In Terrell v. State Farm General In. Co., 40 Cal. App. 5th, 497 (Sept. 26, 2019), the California First District Court of Appeal affirmed the trial court's entry of summary judgment in favor of State Farm General Insurance Company ("State Farm") in connection with a dispute related to coverage of a personal injury lawsuit filed against State Farm's insureds Paul Terrell and Rica Tseng ("the insureds"). State Farm based it denial of coverage on a "business pursuits" exclusion in the insureds' homeowners insurance policy.

The parties' dispute arose out of a personal injury lawsuit filed against the insureds by a tenant renting a home owned by the insureds. Initially, the insureds lived in the home from 2000 to 2003. Thereafter, they rented the home to various tenants from 2003 to 2004. During this time period, the insureds purchased a rental dwelling policy from State Farm to cover the exposure posed by renting the home. Subsequently, the insureds discussed moving into the home and cancelled the rental dwelling policy in 2005 and replaced it with a homeowners' policy. However, the insureds never moved back into the home and continued to rent it out from 2005 to 2014. In 2014, the porch of the house collapsed, causing a renter to sustain personal injuries.

The insureds tendered the defense of a subsequent lawsuit filed by the renter to State Farm. The insureds subsequently settled the underlying lawsuit for $43,000. In response, State Farm denied coverage of the insureds under the policy based on the business pursuits exclusion in its policy. This exclusion stated in relevant part as follows:

"1. Coverage L and Coverage M do not apply to:

b. 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. This exclusion does not apply:

"(1) to activities which are ordinarily incident to nonbusiness pursuits;...

"(3) to the rental or holding for rental of a residence of yours:

"(a) on an occasional basis for the exclusive use of a residence;

"(b) in part, unless intended for use a residence by more than two roomers or boarders; or

"(c) in part, as an office, school, studio or private garage." (Boldface omitted.)

Based on State Farm's coverage denial, the insureds filed an action for declaratory relief and bad faith, arguing that the exception to the exclusion for "activities which are ordinarily incident to non-business pursuits" applied, such that coverage was afforded to the insureds for the underlying lawsuit. The trial court rejected the insureds' argument and entered summary judgment in favor of State Farm. In affirming the trial court's entry of judgment, the Court of Appeal stated as follows:

We have no difficulty in concluding that the business pursuits/rental exclusion in the homeowners policy at issue here is clear and unambiguous. The policy defines a "business" as "a trade, profession or occupation." A "business pursuit" is commonly understood as "a regular activity engaged in for the purpose of earning a profit" and may include "part-time or supplemental income" activities. (State Farm Fire & Casualty Co. v. Drasin (19841 152 Cal.App.3d 864. 870 [199 Cal. Rptr. 749]; see Rev. & Tax Code, § 6013 [defining "business" as "any activity engaged in by any person or caused to be engaged in by him with the object of gain, benefit, or advantage, either direct or indirect."].) While the term "rental" is not defined in the policy, this does not render the provision ambiguous. (Foster-Gardner supra. 18 Cal.4th at p. 868.) A "rental or holding for rental" in this context means "[s]omething (as a property, business premises, car, etc.) that is let out for rent." (Oxford English Dict. Online <> [as of Sept. 26, 2019]; see Webster's 3d New Internat. Dict. (2002) p. 1923 [rent means "a piece of property that the owner allows another to use in exchange for a payment in services, kind, or money: a rented property; especially: an apartment or house that rents"].)

Construing the above policy language under its usual and ordinary meaning, it is clear that appellants' rental of the Property to the Fitzgeralds constituted an excluded activity under both the business pursuits and rental of the premises clauses. Appellants signed a written lease with the Fitzgeralds granting them exclusive use and occupancy of the Property, and in exchange received monthly payments of $2,100. Appellants' income-generating rental activity was not an occasional one: the Fitzgeralds' tenancy lasted from 2006 through 2014, and was preceded by another paying tenancy that dated from 2003 to 2006. In between these two tenancies appellants held the Property out for rent to other prospective lessees through posted signs and online advertisements. That appellants believed their rental of the Property would only be temporary is of no moment. 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 understand as a property rental.

Moreover, the parties do not dispute that the bodily injuries sustained by Mary Fitzgerald from the collapse of the front porch arose solely out of appellants' excluded rental of their home. In California, residential landlords bear a primary responsibility to maintain leased premises in a safe, clean, and habitable condition throughout the term of the lease in addition to other obligations that may derive under contract. (See Green v. Superior Court (1974) 10 Ca1.3d 616. 619 [111 Cal.Rptr. 704, 517 P.2d 1168] [recognizing an implied warranty of habitability for residential leases]; Civ. Code. § 1941.) The injuries occurred during and as a result of the Fitzgeralds' tenancy, and the Fitzgerald lawsuit was predicated upon appellants' status as landlords and their failure to maintain the Property in a safe and habitable condition. Accordingly, unless coverage is restored under an applicable exception, we conclude as a matter of policy interpretation that the business pursuits/rental exclusion bars coverage of any claim arising from the Fitzgerald lawsuit.

The Court of Appeal also rejected the insureds' argument that the exception to the exclusion applied to reinstate coverage under the policy for the underlying personal injury lawsuit.

While 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 Towns v. Northern Security Ins. Co. (2008) 184 Vt. 322 [964 A.2d 1150, 1154-1155] [collecting cases]; 9A Couch on Insurance (3d ed. 2019) §128:25 Activities Usual to Nonbusiness Pursuits.) 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. Gambol/ (1997) 166 Vt. 595 [689 A.2d 453. 454] (Gambell); see State Farm Fire & Casualty Co. v. Moore (1981) 103 lll.App.3d 250 (58 III.Dec. 609, 430 N.E.2d 641, 645] ["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 is "'reasonably necessary in the carrying on of the business." (Fire Ins. Exchange v. A/sop (Utah 1985) 709 P.2d 389, 391 [applying the business pursuits exclusion under such circumstances]; see Blue Ridge Ins. Co. v. Newman (La. 1984) 453 So.2d 554, 556 (Blue Ridge) [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"].) Under these authorities, an act giving rise to liability falls within the business pursuits exclusion—but not the ordinarily incident exception—where that act is directly related to that business and "'contributes to, or furthers the interest of, the business." (United States Fire Ins. Co. v. Reynolds (1984) 11 Ark. App. 141 [667 S.W.2d 664, 666].)

Under these general standards, it cannot seriously be argued that appellants' maintenance of the front porch of the Property falls within an exception for "activities which are ordinarily incident to non-business pursuits." The undisputed facts show that appellants had been engaged in the business of renting the Property consistently for over a decade and were being paid to keep the Property in a habitable condition for their existing tenants at the time of the accident. Any maintenance activities undertaken by appellants with respect to the Property were directly related to their rental of the premises and would have contributed to, and furthered the interests of, their rental business (Gambell, supra, 689 A.2d at p. 454), or enhanced the value of the rental property (Jiminez. supra. 184 Cal.App3d at p. 442). Moreover, as landlords required to maintain the leased premises in a safe and habitable condition, repairs and upkeep of the front porch were a "necessary incident of the business of renting property." (Blue Ridge, supra, 453 So.2d at p. 556.)

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