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Potential for Insurance Coverage Requires Defense

Barry Zalma | January 27, 2017

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Chimney on fire

Refusing a defense to an insured sued for a potentially covered loss is often fraught with danger for the insurer. The insurer who refuses a defense under California law must have every fact and issue pinned down clearly and without the possibility of argument.

In Tidwell Enterprises, Inc. v. Financial Pacific Ins. Co., Inc., 6 Cal. App. 5th 100 (3d Dist. 2016), the California Court of Appeal was asked to resolve whether, under the standard language in a commercial general liability policy, the liability insurer has a duty to defend the contractor even though the fire occurred after expiration of the policy.

Factual Background

A fire destroyed a house. The home owner's insurer agreed to pay for the damages resulting from the fire, then sued the contractor who installed the fireplace several years earlier, claiming negligence. The contractor tendered defense of the action to its liability insurer, asserting that even though the fire occurred after the relevant policy period ended, there is a possibility of coverage because the fire may have been the result of ongoing damage to the wood in the chimney chase during one or more policy periods due to the exposure of that wood to excessive heat from the chimney every time a fire was burned in the fireplace.

Defendant Financial Pacific Insurance Company, Inc., provided general liability insurance coverage to plaintiffs Greg Tidwell, Tidwell Enterprises, Inc., and Tidwell Enterprises Fireplace Division (jointly, Tidwell) between March 2003 and March 2010.

In 2006 or 2007, Tidwell participated in the construction of a house in Copperopolis by installing a fireplace. Apparently, Tidwell's contract included the fabrication and installation of a custom "termination top" for the fireplace designed by the project architect, although Tidwell later testified at a deposition that his employees did not install the top on the chimney.

Twenty months after the end of the last policy period for Tidwell's general liability coverage with Financial Pacific, the house in Copperopolis—owned by Kendall Fox—was damaged by fire. On December 31, 2011, after receiving a request for defense, Financial Pacific sent a letter to Tidwell acknowledging receipt of Tidwell's claim and agreeing to investigate the claim subject to a reservation of rights.

On February 2, 2012, State Farm sued Tidwell for negligence. In June 2012, Financial Pacific sent a letter to Tidwell declining Tidwell's tender of the defense of the State Farm action based on Financial Pacific's conclusion that no potential for coverage existed because the fire happened after the expiration of the Financial Pacific policies.

Tidwell's attorney wrote to Financial Pacific, disagreeing with the insurer's denial of a duty to defend Tidwell in the State Farm action and contending that there was an occurrence because of a continuous and repeated exposure to the same general harmful conditions. Asserting that there could have been occurrences of property damage long before the fire manifested itself on the date provided in the complaint, Tidwell's counsel asked Financial Pacific to reconsider. It refused.

An expert retained by Tidwell's counsel opined that "[t]his structure fire would not happen in most cases with the first or a single fire [but] rather would take a number of fires over several years since 2006 to complete pyrolysis and cause ignition."

Tidwell, unable to convince Financial Pacific to defend, sued for declaratory relief, breach of contract, and tortious breach of contract. Tidwell alleged that there was a continuing occurrence of property damage allegedly caused by Tidwell during the operative period of the policies, which continuing occurrence led inexorably and inextricably to the eventual total destruction of the Fox residence.

Financial Pacific moved for summary judgment on the ground that the insurer "had no duty to defend or indemnify Tidwell in [the State Farm action] because Financial Pacific lacked any potential or actual coverage under its insurance policies for the claims asserted" in that action. The trial court granted that motion.

Discussion of the Defense Obligation

An insurer bears a duty to defend its insured whenever it ascertains facts that give rise to the potential of liability under the policy. Facts known to the insurer and extrinsic to the third-party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy. Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured's favor. The insurer need not defend if the third-party complaint can by no conceivable theory raise a single issue that could bring it within the policy coverage.

On appeal, Tidwell contended that Financial Pacific did not eliminate any possibility of coverage because the undisputed facts showed that Financial Pacific was aware of evidence that the fire may have been simply the culmination of an integrated process of continuing and progressive property damage. Financial Pacific argued that it had no coverage for any earlier damage that might have been done to the wood framing of the chimney chase as a result of the pyrolysis process.

The court of appeal concluded that there was a possibility that the damages occurred because of earlier physical injury to the house for which Tidwell was responsible, and thus there was a possibility that the damages State Farm sought fell within the coverage provided by the terms of the general liability policies Financial Pacific issued to Tidwell. Because there was a potential for liability under the policies, Financial Pacific owed Tidwell a duty of defense.

It is undisputed that under the policies at issue here, Financial Pacific agreed to pay sums that Tidwell became "legally obligated to pay as damages because of … 'property damage'" caused by an "occurrence" if the "property damage" occurred during the policy period. The policies defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Italics added for emphasis.)

When all policy provisions are read together, 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 that 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.

There was a possibility of coverage here based on the allegations of State Farm's complaint and the facts known to Financial Pacific. This is so because, based on the allegations and the known facts, there was reason to believe Tidwell might have negligently installed a custom top on the chimney in the Fox house that restricted the flow of air in the chimney, which in turn might have resulted in excessive heat in the chimney every time a fire was burned in the fireplace from the time the house was built, which in turn (through the process of pyrolysis) might have altered the chemical composition of the wood framing the chimney chase, thereby reducing the temperature at which it would ignite, until eventually, on November 11, 2011, the wood framing of the chimney chase did ignite, which in turn resulted in the fire that damaged Fox's house.

Of course, the court of appeal was not required to conclude that this is what happened, only that under the allegations of State Farm's complaint and the facts known to Financial Pacific, this is what might have happened. And because this might have happened, there was a potential for liability under the policies, and Financial Pacific had a duty to defend.

The distinction between "the causative event—an accident or 'continuous and repeated exposure to conditions'—and the resulting 'bodily injury or property damage'" is entirely unremarkable. Here, an initial causative event constituting an "occurrence," namely, the repeated exposure of the wood framing of the chimney chase to excessive heat in the chimney, may have resulted in property damage over a period of years. That physical degradation of wood may have led ultimately to the fire in November 2011.

A "cause of damage" may be sufficient "to create a potential for covered damage" if that "cause of damage" constituted physical injury to tangible property that occurred during a policy period, resulted from an "occurrence," and ultimately led to the insured's legal obligation to pay damages. Tidwell offered a viable theory as to how the fire that damaged Fox's house could have occurred. Pyrolysis is effectively the degradation of the wood, causing the wood to ultimately reduce its ignition point to a temperature much lower than its typical ignition temperature.

Since Financial Pacific failed to eliminate all possibility that the repeated exposure of wood to excessive temperatures chemically alters the wood in such a way that the wood can be deemed physically injured (i.e., damaged) by that exposure, it is obligated to defend Tidwell.


Pyrolysis has been known to firefighters and fire investigators for centuries. Applying heat to wood members over a long period of time degrades the wood and can make its ignition point reduce to room temperature. The damage is cumulative and causes real damage to the wood. Therefore, there was a duty to defend because there was a potential for coverage requiring a defense.

© 2017 Barry Zalma, Esq., CFE

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