State Farm Fire & Casualty Co. v. Von Der Lieth
2 Cal. Rptr. 2d 183, 820 P.2d 285, 54 Cal. 3d 1123 (1991)
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Rule of Law:
In an all-risk first-party property insurance policy, a loss is covered if the efficient proximate cause is a covered peril, such as third-party negligence, even if that peril sets in motion a chain of events that includes a specifically excluded peril, such as earth movement.
Facts:
- The Von Der Lieths owned a home in the Big Rock Mesa area of Malibu, which was known to have a history of landslides.
- The State of California had removed a portion of the mesa's slope in the 1930s to build the Pacific Coast Highway, reducing the area's stability.
- In the 1960s, the County of Los Angeles approved the housing development with septic tank systems, despite knowing this could elevate groundwater levels and reactivate landslide activity.
- A developer and a subsequent homeowners' organization failed to install and properly maintain drainage and dewatering systems that were required by the county to mitigate the risk of rising groundwater.
- The Von Der Lieths' home was insured by State Farm under an all-risk policy that specifically excluded losses from 'Earth Movement' and 'natural water below the surface of the ground,' but did not exclude third-party negligence.
- Over time, the failure to manage groundwater levels reactivated an ancient landslide, causing cracking and other physical damage to the Von Der Lieths' home, which they first noticed in 1983.
Procedural Posture:
- The Von Der Lieths submitted a claim to their insurer, State Farm, which paid a portion for physical damage but denied coverage for costs to stabilize the land.
- State Farm filed a declaratory relief action in trial court against the Von Der Lieths.
- The Von Der Lieths cross-complained against State Farm for breach of contract and bad faith.
- A jury in the trial court returned a special verdict for the Von Der Lieths, finding that third-party negligence was the efficient proximate cause of the loss and that State Farm breached the contract.
- State Farm, the appellant, appealed the judgment to the California Court of Appeal.
- The Court of Appeal, an intermediate appellate court, reversed the trial court's judgment, holding that the efficient proximate cause was earth movement, an excluded peril.
- The California Supreme Court granted review of the Court of Appeal's decision.
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Issue:
Under an all-risk homeowner's policy that excludes losses from earth movement but does not exclude third-party negligence, is a loss caused by a landslide covered when the landslide was precipitated by the negligence of third parties?
Opinions:
Majority - Lucas, C. J.
Yes. A loss is covered under an all-risk policy when third-party negligence is the efficient proximate, or predominating, cause of the loss, even if that negligence leads to a specifically excluded peril like earth movement. Here, the evidence overwhelmingly supported the jury's finding that the negligence of the County, the state, and the developer in approving and building a subdivision on an unstable hillside without proper water management was the predominating cause of the landslide. This negligence is a covered risk under the policy. The court distinguished this from situations where the negligent act was undertaken for the sole purpose of protecting against an excluded risk, which is a narrow exception that does not apply here. The housing development was created for profit, not to prevent earth movement, so the negligence associated with it remains a separate, covered peril.
Analysis:
This decision solidifies the application of the 'efficient proximate cause' doctrine in California insurance law, confirming that third-party negligence is a distinct, covered peril under all-risk policies unless specifically excluded. The court narrowly interprets the exception suggested in Garvey v. State Farm, preventing insurers from easily conflating covered negligence with the excluded perils it may cause. This ruling protects policyholders by ensuring coverage when the predominant cause of their loss stems from a covered risk, thereby preventing insurance coverage from becoming illusory in complex, multi-cause loss scenarios.
