Written By: Roger J. Brothers, Esq.
Buchman Provine Brothers Smith LLP
Walnut Creek, California
California Appellate Court Determined that an Owner's Knowledge of the Uninhabitable Conditions of a Rental Property Was Sufficient to Find the Owner Liable; the Owner's General Liability Insurance Policy Did Not Extend Coverage.
According to an Appellate Court decision rendered on August 3, 2012, an insured may not be covered for losses caused by the insured's intentional acts. In Axis Surplus Insurance Co. v. Reinoso (145 Cal. Rptr. 3d 128 (Cal. App. 2d Dist. 2012)), the appellant landlord argued that any tenant injuries would qualify as "accidents" under her insurance policy and that she was an innocent insured, thereby entitling her to coverage because she did not expect that the tenants would be injured by the existing property conditions. After examining the landlord's involvement with the property and its decrepit conditions, the Appellate Court found that the landlord acted intentionally in failing to repair such conditions to the extent that the landlord had knowledge of the dangerous conditions at the property sufficient to expect tenants to suffer injuries. Accordingly, the landlord's general liability insurance policy did not extend coverage to the landlord for the tenants' claimed injuries.
The purportedly innocent landlord in Reinoso was determined by the Court not to be covered by their general liability insurance policy. The landlord, who were a husband and wife, co-owned a dilapidated apartment complex and were sued by their tenants due to extreme inhabitability issues, including rampant infestations, mold, water intrusion and generally unsanitary conditions. The landlords and Proud American (the property management company) were insured under two commercial general liability policies issued by Axis Surplus Insurance. The tenants' suit settled for approximately $3,000,000 dollars. Axis Surplus Insurance paid $2,100,000 under the general liability policy held by the landlords.
Axis Surplus filed suit after the settlement was completed to recover defense and settlement costs based on the exclusion for injuries that were "expected or intended from the standpoint of the insured". The court found that Axis Surplus was entitled to a full recovery of the funds paid on behalf of the landlords as part of the settlement proceedings. The landlords were ordered to reimburse Axis Surplus $2,100,000 because the landlords were found to have knowingly and intentionally rented units that were uninhabitable and in violation of various Housing Code sections.
One of the landlords, Linda Reinoso, appealed, arguing that there was an absence of substantial evidence to support the trial court's finding that the landlords expected or intended the tenants' injuries.
The Court of Appeal affirmed that Axis Surplus was entitled to the recovery of the settlement proceeds. The Court of Appeal found that it was doubtful that Reinoso did not expect the tenant's injuries, given the poor condition of the rental units. The Court found also that the testimonial evidence of individuals involved with the property and notices of Housing Code violations were sufficient to support the allegation that Reinoso had actual knowledge of the substandard conditions present at the rental property.
The Axis Surplus decision has the potential to increase a landlord's liabilities to the extent that it provides the framework by which commercial general liability insurance policies can be interpreted to eliminate a potential for coverage in situations where the landlord expected a tenant's injury. Additionally, the decision demonstrates that if a landlord is aware of or should have expected, dangerous conditions to exist on his or her property and such conditions cause harm, for purposes of denying coverage the commercial general liability insurance policy will treat injuries that the landlord expected the same as it treats injuries that the landlord intended.
Landlords should take precautionary steps in order to ensure that their commercial general liability policies extend to all injuries suffered on their properties. All insurance policies should be reviewed in detail in order to assess its provisions relative to hazards that the landlord is expected to remedy. To the extent possible, clauses should be added to the landlord's commercial general liability insurance policy that meet the specific needs of their property in order to define and limit more clearly these hazards that the landlord is expected to monitor. In addition, to the extent that a landlord's commercial general liability policy cannot be amended favorably, landlords should (1) attempt to limit their liability as much as possible through favorable lease provisions and (2) inspect their property frequently in order to (a) avoid violating any applicable Housing Code sections; and (b) discover and remedy any potential hazardous conditions.
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