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An appellate court in California, affirming a trial court's decision, has ruled that homeowners were not entitled to coverage under their homeowners' insurance policy for a personal injury lawsuit filed against them by their tenants.

The Case

After the front porch of the San Francisco home that Paul and Rica Tseng rented to tenants collapsed, Mary Fitzgerald and her mother sued the Tsengs.

State Farm General Insurance Company, which had issued a homeowners' insurance policy to the Tsengs, denied coverage and declined to provide a defense.

The Tsengs settled the Fitzgeralds' lawsuit for $43,000 and then sued State Farm.

The trial court granted summary judgment in favor of State Farm, and the Tsengs appealed.

The Appellate Court's Decision

The appellate court affirmed.

In its decision, the appellate court explained that the State Farm insurance policy excluded coverage for "bodily injury or property damage arising out of business pursuits of any insured or the rental or holding for rental of any part of any premises by any insured." The appellate court ruled that the business pursuits/rental exclusion was "clear and unambiguous" and that the Tsengs' rental of their home to the Fitzgeralds constituted an excluded activity under both the business pursuits and rental of the premises clauses.

The appellate court pointed out that the Tsengs had signed a written lease with the Fitzgeralds granting them exclusive use and occupancy of the property, and in exchange had received monthly payments of $2,100. The appellate court added that the Tsengs' income-generating rental activity was "not an occasional one," noting that the Fitzgeralds' tenancy had lasted about eight years, and that it had been preceded by another paying tenancy that had lasted about three years.

According to the appellate court, the fact that the Tsengs may have believed that their rental of the property would only be temporary was "of no moment." In the appellate court's opinion, they were engaged in a "regular business activity that generated substantial income over an extended period of time and under written lease terms" that would be commonly understood as a property rental.

The appellate court then rejected the Tsengs' contention that they were entitled to coverage under the "ordinarily incident" exception to the exclusion, which provided that the exclusion did not apply to activities "ordinarily incident to non-business pursuits," because the porch was an activity ordinarily incident to nonbusiness pursuits (that is, home ownership).

The appellate court declared that it could "not seriously be argued" that the Tsengs' maintenance of the front porch of the property fell within an exception for activities "ordinarily incident to non-business pursuits." It reasoned that the Tsengs had been engaged in the business of renting their home consistently for over a decade and were being paid to keep it in a habitable condition for their existing tenants at the time of the accident. Any maintenance activities undertaken by the Tsengs with respect to their home "were directly related to their rental of the premises and would have contributed to, and furthered the interests of, their rental business" or "enhanced the value of the rental property."

The appellate court ruled that the Tsengs were landlords required to maintain the leased premises in a safe and habitable condition, and accordingly that repairs and upkeep of the front porch were a "necessary incident of the business of renting property."

It concluded that the Tsengs "were not entitled to the insurance benefits they wanted, for the simple reason that they failed to buy the insurance policy they needed."

The case is Terrell v. State Farm General Ins. Co., No. A152541 (Cal. Ct. App. Sep. 26, 2019). Attorneys involved include: Emergent LLP, Peter Roldan, for Plaintiffs and Appellants. Pacific Law Partners, LLP, Sandra E. Stone, Jenny J. Chu, for Defendant and Respondent.

Insurance Coverage Law Center Comment

Although California precedent interpreting an "ordinarily incident" exception in a homeowners' insurance policy is scarce, courts in other jurisdictions have identified certain factors relevant to distinguishing business from nonbusiness pursuits. See, e.g., Towns v. Northern Sec. Ins. Co., 964 A.2d 1150 (Vt. 2008) (collecting cases).

For example, the ordinarily incident exception has been applied to afford coverage under an insurance policy where the acts or omissions alleged to have caused the injury did not "contribute to or further the interest of the insured's business" and were not "directly related to that business." Vermont Mutual Ins. Co. v. Gambell, 689 A.2d 453 (Vt. 1997); see, State Farm Fire & Casualty Co. v. Moore, 430 N.E.2d 641 (Ill. Ct. App. 1981) ("If an activity is not done for the purpose of expediting the insured's business . . . it is within the exception.").

Other courts have examined whether the activity giving rise to liability was "reasonably necessary in the carrying on of the business." Fire Ins. Exchange v. Alsop, 709 P.2d 389 (Utah 1985) (applying the business pursuits exclusion under such circumstances); see, Blue Ridge Ins. Co. v. Newman (La. 1984) 453 So.2d 554 (La. 1984) (business pursuits exclusion did not apply where the activity "was not directly related to the renting of the house and was not a necessary incident of the business of renting property").

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Mr. Meyerowitz is the Director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He may be contacted at smeyerowitz@meyerowitzcommunications.com.