On November 29, 2011, State Farm's attorney sent a letter to Tidwell notifying Tidwell of the fire. The letter stated that “the cause of the fire may be related to the manufacture, design or installation of the fireplace, chimney chase, residence structure or involved component parts” and expressed the understanding that Tidwell might have been involved “with the construction elements of the home specifically related to the area of the fireplace, chimney chase and residential structure.”

Tidwell forwarded State Farm's letter to Financial Pacific.

On December 31, 2011, 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.

At some point thereafter, Financial Pacific received a fire investigation report dated January 17, 2012 that was prepared for State Farm's attorney by Dale Feb of F.I.R.E. Associates. The report concluded that the fire had been caused by the installation of an “unlisted shroud located at the top of the chimney chase.” According to the report, the unlisted shroud prevented the fireplace from drafting properly, which “resulted in the overheating of the fireplace and heat transfer to the surrounding wood framing members.” The report concluded that “[t]he overheating of this fireplace resulted in the ignition of the surrounding framing members at the sides, top and bottom of this fireplace.”

On February 2, 2012, State Farm sued Tidwell for negligence, alleging that Tidwell had negligently installed the fireplace system in the Fox home and that Tidwell's negligence had been the proximate cause of the fire, which had resulted in damage to the home.

State Farm alleged that it was seeking subrogation losses pursuant to the insurance policy it had issued to Mr. Fox.

Financial Pacific retained O'Connor Engineering, Inc., to inspect the fire scene. In a report dated May 22, 2012, O'Connor reported to Financial Pacific that the chimney assembly had been modified by the use of a customized termination top that Tidwell had fabricated and installed at the direction of the general contractor following a design by the architect. O'Connor concluded that the termination top posed a fire hazard because it had restricted the air flow in the chimney, which “result[ed] in increased operating temperature of the flue vent sections and the fireplace.” O'Connor could not rule out the installation of the custom terminal top as a cause of the fire.

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. Financial Pacific concluded that “the fire started as a result of the chimney shroud which did not allow free movement of air” but further concluded that “the property damage occurred on November 11, 2011 the date of the fire at issue, long after Financial Pacific's policies had expired,” and “for coverage to exist, the property damage must take place during the policy period.”

In August 2012, Tidwell's attorney wrote to Financial Pacific, disagreeing with the insurer's denial of a duty to defend Tidwell in the State Farm action. Among other things, Tidwell's attorney asserted that “[t]he construction of the fireplace and the continuous burning of fires therein create[d] the potential for continuous and repeated exposure to the same general harmful conditions. The policy definition of 'occurrence' does not rule out the possibility that damage could have been occurring prior to the final fire that burned the house.”

Referring to the reports Financial Pacific had already received, Tidwell's attorney further asserted that “[t]he fact that the installation of the termination top could have led to continuous and progressive damage as a result of each fire in the fireplace running too hot fits squarely within the definition of an 'occurrence.'”

The attorney concluded by asserting that Financial Pacific could not:

at this point in the case, based on the allegations and expert reports, conclude that there was no continuous and progressive property damage occurring during the policy period. There could have been occurrences of property damage long before the fire manifested itself on the date provided in the Complaint. As you cannot conclude there was a lack of property damage during the policy period and you have no other basis for further denying the duty to defend the insured against the above-referenced complaint, it is clear that there has been an ongoing duty in Financial Pacific to have mounted and funded the insured's defense since the initial tender of defense.

In September 2012, Financial Pacific's attorney responded, asserting, among other things, that the insurer had no duty to defend Tidwell because “the only 'property damage' alleged and being sought in State Farm's Complaint occurred on November 11, 2011, the date of the fire.”

Then, in April 2013, Tidwell's attorney informed Financial Pacific's attorney that Tidwell was “in the process of obtaining additional expert reports that we believe will continue to support our position that the ongoing use of the fireplace during the policy period in its allegedly defective condition created occurrence of damage to the fireplace that culminated in the November 11, 2011 fire.”

Thereafter, in July 2013, Tidwell's attorney sent Financial Pacific a report prepared by a retained expert, Randy Brooks, who concluded that the repeated exposure of the combustible materials framing the chimney chase to the excessive heat from every fire burned in the fireplace since it was installed “would begin [to] lower the ignition temperatures of that combustible framing to in some cases below 250 degrees. This 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.” Thus, it was Tidwell's position, based on its expert's opinion, that “successive fires over the course of six years (during five of which Tidwell was insured by Financial Pacific) each caused damage to the chimney system and lowered the point of combustion which eventually resulted in the main fire damage to the Fox home.”

In September 2013, Financial Pacific's attorney once again responded to Tidwell's attorney, affirming the insurer's denial of Tidwell's tender of the defense in the State Farm action. Financial Pacific's attorney asserted that “[c]overage under the Financial Pacific policies applies to 'property damage' during the policy period caused by an 'occurrence'” and argued that the insurer's policy did “not provide coverage for injury sustained after the expiration of the policy period as the result of a condition created during the policy period.”

Tidwell sued Financial Pacific, alleging that Financial Pacific had breached its insurance contracts with Tidwell by refusing to pay Tidwell's defense costs in the State Farm action because it was possible 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.” Tidwell alleged on information and belief “that numerous fires were repeatedly set in the fireplace at the Fox Residence during the period covered by the Policies, and that each of those fires actually caused 'physical injury to tangible property,' 'property damage' as defined in the Policies, by causing, inter alia, a chemical decomposition of wood in framing proximate to the fireplace, in a process known as pyrolysis.” Tidwell sought a declaration that Financial Pacific owed Tidwell a duty to defend the State Farm action and damages from Financial Pacific for the insurer's breach of its duty to defend.

Financial Pacific moved for summary judgment. The trial court ruled in its favor, declaring:

State Farm sought recovery for the fire which occurred November 11, 2011. The insurance policy at issue in this case lapsed March 1, 2010…. Plaintiffs may not assert alternative causes State Farm “should have” alleged in order to create coverage issues.

Tidwell appealed.

The Financial Pacific Policies

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.

The policies defined:

property damage

as:

p]hysical injury to tangible property, including or resulting in loss of use of that property

or:

[l]oss of use of tangible property that is not physically injured. 

The appellate court reversed.

In its decision, the appellate court explained that Financial Pacific was liable under its policies for any sums Tidwell became legally obligated to pay as damages because of physical injury to tangible property that: (1) occurred during a policy period; and (2) was caused by continuous or repeated exposure to substantially the same general harmful conditions. Thus, the appellate court continued, if Tidwell's negligence had resulted in a repeated exposure of tangible property to substantially the same general harmful conditions (an occurrence), repeated exposure to those conditions had 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.

It then found the “possibility of coverage” based on “the allegations of State Farm's complaint and the facts known to Financial Pacific.” The appellate court reasoned that, 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 the chimney chase did ignite, which in turn resulted in the fire that damaged Fox's house, for which State Farm was obligated to indemnify Fox as Fox's insurer.

If that was what happened, the appellate court added, then Financial Pacific would potentially be liable under its policies to pay any sums Tidwell became legally obligated to pay State Farm as damages because the repeated exposure of the wood framing the chimney chase to the excessive heat in the chimney, for which Tidwell was responsible, may have caused physical injury to the wood (by altering its chemical composition and reducing its ignition point) during one or more policy periods, and that physical injury would have caused Tidwell's legal obligation to pay damages for the fire that resulted (at least in part) from the damaged wood.

The appellate court observed that it did not have to conclude that this was what happened, only that “under the allegations of State Farm's complaint and the facts known to Financial Pacific” this was “what might have happened.”

Because this might have happened and because Financial Pacific had not eliminated all possibility of coverage, the appellate court concluded, there was a potential for liability under the policies, and Financial Pacific had a duty to defend.

The case is Tidwell Enterprises, Inc. v. Financial Pacific Ins. Co., Inc., No. C078665 (Cal. Ct.App. Nov. 29, 2016). Attorneys involved include: Prenovost, Normandin, Bergh & Dawe, Michael G. Dawe and Kristin F. Godeke, Santa Ana, for Plaintiffs and Appellants; Gordon & Rees, Arthur Schwartz and Randall P. Berdan, San Francisco, for Defendant and Respondent.