Legal Question in Real Estate Law in California

I assume your rental included the garage with the water heater. Statutes and case law I've just looked at suggest that the landlord's responsibility would have been triggered by your reporting the situation. Landlords are generally not liable for property-maintenance problems unless and until they become aware of them. Had you noticed the steam and reported it to the landlord, he would have had a duty to repair, and in failing to repair, would become liable for the resulting damage to your personal property. So, unless you can plead and prove that the landlord knew that the water heater was defective, I'd say his proposed defense is good and you'd probably lose at trial.