Insurance Law

How Broad Can The Duty To Defend Be? Really Broad

We all know that the duty to defend is broad. But just how broad? You’ll see. Bear with me here. This is worth reading – but it takes a lot of set up to get there.

Zhaoyun Xia v. Probuilders Specialty Insurance Co., No. 71951-3-I (Wash. Ct. App. Aug. 24, 2015), [subscribers can access an enhanced version of this opinion: | Lexis Advance], involved coverage under a general liability policy, for claims brought by Zhaoyun Xia, against a builder, for carbon monoxide injuries that she sustained in her home. It was determined that the exhaust vent of the water heater was never connected to an exterior vent.

The case addresses a multitude of coverage issues. Here I focus on the following Townhouse Exclusion, which the trial court held applied to preclude a duty to defend:

“Property damage or bodily injury within the products-completed operations hazard arising from, related to or in any way connected with your work or your work product which is, is part of or is incorporated into or upon a ...townhouse project, or to personal injury or advertising injury arising or resulting from your operations performed upon, at or for a ...townhouse project.”

The duty to defend standard was described by the court, in part, as follows:

“The duty to defend is generally determined from the ‘eight corners’ of the insurance contract and the underlying complaint. There are two exceptions to this rule and both favor the insured. First, if it is not clear from the face of the complaint but coverage could exist, the insurer must investigate and give the insured the benefit of the doubt. Second, if allegations in the complaint conflict with facts known to the insurer or if the allegations are ambiguous, facts outside the complaint may be considered. But ‘extrinsic facts’ may only be used to trigger the duty to defend; the insurer may not rely on such facts to deny its defense duty.”

As the court rightly noted, the issue before it was whether Xia’s home was part of a “townhouse project.” The policy did not define the term “townhouse project.”

With no definition of “townhouse” in the policy, the court turned to dictionaries. “The Merriam–Webster Online Dictionary defines ‘townhome’ or ‘town house’ as: ‘[A] house that has two or three levels and that is attached to a similar house by a shared wall.” And Black’s Law Dictionary defines ‘townhouse’ or ‘townhome’ as: ‘A dwelling unit having usu[ally] two or three stories and often connected to a similar structure by a common wall and (particularly in a planned-unit development) sharing and owning in common the surrounding grounds.”

ProBuilders argued that Xia’s home constituted a “townhouse” within the meaning of the exclusion. Further, Xia consistently referred to her house as a “town home” or “town house” in her original and amended complaints. Xia disagreed, “asserting that she owns a ‘zero lot line’ home and that it does not fall within the ordinary meaning of the policy exclusion for townhouse. She further asserts that to the extent the term is ambiguous, this ambiguity imposed on ProBuilders the duty to defend.”

The court agreed with Xia: “These definitions explain that the plain meaning of a townhouse is a structure that has either a ‘shared’ or a ‘common’ wall with adjacent units. Looking to Xia’s complaint on its face, it is not clear whether her home falls within the plain meaning of this definition. Whether Xia’s home had shared or common walls is the determinative question for purposes of applying this exclusion. Accordingly, because coverage was not clear from examining the face of the complaint but might have existed, ProBuilders had a duty to investigate the claim and give the insured the benefit of the doubt.”

The court also turned to underwriting, stating that “[p]resumably, when underwriting the policy it issued in this case, ProBuilders either knew or should have known of the physical characteristics of the units in this development. In either event, at minimum, the insurer had a duty to investigate to verify whether the home had shared or common walls in order to apply the townhouse exclusion. There is no evidence in this record to show that it did so.”

The court was also persuaded that “the allegations in Xia’s complaint conflicted with facts either known or that should have been known to ProBuilders. Specifically, ProBuilders knew that Xia’s home was marketed as a “zero lot line” home. A zero lot line townhouse must have ‘independent structural walls.’ Specifically, an air gap must exist between the structural walls of the units.”

Held: “In sum, on examining the ‘eight corners’ of Xia’s amended complaint and the policy, it was unclear whether the townhouse exclusion applied. Because of the uncertainty, the proper course of action for ProBuilders was to investigate and defend under a reservation of rights and commence a declaratory judgment action to obtain a court ruling on the applicability of the exclusion. ProBuilders was not entitled to make this judgment on its own, leaving its insured to undertake its defense at its own expense.

If ProBuilders knew that Xia’s home was marketed as a “zero lot line” home, then it’s hard to quarrel with the decision based on the duty to defend standard at issue. But what’s troubling is that the court seemed willing to find a duty to defend even without this fact. Xia consistently referred to her house as a “town home” or “town house” in her original and amended complaints. Nonetheless, the court noted that, based on the face of the complaint, it was not clear whether Xia’s home had shared or common walls.

There are exceptions to the duty to defend eight corners rule -- one being that if it is not clear from the face of the complaint that coverage could exist, the insurer must investigate and give the insured the benefit of the doubt. However, here it was clear from the face of the complaint that the townhouse exclusion applied. Xia consistently referred to her house as a “town home” or “town house” in her original and amended complaints. The court’s decision here seems to impose an obligation on the insurer to take nothing in a complaint at face value when determining if a duty to defend exists.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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