May 22, 2023

Policyholders Should Be Skeptical of Coverage Denials, Court of Appeal Warns

On May 5, 2023, the California Court of Appeal for the Second District released a policyholder-friendly decision reiterating the importance of an insurer’s duty to defend. The case also is a reminder to policyholders to critically review insurance coverage denials because the arguments made by insurance carriers are not always correct.


The case, Poonam Dua v. Stillwater Insurance Company, involved an underlying lawsuit, brought against a homeowner (“Dua”) for injuries that her boyfriend’s two dogs had allegedly caused to a neighbors’ two dogs. The neighbors’ complaint alleged that the dogs lived with Dua, that she knew they were dangerous, and that she therefore had a duty to prevent the dog attack.

Dua notified her homeowner’s insurer, Stillwater Insurance Company (“Stillwater”), of the pending lawsuit and requested a defense. Dua made clear in her tender that her boyfriend had been walking the dogs when the attack happened and that the dogs were not hers.

Stillwater denied coverage and refused to defend Dua, claiming that the policy’s “Animal Liability Exclusion” applied. This exclusion eliminated coverage for any “occurrence or damages caused by any animal, at any time, at any premises insured hereunder, or caused by…any animal owned by or in the case, custody, or control of the insured, or any member of the insured’s family or household.” Stillwater reached this conclusion based exclusively on the facts as alleged in the neighbors’ complaint, disregarding what Dua asserted when she tendered her defense to Stillwater.

After Stillwater denied coverage, Dua was forced to settle the neighbors’ lawsuit. Dua then sued Stillwater for breach of contract and bad faith. Dua based her claims on Stillwater’s failure to adequately investigate the claims made against her in the neighbors’ lawsuit and the resulting failure to defend and indemnify her. Dua alleged that any reasonable investigation would have demonstrated that the Animal Liability Exclusion did not apply. Stillwater moved for summary judgment, which was granted, finding that the Animal Liability Exclusion was applicable and its refusal to defend or indemnify was reasonable.

The court of appeal reversed both findings.      

Breach of Contract – Duty to Defend

Stillwater argued on appeal that, regardless of the outcome of the underlying case, Stillwater would never have had a duty to indemnify. Stillwater reasoned that if the court found Dua responsible for the attacking dogs, then the Animal Liability Exclusion would apply; but if the court came to the opposite conclusion, Dua would incur no liability and Stillwater’s duty to indemnify would not be triggered. In Stillwater’s view, since there was no possibility for coverage under either possible outcome, there could be no duty to defend.

Stillwater’s argument was soundly rejected by the Court of Appeal, which found that Stillwater had “conflate[d] the possibility of Dua’s liability with Stillwater’s duty to defend.” Reiterating the maxim that “[t]he duty to defend is broader than the duty to indemnify,” the Court of Appeal emphasized that it did not matter that the neighbors’ claims may have been “frivolous or unmeritorious,” because an insurer can be excused from the duty to defend “only when the third party complaint can by no conceivable theory raise a single issue which could bring it within policy coverage.” Because the facts initially provided by Dua suggested coverage may exist, and because Stillwater could not prove conclusively that no coverage existed, Stillwater had a duty to defend Dua against the neighbors’ lawsuit.

Breach of the Covenant of Good Faith and Fair Dealing

The Court of Appeal also reversed the trial court’s finding of summary judgment in favor of Stillwater on Dua’s bad faith claim. Stillwater had argued that its denial of coverage to Dua on the basis of the Animal Liability Exclusion was reasonable based on the facts gleaned from the complaint. The Court of Appeal disagreed, noting that “a material dispute of facts” was created when Dua told Stillwater that the dogs were not hers and she was not present for the attack. Because these facts suggested that the Animal Liability Exclusion did not apply, it was possible that the denial was unreasonable and the trial court’s grant of summary judgment was improper.


This case is a good reminder of the strength of the duty to defend under California law. The actions taken by the insurer in this case are not uncommon. All too often, however, a policyholder may make the same mistake that the trial court did, and conflate the duty to defend with the duty to indemnify. As the Court of Appeal here makes clear, these duties are distinct and the broader duty to defend includes claims that might only potentially be covered. This case confirms the unfortunate reality that insurance company denials must always be viewed critically and with some skepticism.