The California Court of Appeal reversed the trial court's issuance of summary judgment to the insurer, finding that the insured did not make misrepresentations when applying for a policy to cover rental property. Duarte v. Pacific Spec. Ins. Co., 13 Cal. App. 5th 45 (2017).
Duarte rented his house to Jennifer Pleasants. Duarte gave her a 45-day notice to quit in February 2012, but she did not leave. Two months later, Duarte applied for landlord-tenant coverage with Pacific. The application was submitted electronically and Pacific issued a policy to Durate the same day.
In June 2012, Pleasants filed a lawsuit against Duarte, alleging ten causes of action arising from habitability defects which began in 2009. The suit claimed Pleasants had notified Duarte about the defects, she had suffered emotional distress and physical injury, and over paid rent, and had out-of-pocket expenses.
In August 2012, Duarte tendered the defense of the suit to Pacific, which denied coverage. Duarte then sued Pacific for a declaratory judgment that Pacific must defend Duarte. Both parties filed motions for summary judgment. Pacific argued it had no obligations under the policy because Duarte had made misrepresentations when applying for the policy by not notifying Pacific of the prior dispute with Pleasants and not informing Pacific that Pleasants ran a business out of the home. The trial court granted Pacific's motion and ruled that Pacific was entitled to rescind the policy because Duarte made material misrepresentations in applying for the policy.
The court of appeal reversed. In his application Duarte answered "no" to question 4, 'has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes and/or (d) lawsuits?" Duarte also answered "no" to question 9, "is there any type of business conducted on the premises"?
The court found question 4 utterly ambiguous. The syntax of question 4 was garbled. The only verb was contained in the phrase "has damage remained unrepaired?" The subject of the verb was "damage." Therefore, the question was reasonably construed as simply asking whether damage has "remained unrepaired" from various past events, such as a "previous claim" or a property dispute or lawsuit. In other words, a logical way to read the inconsistently worded sentence was to tie everything back to the existence of unrepaired damage.
The court agreed with Duarte that the question was reasonably interpreted as asking whether the property had unrepaired damage associated in some with previous or pending claims, known or potential defects, known or potential claim disputes, known or potential property disputes, or known or potential lawsuits. Duarte understood the term "claim" to mean insurance claim. When he submitted the application, there was no unrepaired damage at the property from previous insurance claims.
Regarding business being conducted on the property, Pleasants' father worked on motorcycles and occasionally sold refurbished motorcycles. Duarte thought the question referred to regular and ongoing business activity. Since there was no regular and ongoing business activity at the rental house when he applied for insurance, Pacific had not met its burden.
