There Was No Duty To Defend Until There Was A Claim For Damages

San Miguel Community Association v. State Farm General Insurance Company
(Cal. Ct. of App., 4th Dist.), filed October 1, 2013, published October 16, 2013

KEY FACTS

San Miguel Community Association members complained that the Association was not enforcing parking regulations as set forth in the CC&Rs. When the Association declined to act, the members demanded that the matter be referred to alternative dispute resolution. When that did not solve the problem, they filed suit.

The Association was insured under a State Farm liability insurance policy. State Farm’s policy covered “sums that the insured becomes legally obligated to pay as damages because of bodily injury, property damage, personal injury or advertising injury” caused by an “occurrence.”

The policy defined an “occurrence” as either, “an accident . . . which result[s] in bodily injury or property damage,” or “the commission of an offense, or a series of similar or related offenses, which results in personal injury or advertising injury.” The policy defined “property damage” as: (1) “physical injury to or destruction of tangible property, including all resulting loss of use of that property…and (2) loss of use of tangible property that is not physically injured or destroyed, provided such loss of use is caused by physical injury to or destruction of other tangible property…”

State Farm agreed to “defend any claim or suit seeking damages payable under this policy even though the allegations of the suit may be groundless.” A “suit” was defined as “a civil proceeding in a court of law in which damages…to which this insurance applies are alleged,” and includes “an arbitration proceeding in which such damages are claimed” and “any other alternative dispute resolution proceeding in which such damages are claimed and to which you submit with our consent.”

When the Association received the demand for alternative dispute resolution, it tendered the demand to State Farm. When it was sued, it tendered the complaint. It also tendered a first and second amended complaint.

State Farm denied coverage for the claims asserted in the demand for alternative dispute resolution and the original and first amended complaints. The original complaint only sought injunctive relief, and the first amended complaint added only a cause of action for breach of fiduciary duty.

State Farm did accept coverage for the claims asserted in the second amended complaint because it contained a claim for monetary damage in addition to claims for equitable relief. However, State Farm declined to reimburse the Association for legal fees it incurred in resisting claims prior to the tender of the second amended complaint.

The Association sued State Farm. The trial court granted State Farm’s motion for summary judgment based on its conclusion that there had been no duty to defend before the second amended complaint against the Association.

HOLDING & REASONING

The Court of Appeal affirmed. The court framed the question before it, and answered it as follows:

When an insurance company issues a liability policy, agreeing to indemnify its insured against a third party claim for damages covered under the policy, and to defend the insured against any such claim, does the insurer have a duty to defend the insured against a third party lawsuit seeking injunctive relief but no compensatory damages? Answer: No. The third party’s failure to seek compensatory damages against the insured means the dispute is not a claim for damages under the policy. The insurer’s defense obligation requires it to provide the insured with a defense against a claim seeking damages potentially payable under the policy, not to defend the insured’s honor or otherwise assist it in resolving a nonmonetary dispute.

The court explained:

In the abstract, it is irrelevant that the third party might have suffered harm that could give rise to a claim for damages covered under the insured’s policy. What matters is whether the third party has sought to recover damages from the insured. It is only when the third party does that, that it has made a claim which triggers even potential coverage under a liability policy. That did not occur here until the third party plaintiffs amended their pleading to include a claim for compensatory damages.

There is a duty to defend whenever there is a potential for an award of covered damages. However, the court found there was no potential for a covered judgment until the second amended complaint asserted damages claims.

The court rejected the Association’s argument that a claim for damages should be implied from the allegations of the original and first amended complaints. It reasoned that case law does not establish a rule that insurers must infer the existence of additional allegations not actually included within the underlying third party complaint, merely because it is aware those additional claims might have been plausibly included.

The court said:

In effect, [the Association] is asserting that because the third party plaintiffs in the underlying case purportedly sustained some actual damage as a result of [the Association’s] alleged wrongs – albeit in an amount that plaintiffs’ own attorney characterized as “de minimus” – and thus could have sought recovery of those damages from [the Association] in earlier pleadings, State Farm was obligated to infer they had actually done so. We reject the assertion.

ANALYSIS

Courts will not imply damages that are not specifically pled and speculation as to unpled claims cannot create potential coverage. But if the alleged facts support a covered theory of liability, courts typically find a duty to defend.