SAN DIEGO, Calif. — Exclusions for occurrences arising out of a home sale preclude coverage for claims by buyers for construction defects, a California appellate court affirmed Nov. 18. Davis v. Farmers Insurance Group, No. D044724 (Calif. App., 4th Dist.).

Cynthia and Daniel Davis were sued by Rick and Kristin Engebretsen in July 2001 for alleged latent construction defects and mold damage in a home the Davises sold to the Engebretsens in June 1998. The Engebretsens allege personal injuries as well as property damage, contending that Daniel Davis, as the home’s general contractor, should have been aware of defects in the home.

The Davises sought a defense from Fire Insurance under two policies: a construction policy issued in 1997 and cancelled on Aug. 3, 1998, after the home was sold, and a homeowner’s policy issued on a second home the Davises purchased in 1998.

Fire Insurance denied coverage under both policies and the Davises sued in San Diego County Superior Court, claiming breach of contract and bad faith. The Superior Court granted Fire Insurance’s motion for summary judgment and the Davises appealed to the Court of Appeal, 4th Appellate District.

Fire Insurance argued on appeal that both policies contained exclusions for occurrences 'arising out of' the sale of the property, which would include the Engebretsens’ claims.

The Davises conceded that their misrepresentation claim 'arose out of' the sale and is, thus, not covered, but the couple contended that the alleged defects arose prior to the sale and would not be subject to the exclusion.

In a published opinion, the 4th District sided with Fire Insurance.

'Read as a whole, the arising out of the sale exclusion provides that after real property is sold or transferred, claims for bodily injury or property damage resulting from certain known or unknown defects in the real property are not covered,' the court said. 'Here, the injuries that the Engebretsens allegedly suffered, for which the Davises sought coverage, arose out of known or unknown defects in the real property after the sale of the real property. Thus, the exclusion was drafted to encompass the very type of claims alleged against the Davises.'

The Davises ignored examples of defects that were included in the exclusion, the court explained.

'We do not believe that the plain meaning of the exclusion is reasonably susceptible to the Davises’ interpretation because it renders the exclusion meaningless as to claims against an insured for property damage,' the court found.

'We cannot envision how the act of selling or transferring property could ever ‘cause’ property damage. Thus, although the exclusion is not a model of clarity, its intent is clear and unambiguous,' the court concluded.

John K. Saur of Laguna Beach, Calif., represents the Davises.

Robert H. Wright, Jason R. Litt, Hollins Schechter and Gina M. Linthicum of Horvitz & Levy in Encino, Calif., represent Farmers Insurance Group.
 

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