The California Court of Appeals reversed the trial court's grant of summary judgment to the insurer regarding a claim for fire loss. Mosley v. Pacific Sec. Ins, Co., 2020 Cal. App LEXIS (Cal. Ct. App, May 26, 2020).
The Mosleys rented their property to Pedro Lopez. Six months later, the property was damaged by fire. Lopez had tapped a main power line into the attic to power his energy-intensive marijuana growing operation. The illegal power line caused the fire.
Pacific Specialty Insurance Company (PSIC) insured the property under an HO-3 Standard Homeowners policy. Paragraph E of the policy provided,
We do not insure for loss resulting from any manufacturing, product or operation, engaged in:
- The growing of plants; or
- The manufacture, production, operation or processing of chemical, biological, animal or plant materials.
PSIC denied coverage for the loss, determining it was excluded from coverage under Paragraph E. The loss resulted from Lopez's growing marijuana. The Mosleys sued PSIC for breach of contract. The parties filed cross-motions for summary judgment. The trial court denied the Mosleys' motion, granted PSIC's motion, and entered judgment for PSIC.
On appeal, it was undisputed that the fire that damaged the property "result[ed] from" Lopez's re-wiring the property's electrical system in order to power his marijuana growing operation. But the parties disputed whether this meant the damage "result[ed] from "the growing of plants."
California courts broadly interpreted the term "resulting from" in a policy. The appellate court determined there was a "minimal causal connection" between Lopez's growing marijuana, the fire and the resulting loss. Therefore, the loss resulted from an operation engaged in the growing of plants, which Paragraph E excluded from coverage.
The Mosleys argued that, even if Paragraph E excluded the loss, the policy was void because it provided less coverage than Insurance Code section 2070 provided. Under section 2070, policies had to be at least as broad and favorable to the insured as that provided in section 2071, Section 2017 stated that an "insurer shall not be liable for loss occurring . . . while the hazard is increased by any means within the control or knowledge of the insured." The trial court found that PSIC was not liable for the loss because Lopez's marijuana growing operation, as well as the electrical alterations he made to the property increased a hazard "within the control or knowledge" of the Mosleys.
An insured increased a hazard "within its control" only if the insured was aware of the hazard or reasonably could have discovered it through exercising ordinary care. No authority suggested that a landlord-insured was strictly liable for a hazard created by the insured's tenant even if the insured was unaware of the hazard.
It was undisputed that the Mosleys did not know about Lopez's marijuana growing operation or his altering the property's electrical system. Whether Lopez's conduct was "within the control" of the Mosleys was a fact issue for the jury to decide because the record was silent as to what, if anything, the Mosleys reasonably could have done to prevent or discover Lopez's marijuana growing operation.
To the extent PSIC's interpretation of the policy rendered the Mosleys strictly liable for Lopez's conduct, the policy was void under section 2071. By holding the Mosleys responsible for the damage Lopez caused, irrespective of the Mosleys' knowledge of his conduct or their responsibility for it, the policy subjected the Mosleys to increased liability - and less favorable coverage that was not "substantially equivalent" to coverage provided under section 2071. The trial court's order granting summary judgment to PSIC was reversed and the order denying the Mosleys' motion for summary judgment was affirmed.
The court's holding that the phrase "results from" requires only a minimal causal connection" may become beneficial to policy holders in COVID-19 claims. The causal connection between the coronavirus (a covered cause) and business interruption losses arguably exists. The coronavirus is the cause of the insured's physical loss or damage and the resulting business interruption loss.
