Why it matters: A California federal judge has ruled that an insurer had a duty to defend an apartment owner and its construction contractor in connection with a suit brought by tenants who allege they were exposed to asbestos. Although the policy contained an exclusion for injuries that "related in any way" to asbestos, the underlying allegations included potentially covered claims, such as wrongful entry into the tenants' unit. As such, the insurer was obligated to defend the entire suit. The insurer asserted that the asbestos exclusion still applied to those allegations because the insured's employees made multiple entries into the building to abate the asbestos. But the court disagreed, finding that argument to be baseless, pointing out that the tenants did not claim in their suit that asbestos abatement was the reason for the alleged wrongful entries. Emphasizing that the test to prove a duty to defend is extremely lenient, the court explained that "even if one such entry could properly be excluded under the asbestos exclusion, [the insurer] has not established that there was no potential for coverage for the other alleged entries."

Detailed discussion: In 2012, tenants of Parklyn Bay brought suit against the apartment owner and its contractor Oliver & Co., alleging, among other things, that they knowingly or negligently exposed the tenants to asbestos during a construction project.

The complaint also contained allegations that were unrelated to asbestos. For example, one of the allegations stated: "During the time that plaintiffs were out of their unit, defendants and/or workers employed by defendants made multiple entries into the Premises without prior notice, and without the consent of plaintiffs."

Parklyn turned to Liberty for coverage. Pointing to an asbestos exclusion, Liberty denied the request, arguing that all of the allegations in the complaint arose out of and related to asbestos. The insurer eventually settled the tenants' action and then filed suit against Liberty.

Granting Parklyn Bay's motion for summary judgment, the court explained that an insurer owed a broad duty to defend its insured against claims that create even a potential for indemnity. "Because the allegations in the [tenants'] complaint clearly created a 'potential for indemnity' not excludable under any policy term, Liberty had a duty to defend both Parklyn Bay and Oliver," the court stated.

The test for an insured to prove that it was owed a duty is extremely lenient, the court noted. "Perhaps for this reason, the California Supreme Court has advised insurers that 'to avoid any possibility that a refusal to defend may subject it to eventual liability for bad faith, the insurer is well advised to seek a judicial determination that it owes no defense' before it refuses to defend a tendered claim," the court reasoned. "Liberty did not heed the Supreme Court's wisdom. . . . [T]his was a mistake."

The court found a duty to defend based solely on the allegations of paragraph 18 of the tenants' complaint. The policy provided coverage for "personal and advertising injury" defined to include "[t]he wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy or a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord, or lessor."

"Quite plainly, the allegations in Paragraph 18—that Parklyn Bay or its employees made 'multiple entries' into the Tenants' apartment without prior notice or consent—raise at least the 'potential for coverage' under the 'personal and advertising injury' Policy provision; that provision expressly covers injuries 'arising out of … [the] wrongful entry into, or invasion of the right of private occupancy or a room,' " the court stated.

Liberty contended that the reason Parklyn Bay and its employees allegedly made multiple entries into the tenants' apartment was "to abate the asbestos." But the court disagreed; the complaint itself made absolutely no allegations for the reasons behind the alleged entries.

To read the order in Parklyn Bay Company v. Liberty Insurance Corp., click here.