Legal Question in Business Law in California

My neighbor's water heater malfunctioned and leaked. The leak caused water damage to my condo, which amounted to about $1,500 for repair and mold removal. The neighbor subsequently repaired the leak upon me notifying her of the water damage.

The neighbor's insurance company, Farmers, has declined to take liability for this damage. They claim that their insured (my neighbor) was not negligent in any way, and therefore she is not legally liable for the damage. They claim that their insured had just had the water heater checked only 3 months prior to the leak by a plumbing company who said everything was ok. They provided the name of the plumbing company as TLC Plumbing. They claim that because of these facts, they do not believe their insured was negligent in any way, and therefore, she is not legally liable. In this regard, Farmers insurance writes in a letter:

"Our insured's policy provides liability coverage if the facts of the loss clearly show our insured is legally liable. The investigation indicated our insured was not negligent and would not be liable for this loss. We regret you incurred this loss, but believe the claim was handled appropriately and the denial is proper."

Is a neighbor liable if their water heater malfunctions and causes water damage to an adjacent neighor's condo? Or is the insurance company correct in stating that the neighbor was not negligent, and therefore is not legally liable?

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