United States: Duarte v. Pacific Specialty Insurance Company

In Duarte v. Pacific Specialty Insurance  Company, 13 Cal.App.5th 45 (June 29, 2017), the California First District Court of Appeal reversed the trial court's entry of judgment in favor of Pacific Specialty Insurance Company ("Pacific") in connection with its rescission of a policy affording liability coverage for a rental property owned by plaintiff and insured, Victor Duarte ("Duarte"). The parties' dispute arose out of Duarte's purchase of property located in Oakland, California. An individual, who occupied the rental property at the time of Duarte's purchase, entered into a rental contract with Duarte and remained at the property as a tenant. At some point, the tenant's daughter moved into the property, and she remained there after the tenant died in about 2010. In February, 2012, Duarte gave the tenant's daughter a 45-day notice to quit but she did not leave. On April 19, just two months later, Duarte applied for landlord – tenant insurance coverage for the property with Pacific. The application was submitted electronically and the same day, Pacific issued Duarte a policy on the property that included "owners, landlords and tenants liability coverage," effective April 19, 2012 to April 19, 2013.

In his application for insurance, Duarte answered "no" to underwriting question 4, "has damage remained unrepaired for previous claim and/or pending claims, and/or known or potential (a) defects, (b) claims disputes, (c) property disputes, and/or (d) lawsuits?" Duarte also answered "no" to the underwriting question 9, "is there any type of business conducted on the premises?" Duarte certified that he reviewed the entire application for insurance, that his answers were true and correct, and that he received, read and understood the application, including the underwriting guidelines that were included in it.

In June 2012, the tenants filed a lawsuit against Duarte in superior court setting out 10 causes of action arising from habitability defects that had allegedly existed throughout their tenancy of the rental property, which began in 2009. In August 2012, Duarte tendered the defense of the tenants' suit to Pacific which denied coverage and refused to defend the suit. Thereafter, in July 2013 after several months of correspondence from Pacific, Duarte sued Pacific in superior court seeking a declaration that the policy required Pacific to defend Duarte in the tenants' suit and also seeking damages for breach of contract and tortious breach of insurance contract, on the grounds that Pacific not only failed to defend the tenants' suit, but also "wrongfully cancelled" his policy. Thereafter, Duarte and Pacific filed cross-motions for summary judgment addressing the duty to defend and Pacific's rescission of Duarte's policy. The trial court agreed with Pacific and held that it was entitled to rescind the policy because Duarte made material misrepresentations in its application for insurance.

In reversing the trial court's decision, the Court of Appeal held as follows:

Question 4 does not include any form of the verb "to be," and therefore it is not at all clear that it asks, "Are there any pending claims," or "Are there any known or potential claim disputes," or "Are there any known or potential property disputes," or "Are there any known or potential lawsuits?" Nor does the question, or anything else that Pacific points us to, offer any explanation of the terms used in the question, such as "claim," not to mention any explanation of the differences among "known or potential claim disputes" and "known or potential property disputes" and "known or potential lawsuits." Indeed, the question's ambiguity is underscored by Pacific's reliance on its underwriting guideline No. 22 to interpret question 4. That guideline, one of 16 that identify "unacceptable properties," reads as follows: "Dwellings with unrepaired damage (including earthquake damage) and/or open or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuits." is hardly a model of clarity itself. In sum, we find Pacific's analysis of question 4 unconvincing.

Instead, we agree with Duarte that the question is reasonably interpreted as asking whether the property has unrepaired damage associated in some way 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 stated in his declaration that he understood the term "claim" to mean insurance claim, and that when he "submitted the application there was no unrepaired damage at the Property from previous insurance claims." We agree that Duarte's proposed interpretation of question 4 is reasonable. Under this interpretation, Pacific has not met its burden to show that Duarte made a misrepresentation in his response to question 4, because Pacific has not shown that Duarte knew of any unrepaired damage from the identified sources. (See O'Riordan v. Federal Kemper Life Assurance (2005) 36 Cal.4th 281, 287–288 [no misrepresentation if applicant who has smoked just a couple of cigarettes answers "no" to the question, "Have you smoked cigarettes in the past 36 months?" which is reasonably construed as an attempt to determine habitual use].)

As evidence that Duarte knew there was a business conducted on the property and misrepresented that fact by answering "no" to question 9, Pacific offered testimony from Duarte's deposition that Duarte knew that Pleasants's father sold motorcycle parts from the basement of the rented house while he lived there; that after Pleasants's father died in 2010, Pleasants sometimes sold motorcycle parts from the basement of the rented house; that Pleasants kept sandblasting equipment there; and that Duarte complained to the City of Oakland in March 2012 that Pleasants had "a welding shop," and the shop was "using oxygen tanks and hazardous materials, and can cause a fire to the neighborhood."

. . .

Duarte argues that because he reasonably interpreted the phrase "business [being] conducted on the premises" in question 9 as referring to "regular and ongoing business activity," and because there was no such regular and ongoing business activity at the rental house (as opposed to an occasional sale) when he applied for insurance, Pacific has not met its burden, and that at the very least there is a dispute of fact as to whether there was a business conducted at the rental house. We agree that Duarte's interpretation of question 9 is reasonable, and Pacific does not argue otherwise. In the face of Pacific's own evidence that its inspector reported that there was no business, farm or ranch operating on the property, in the face of Duarte's reasonable interpretation of question 9 as referring to ongoing and regular business activity, and in light of the requirement that we view the evidence in the manner most favorable to Duarte as the nonmoving party, we are not persuaded that Pacific met its burden to show that Duarte misrepresented the existence of a business on the premises at the time he submitted the application for insurance.

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