

I’ve yet to find reading through an insurance policy on anyone’s “bucket list.”

But read them you should. Or have your attorney read through them (wink, wink).

Because when you need to tender a claim there’s probably no more important document in the world.

In Tidwell Enterprises, Inc. v. Financial Pacific Insurance Company, Inc., Case No. C078665 (November 29, 2016), a client whose attorney did read the policy, bested the insurer of a policy it issued.

Tidwell Enterprises, Inc.

In 2006 or 2007, Tidwell Enterprises, Inc. installed a fireplace at a single-family home located in Copperopolis, California. At the time, Tidwell had a general commercial liability policy issued by Financial Pacific Insurance Company, Inc. which expired in March 2010.

Under the policy, Financial Pacific agreed to pay sums Tidwell became “legally obligated to pay as damages because of . . . ‘property damage'” cause by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same harmful conditions” and defined “property damage” as “[p]hysical injury to tangible property, including or resulting in loss of use of that property” or “[l]oss of use of tangible property that is not physically injured.”

In November 2011, the house was damaged by fire. The homeowner tendered a claim under his homeowner’s insurance policy issued by State Farm General Insurance Company that determined that “the cause of the fire may be related to the manufacture, design or installation of the fireplace, chimney chase, residence structure or involved component parts.” Thereafter, State Farm sent a demand letter to Tidwell, and Tidwell in turn tendered the claim to Financial Pacific.

In or about January 2012, Financial Pacific received a fire investigation report prepared for State Farm by Dale Feb of F.I.R.E. Associates. The report concluded that the fire was caused by the installation of an “unlisted shroud located at the top of the chimney chase.” According to Feb, the unlisted shroud prevented the fireplace from drafting properly, which “resulted in the overheating of the fireplace and heat transfer to the surrounding wood framing members.”

In February 2012, State Farm sued Tidwell for negligence alleging that Tidwell had negligently installed the fireplace system and that Tidwell’s negligence was the proximate cause of the fire. After Tidwell tendered the lawsuit to Financial Pacific, Financial Pacific denied the claim on the ground that “the property damage occurred on November 11, 2011, the date of the fire at issue, long after Financial Pacific’s policies had expired” and that “for coverage to exist, the property damage must take place during the policy period.”

After several back and forths during which Financial Pacific refused to reconsider its position, Tidwell sued Financial Pacific in a bad faith insurance action, and Financial Pacific in turn filed a motion to dismiss Tidwell’s case on the ground that it had no duty to defend or indemnify Tidwell.

The trial court agreed with Financial Pacific, and Tidwell appealed.

The Appeal

On appeal, the Court of Appeals for the Third District reversed the trial court’s decision.

Reading the policy provisions together, the Court of Appeals held that “a straightforward application of the applicable policy provisions” indicates that when repeated exposure to conditions results in property damage during a policy period (even through the fire did not occur until after the policy period) that coverage exists:

When the foregoing provisions are read together, it can be seen that Financial Pacific would be liable under the policies for any sums Tidwell became legally obligated to pay as damages because of physical injury to tangible property that: (1) occurred during a policy period; and (2) was caused by continuous or repeated exposure to substantially the same general harmful conditions. Thus, if Tidwell’s negligence resulted in a repeated exposure of tangible property to substantially the same general harmful conditions (an occurrence), and that repeated exposure to those conditions resulted in physical injury to the property (property damage) during a policy period, and Tidwell became legally obligated to pay damages because of that negligence, then coverage would, at least potentially, exist under the Financial Pacific policies.

While the Court of Appeals was careful not to find that coverage did in fact exist, the “possibility” that coverage could exist, meant Financial Pacific had an obligation to defend Tidwell under the terms of its policy.

Conclusion

Although not discussed by the Court of Appeals there is an important distinction between “occurrence-based” insurance policies and “claims-made” insurance policies. Under an occurrence-based policy, a covered incident that “occurs” during the policy period is covered regardless of when a claim is filed, even after the policy has been cancelled. Conversely, under a claims-made policy, a covered incident must occur and a claim must be filed during the policy period.