Water damage claims are among the most frequently denied insurance claims in California and throughout the country. Insurers often rely on “continuous or repeated seepage or leakage” (“CRSL”) exclusions to deny coverage, even where there is little evidence that the damage caused by a burst or leaking pipe was actually occurring continuously or repeatedly.
Policyholders have experienced State Farm’s aggressive use of this exclusion for years, despite California law requiring that coverage grants be read broadly, exclusions narrowly, and ambiguous policy language resolved in favor of the insured’s reasonable expectations.
A recently published California appellate decision delivered an important victory for policyholders facing these denials. In Nargizyan v. State Farm Gen. Ins. Co. (May 14, 2026, B342340) ___ Cal.App.5th ___, California’s Second District Court of Appeal reversed summary judgment in favor of State Farm, finding that the trial court failed to recognize triable issues of material fact on Nargizyan’s claims for breach of contract, bad faith, and unfair business practices. The appellate court recognized issues with State Farm’s investigation and denial of the claim and pierced holes in California’s “genuine dispute doctrine,” a doctrine carriers have been using for years to protect themselves from bad faith liability.
The Facts of the Loss
On June 6, 2020, homeowner Levon Nargizyan noticed unusually warm kitchen tiles and found water dripping from the top of the crawl space beneath his house. He called a plumber, who discovered water spraying from a hot water pipe beneath the home, soaking insulation, wood, and flooring materials.
State Farm’s adjuster, or what State Farm calls a “Claim Specialist,” interviewed the plumber and reviewed photos from under the house. Based on her opinion, the failed pipe showed “evidence of possible continuous or repeated seepage or leakage of water.” Nargizyan challenged her opinion and requested a site visit by State Farm. State Farm eventually sent out another claim specialist, who opined that the loss did not appear to be barred by the CRSL exclusion.
At that point, State Farm actually afforded coverage, but under a reservation of rights while it gathered information regarding the costs of cleanup and repairs. Nargizyan then hired a public adjuster to assist him with the claim. In response, State Farm hired an engineer, Bruce Agle of 4x Forensic Engineering Laboratories, to determine the cause of the leak. Agle concluded that the pipe suffered a pinhole perforation most likely caused by a nail or screw. He also opined that the punctured pipe would not have leaked, or would have leaked only minimally, while the screw or nail remained inside it, but that the leakage would have increased over time as the screw or nail corroded. On this basis, State Farm denied the claim, contending that the damage was caused by faulty workmanship that resulted in continuous or repeated seepage or leakage and thus was excluded under the policy.
Nargizyan’s public adjuster challenged that conclusion, pointing out several major problems with State Farm’s investigation:
- No evidence established how long the leak existed;
- There was no mold, standing water, or long-term deterioration;
- State Farm’s own engineer gave conflicting opinions regarding the water release rate; and
- The evidence supported a sudden water release, not gradual seepage.
Despite this, State Farm maintained its denial.
State Farm’s Motion for Summary Judgment
Nargizyan filed suit in September 2021. In December 2023, State Farm moved for summary judgment. State Farm argued it did not breach the policy because the claim was excluded. Moreover, it argued it did not act in bad faith because it conducted a full and fair investigation of the claim. State Farm further maintained that the genuine dispute doctrine applied to coverage, such that its denial of the claim was not unreasonable.
The trial court agreed with State Farm, finding that even though 4x’s evidence and actual findings were disputed, State Farm met its initial burden to show the water loss was the result of CRSL and that Nargizyan did not meet his burden of showing that State Farm was unreasonable.
The Appellate Court Found Many Triable Issues of Fact as to Whether the CRSL Exclusion Should Apply
On appeal, Nargizyan pointed to evidence in the record demonstrating triable issues of fact on whether the CRSL exclusion should apply. Nargizyan pointed out that:
- Despite walking barefoot in his home every day for 10 years, this was the first time he felt a temperature change in the kitchen tiles;
- He immediately inspected the crawl space and discovered water spraying from the pipe, but did not observe pooled water in the soil;
- His observations were confirmed and documented by a plumber;
- There was no mold; and
- State Farm’s initial adjuster opined that the loss did not appear to be CRSL.
He also presented evidence from his own retained engineer that the pipe damage could have occurred due to other factors and that 4x’s nail-and-screw theory was unsupported by the evidence. The appellate court agreed that triable issues of material fact existed on the breach of contract claim.
The Court of Appeal agreed that there were significant factual disputes that a jury should decide and reversed the trial court’s summary judgment in favor of State Farm. This was an important victory for policyholders facing denied water damage claims and sends a strong message to State Farm and other insurers attempting to stretch “continuous or repeated seepage or leakage” exclusions beyond their intended scope.
Important Bad Faith Ruling
The decision is also significant for bad faith claims.
State Farm argued its denial was reasonable because there was a “genuine dispute” regarding coverage. But the appellate court held that a jury could conclude State Farm failed to conduct a fair and thorough investigation before denying the claim. The court found that a reasonable jury could conclude that State Farm failed to conduct a sufficient investigation into the duration of the leak and ignored available evidence and alternative theories of the pinhole’s creation before denying the claim. The court also mentioned State Farm’s hiring of an expert to negate coverage after its own claim specialist indicated that the CRSL exclusion should not apply.
The court pointed out that State Farm’s investigation failed to determine how long water was discharging from the pipe. This is important because that is the main factor State Farm would need to know in order to deny a claim under the CRSL exclusion. The appellate court noted that 4x did not attempt to ascertain or estimate when the leak may have first sprung. The court also noted that State Farm failed to respond to the public adjuster’s criticisms of its report and refused to provide a substantive response when these issues were raised during the claim.
Finally, the court focused on issues with State Farm’s expert selection, noting that 4x had been retained more than 3,000 times by State Farm, suggesting some form of bias.
The court found there was evidence State Farm:
- Failed to adequately investigate the duration of the leak;
- Ignored evidence supporting coverage; and
- Relied on potentially biased engineering opinions.
The court also revived the homeowner’s punitive damages claim, finding triable issues regarding whether State Farm management ratified the alleged misconduct.
Merlin Law Group and United Policyholders Helped Shape the Appeal
This decision was not only a major victory for the individual policyholder, it was also an important appellate advocacy effort on behalf of insurance consumers statewide.
Merlin Law Group attorneys Daniel Veroff and Victor Jacobellis authored an amicus curiae brief on behalf of United Policyholders, the nation’s leading nonprofit policyholder advocacy organization. By filing briefs in these actions, United Policyholders plays an important role in serving as a voice for insurance consumers in all 50 states and providing vital information to policyholders.
Nargizyan Clarifies Carriers’ Obligations When Denying Claims Under CRSL Exclusions
State Farm and other attorneys who end up defending these cases in litigation will argue that Nargizyan is a fact-intensive case and does not establish a new rule of law. What these attorneys ignore is that Nargizyan clarifies how insurance companies should search for information on pipe burst claims and what information should be considered before denying a claim under the CRSL exclusion. In doing so, the court established precedent that the genuine dispute rule will not automatically shield these cases from going to juries.