Failure to Investigate Potential for Coverage
Barry Zalma
May 9, 2023
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When an insurer contended that an animal liability exclusion in the insured’s homeowner’s insurance policy (the policy) precluded any duty to defend because the third party plaintiffs sued the insured for injuries they and their dogs sustained when their dogs were bitten by two pit bulls on a public street, the trial court granted summary judgment to the insurer and the insured appealed.
In Poonam Dua v. Stillwater Insurance Company, B314780, California Court of Appeals, Second District, Second Division (May 5, 2023) the California Court of Appeals explained why the duty to defend is greater than the duty to indemnify and why the insurer should conduct a thorough investigation before denying a claim for defense.
FACTS
The insurer reviewed the underlying complaint and determined that the exclusion applied because the underlying complaint alleged that the pit bulls lived at the insured’s home, which was covered by an animal liability exclusion and therefore it had no obligation to indemnify an excluded claim. The insured denied any ownership or control of the pit bulls, which were owned by her boyfriend, who did not live at her home.
The insurer, ignoring basic insurance policy interpretation rules, equated its obligation to indemnify with its duty to defend. The insurer denied the insured a defense because, if the exclusion applies, the insurer has no obligation to defend.
Even if the insured was correct and the pit bulls were not under her ownership, did not live in her home, and were not under her control when the attack occurred the Court of Appeals noted that the third party still might have raised a claim potentially covered by the policy. An insurer can be excused from the duty to defend only if the third party complaint can by no conceivable theory raise an issue within the policy’s coverage.
The insured was alleged to know the dogs were dangerous and the insurer knew that the dogs were being walked by the insured’s boyfriend near her home. Even if, as currently pleaded, the third party lawsuit was frivolous and baseless, does not mean there was no possibility of coverage and thus no duty to defend. Ignoring the California Fair Claims Settlement Practices Regulations, the insurer did nothing to investigate and concluded there was no possible coverage based only on the animal liability exclusion.
Poonam Dua (Dua) argued that the trial court erred in granting summary judgment in favor of Stillwater on her claims based on Stillwater’s refusal to defend Dua in the third party lawsuit.
FACTUAL BACKGROUND
Dua was the named insured on a homeowner’s insurance policy issued by Stillwater that provided her with personal liability coverage. The policy made three references to an “animal liability exclusion.”
Third Party Lawsuit Against Dua
Simeon and Roslyn Peroff sued Dua and Eric Taylor (Taylor) for personal injuries and property damage caused by Taylor’s dogs. In their complaint, the Peroffs alleged that while they were walking their two dogs on a street in Calabasas, California, Taylor was also walking his dogs, and Taylor’s dogs attacked the Peroffs’ dogs. Taylor was alleged as the owner and the only person walking the dogs when the attack occurred.
As to Dua, the Peroffs’ complaint alleged that Taylor and his dogs lived at Dua’s home, that Dua knew the “TAYLOR PIT BULLS” were dangerous and their attack was reasonably foreseeable to her but she did not prevent it, and that Dua was therefore liable because she was “the owner of the property and/or related [sic] that housed or w[as] otherwise aware of the TAYLOR PIT BULLS,” and had a “duty of care” to take measures to prevent the attack and did not do so.
The trial court granted Stillwater’s motion for summary judgment.
DISCUSSION
Since the duty to defend is contractual (Buss v. Superior Court (1997) 16 Cal.4th 35, 47.) A liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. The duty to defend applies to claims that are groundless, false, or fraudulent. However, where there is no possibility of coverage, there is no duty to defend.
Where the extrinsic facts eliminate the potential for coverage, the insurer may decline to defend even when the bare allegations in the complaint suggest potential liability. This is because the duty to defend, although broad, is not unlimited.
When Dua sought Stillwater’s defense against the Peroffs’ lawsuit, she informed Stillwater that she did not own the dogs and that the dogs were in the care, custody, and control of her boyfriend when the dog attack occurred because Taylor was walking the dogs. There was no evidence that Stillwater took any measures to investigate or otherwise negate the facts suggesting that an animal liability exclusion may not apply and there was potential coverage, and therefore it had a duty to defend Dua.
Stillwater conflated the possibility of Dua’s liability with Stillwater’s duty to defend. The Court of Appeals concluded that Stillwater had not established that there was no conceivable theory to bring the third party complaint within the possibility of coverage, and the facts Dua provided to Stillwater suggested that there may be coverage. In sum, Stillwater failed to meet its burden of establishing it was entitled to summary judgment on Dua’s breach of contract claim, and the trial court erred in granting it summary judgment.
A mere breach of contract, as alleged, however, is insufficient to determine bad faith. Dua has introduced facts giving rise to a material dispute of fact as to whether Stillwater unreasonably or improperly failed to defend when it was presented with facts suggesting that the animal liability exclusions did not apply.
The Court of Appeal concluded that summary judgment in favor of Stillwater was improper and on remand, the trial court was required to enter an order denying Stillwater’s motion for summary judgment on Dua’s second cause of action for bad faith and breach of the covenant of good faith and fair dealing.
ZALMA OPINION
California’s Fair Claim Settlement Practices regulations require the insurer to conduct a thorough investigation of a claim against an insured before making a decision to defend or indemnify an insured. Stillwater decided to rely on an exclusion that, had it done a thorough investigation and believed the reports of its insured, would have defended its insured. The decision of the trial court was a Pyrrhic victory since, on appeal, the appellate court followed the law and compelled the insurer to defend, and possibly indemnify its insured to a spurious claim against a person who neither owned nor controlled the Pit Bulls that caused the injury.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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Barry Zalma, Esq., CFE, is available at http://www.zalma.com and [email protected]
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