Opinion ID: 1386321
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Heading: The Court of Appeal Holding

Text: The Court of Appeal reversed the judgment and held that the efficient proximate cause of the damage to insureds' home was earth movement, an excluded risk. The court believed the rising groundwater level due to septic systems on the mesa precipitated the earth movement. This rising groundwater, the court reasoned, was also an excluded risk under the policy provision excluding loss caused by natural water below the surface of the ground, including water which exerts pressure on, or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure. The Court of Appeal rejected insureds' contention that the elevation of the water level did not involve natural water as contemplated by the exclusion, because the groundwater flowed from the septic system, an artificial source of water. Although noting that uncertainties in policy language must be resolved in favor of insured's reasonable expectations, the Court of Appeal concluded this general rule could not assist the coverage claim here. The court held that an ordinary insured could not reasonably believe the exclusion applied to pure, natural groundwater only. Rather, the court concluded, the language of the exclusion was meant to distinguish between groundwater, an excluded risk, and water emitting from a burst pipe, a covered risk. The court also noted the policy excluded damage caused by leakage or seepage of water ... from any ... plumbing system. Alternatively, the court reasoned that even if it were to assume the building of the Pacific Coast Highway, the failure to timely dewater the mesa, and poor maintenance of the mesa, amounted to negligent acts under insureds' policy, those acts were excluded from coverage by Garvey, supra, 48 Cal.3d at pages 408-409, footnote 7, because they were not distinct from other excluded risks. In so holding, the court observed that in Garvey, supra, we left open the question whether courts should distinguish between different types of third party negligence when determining whether such negligence could ever be considered a covered cause under an all-risks homeowner's policy. We stated, For example, if construction is undertaken on the insured premises for the sole purpose of protecting against the operation of a specifically excluded risk under the homeowner's policy, and that improvement subsequently fails to serve its purpose because it was negligently designed or constructed, the damage to the structure should arguably not be covered. On the other hand, ordinary negligence that contributes to property loss, but does not involve acts undertaken to protect against an excluded risk, may give rise to coverage under an all-risk policy.... (48 Cal.3d at pp. 408-409, fn. 7.) In addition, the Court of Appeal herein found that the state's conduct in removing the toe of the Big Rock Mesa in order to construct the Pacific Coast Highway in 1933 was simply too remote to be regarded as an efficient proximate cause of the damage. The court also observed that it failed to see how the County's failure to prevent the excluded loss could transform it to an included one. The court determined that the jury erroneously concluded negligence was the efficient proximate cause of the loss because it was improperly instructed under Sabella v. Wisler (1963) 59 Cal.2d 21, 31-32 [27 Cal. Rptr. 689, 377 P.2d 889] ( Sabella ), on the prerequisites for reaching an efficient proximate cause determination. As the Court of Appeal observed, Sabella, supra, held that when dependent concurrent causes interact to create property loss, the loss must be attributed to the moving or triggering cause. Here, the jury was instructed pursuant to Sabella, supra, that the efficient proximate cause of the loss, where there are concurring causes, is the one that sets the others in motion. The efficient proximate cause is the one to which the loss is to be attributed, though other causes may follow it and operate more immediately in producing the loss. (See ibid. ) In Garvey, supra, we approved Sabella's dependent concurrent causation analysis, but modified its test for determining the efficient proximate cause of a loss by noting that we use the term `efficient proximate cause' (meaning predominating cause) when referring to the Sabella analysis because we believe the phrase `moving cause' can be misconstrued to deny coverage erroneously, particularly when it is understood literally to mean the `triggering' cause. Indeed, we believe misinterpretation of the Sabella definition of `efficient proximate cause' has added to the confusion in the courts .... ( Garvey, supra, 48 Cal.3d at pp. 403-404.) As we explain, we conclude the decision of the Court of Appeal should be reversed. The court's determination, that earth movement caused by rising groundwater levels was the efficient proximate cause of the loss, was erroneous under these facts. In addition, the court's conclusion that there was no coverage under the homeowner's policy even if third party negligence was the efficient proximate cause of the loss, because the asserted acts of negligence did not involve risks separate from excluded perils, conflicts not only with policy provisions and principles of coverage as discussed in Garvey, supra, 48 Cal.3d 395, but also with the Court of Appeal's decision in Davis v. United Services Auto. Assn. (1990) 223 Cal. App.3d 1322 [273 Cal. Rptr. 224] ( Davis ), which we approve. (See also Winans v. State Farm Fire & Cas. Co. (S.D.Cal. 1990) 743 F. Supp. 733, 736 ( Winans ) [construction negligence resulting in earth settlement is separate act not subject to earth movement exclusion in all-risk policy].)

(1) As we explained in Garvey, supra, 48 Cal.3d at pages 406-407, the scope of coverage under an all-risk homeowner's policy includes all risks except those specifically excluded by the policy. When a loss is caused by a combination of a covered and specifically excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss. ( Id. at p. 402.) As we further explained, the question of what caused the loss is generally a question of fact, and the loss is not covered if the covered risk was only a remote cause of the loss, or the excluded risk was the efficient proximate, or predominate cause. (See id. at p. 412.) Here, there were several causes of the loss: (i) earth movement caused by rising groundwater levels, and (ii) negligence of certain entities and parties in failing to take proper measures to preserve the mesa. (2a) Insureds first contend the Court of Appeal erroneously concluded that under Garvey, supra, 48 Cal.3d at pages 403-404, earth movement, an excluded cause, was the efficient proximate cause of the loss. In determining that earth movement resulting from the rising groundwater level on the mesa was the efficient proximate cause of the loss, the Court of Appeal relied on our observation in Garvey, supra, 48 Cal.3d at page 408, that remote causes of a loss should not amount to covered causes. Garvey reasoned that if the insurer is expected to cover claims that are outside the scope of the first party property loss policy, an `all risk' policy would become an `all loss' policy. [Citation]. In most instances, the insured can point to some arguably covered contributing factor.... The Court of Appeal relied on the above language to conclude that third party negligence was too remote a cause to give rise to coverage under insureds' homeowner's policy. In so doing, however, the court overlooked an important point regarding the scope of an all-risks homeowner's policy. (3) We emphasized in Garvey, supra, 48 Cal.3d at page 408, that if third party negligence is not excluded under such a policy, it is a covered peril. As we stated, third party negligence under a homeowner's policy is a risk of physical loss under the policy. ( Ibid. ) (2b) Moreover, the third party negligence that occurred here could not be considered a remote cause of the loss under either Garvey, supra, 48 Cal.3d 395, or Sabella, supra, 59 Cal.2d at pages 31-32. The expert testimony overwhelmingly supported the jury's determination that the predominating cause of the loss at Big Rock Mesa was third party negligence. By developing the hillside with septic tanks instead of sewers and failing to properly dewater the hillside, it was inevitable the ancient landslide would be reactivated, causing damage to a substantial number of properties on the mesa. In addition, the fact that the jury was instructed under Sabella's literal moving cause language rather than under Garvey's broader efficient proximate cause language ( Garvey, supra, 48 Cal.3d at pp. 403-404) is of no consequence. Based on the testimony, it is not reasonably probable a different result would have been reached under Garvey's definition of efficient proximate cause. ( Ibid. ) Accordingly, the Sabella, supra, 59 Cal.2d at page 31, instruction did not prejudice State Farm. The Court of Appeal and State Farm also rely on Finn v. Continental Ins. Co. (1990) 218 Cal. App.3d 69, 71 [267 Cal. Rptr. 22], to support the argument that coverage does not exist in this case. The Finn court upheld summary judgment for the insurer after determining that property loss attributed to leaking water caused by a broken sewer pipe was an excluded risk under the homeowner's policy provision excluding losses caused by Continuous or Repeated Seepage or Leakage. ( Ibid. ) The insured's claim, that the break in the pipe (a nonexcluded cause) rather than the leakage from the pipe was the cause of the loss, was rejected by the court on the ground that Leakage or seepage cannot occur without a rupture or incomplete joining of the pipes. ( Id. at p. 72.) Thus, whereas the Finn court made a coverage determination based on one cause of a loss, the present case involves several levels of causation  an unstable hillside, third party negligence, earth movement, and a rise in the groundwater level. This is not, as the insurer claims, a case in which the negligence cannot be separated from the earth movement, thus leaving only one cause of the loss. Although the causes may be distinct in origin, they were dependent causes in the sense that, but for the negligence in building the structures on an ancient landslide site without the proper sewer system or stabilization of the mesa, the landslides might not have occurred or damaged the property to the extent it was damaged. Unlike Finn, supra, 218 Cal. App.3d 69, this case presents the classic Garvey situation, in which the efficient proximate cause must be determined from a combination of covered and specifically excluded risks. ( Garvey, supra, 48 Cal.3d at pp. 402-404.) (4) In addition, the fact that the earth movement may have resulted from rising groundwater levels caused by the development on the mesa does not preclude coverage in this case. As insureds observe, the policy's groundwater exclusion applies to water damage caused by natural water below the surface of the ground and not to the artificially high level of groundwater that followed the housing development. Accordingly, we find the natural water exclusion does not preclude coverage here. (2c) We conclude the Court of Appeal erred in determining, as a matter of law, the damage suffered by insureds was not covered by their homeowner's policy. Instead, we hold the jury properly found on these facts that third party negligence was the efficient proximate cause of insureds' property loss, and was covered under their policy with State Farm.
Although we determined in Garvey that third party negligence is a covered risk unless specifically excluded by the standard homeowner's policy, we suggested there might be a narrow category of third party negligence cases in which coverage was not available. As an example, we indicated that if a structure was constructed on an insured's property solely to protect the insured's home against the operation of a specifically excluded risk and because of negligent construction the structure subsequently failed to serve its purpose and the home was damaged by the excluded risk, the damage to the house arguably should not be covered. ( Garvey, supra, 48 Cal.3d at pp. 408-409, fn. 7.) (5) State Farm contends the Court of Appeal correctly found that even if the acts and failings of the state, County, and developer amounted to negligence, such acts could never be the efficient proximate or predominant cause of the landslide because they did not involve perils distinct from excluded risks. In other words, State Farm asserts the third party negligence involved here is the type of negligence that Garvey, supra, 48 Cal.3d at pages 408-409, footnote 7, meant to exclude. State Farm claims, Each alleged act of negligence identified by [insureds]..., was negligence only because it exposed [insureds'] property to earth movement, an excluded peril.... There would have been no negligence absent the risk of earth movement. Therefore, the negligence cannot be separated from the earth movement. The negligence that occurred in this case was the undertaking of activity that exposed the insured property to greater danger of landslides and earth movement without taking counter measures to eliminate the increased risk of damage. As insureds observe, footnote 7 in Garvey does not apply to these facts. The negligent conduct outlined above, causing the landslide and resulting damage to insureds' home, was not designed to and did not fail to prevent the landslide; it was, in fact, the predominating factor precipitating the slide. It is clear that the housing tract at Big Rock Mesa was not created for the purpose of preventing earth movement; it was created as a profit-making development. Likewise, there is no indication the County approved the development in order to prevent earth movement. The septic systems were installed to dispose of household wastewater, not to prevent future landslides. Although the jury reasonably found that these acts amounted to third party negligence, none was completed for the sole purpose of protecting against the operation of a specifically excluded risk under the homeowner's policy.... ( Garvey, supra, 48 Cal.3d at p. 408, fn. 7.) Indeed, State Farm's argument would essentially render third party negligence coverage illusory. Our observation in Garvey, supra, at pages 408-409, footnote 7, simply indicated that an insured cannot automatically transform an uncovered loss into a covered one by claiming a negligent construction job existed in the chain of causation. This principle is illustrated in Davis, supra, 223 Cal. App.3d 1322, 1329-1330, in which the Court of Appeal found that coverage existed under an all-risk homeowner's policy for property loss caused by the excluded risk of settlement that, in turn, was caused by a contractor's failure to properly prepare the soil on which the home was constructed. The contractor also failed adequately to reinforce the dwelling's foundation. The insurer contended the contractor negligence was the type of negligence Garvey suggested would not be covered. In rejecting the insurer's argument, the Davis court noted, There are a number of problems with this argument.... The improvements here were not merely anti-earth movement devices; they were: (1) grading and (2) a foundation. When seen in this light, it becomes clear neither improvement was the type undertaken solely to prevent earth movement; grading is performed for a variety of reasons including providing an area on which it is cheaper and quicker to build and which may provide a lot more desirable to the final buyer[;] a foundation also provides support for the structure. ( Id. at p. 1329; see also Winans, supra, 743 F. Supp. 733, 736.) As the Davis court observed, footnote 7 in Garvey, supra, was never intended to exclude coverage for negligence when the record establishes the negligently constructed improvements were the type undertaken for reasons other than prevention of an excluded occurrence. ( Davis, supra, 223 Cal. App.3d at p. 1329.) Here, there was ample evidence that the third party negligence leading to the landslide was negligence in planning, approving, and building the Big Rock Mesa subdivision and not negligence in acting to prevent landslides resulting from natural causes. We therefore conclude that our observation regarding types of third party negligence in Garvey, supra, 48 Cal.3d at pages 408-409, footnote 7, did not preclude liability based on the jury finding that third party negligence was the efficient proximate cause of the insureds' property loss.
The decision of the Court of Appeal is reversed. Because it directed judgment for State Farm on the coverage issue, the Court of Appeal declined to address the remaining issues raised by the parties, involving the jury's finding of bad faith, the issue whether State Farm owes a contractual obligation to pay for stabilization of the entire mesa, jury instructions, and evidentiary rulings. We remand the case, therefore, to the Court of Appeal for a determination of these issues in proceedings consistent with this opinion. [1]