The California Court of Appeal, Fourth Appellate District, recently affirmed a trial court order granting summary judgment to a liability insurer. In San Miguel Community Association, et al. v. State Farm General Insurance Co., the issue was whether the insurer owed a duty to defend its insured in an underlying action that initially sought only injunctive relief. While the insurer eventually agreed to defend after the underlying plaintiffs amended their complaint to seek “damages,” the insured argued that the insurer had a duty to defend from the outset of the case because the original complaint implied a claim for “damages.” The trial court rejected this argument, and the Court of Appeal affirmed on Oct. 1. Whether the underlying plaintiffs had sustained “damages” prior to the plaintiffs’ amendment was irrelevant because the earlier complaints did not seek recovery of “damages.”
State Farm insured the San Miguel Community Association, an owners association, under a policy affording general liability and directors’ and officers’ liability coverages. The policy promised that State Farm would defend suits seeking potentially covered “damages.”
The underlying litigation against San Miguel involved a dispute over enforcement of parking restrictions in the community. In late 2008, the underlying plaintiffs began complaining at board meetings that San Miguel was not enforcing the restrictions. They initially alleged distress, adverse effect on property values, and nominal out-of-pocket costs (such as for copying). By December 2008, the dispute had not been resolved, and San Miguel demanded mediation. San Miguel tendered its defense of the claim to State Farm, which declined coverage because plaintiffs did not seek recovery of “damages” from San Miguel.
The underlying plaintiffs subsequently filed suit against San Miguel for injunctive relief. Neither the original nor the first amended complaint sought “damages” (although the plaintiffs requested punitive damages). State Farm reiterated its prior coverage denial with respect to both complaints. The court allowed the plaintiffs to file a second amended complaint in August 2009. In this new pleading, the underlying plaintiffs claimed – for the first time – that they sustained actual monetary “damages.” State Farm initially denied coverage for the second amended complaint but, after speaking with the underlying plaintiffs’ counsel, agreed to provide San Miguel with a defense.
This coverage litigation followed. San Miguel alleged State Farm breached the insurance contract and the covenant of good faith and fair dealing in declining to pay for the defense of the underlying claim prior to the second amended complaint. San Miguel also contended that State Farm misrepresented its conversations with the underlying plaintiffs’ counsel in an effort to avoid coverage. State Farm successfully moved for summary judgment, and San Miguel appealed.
On appeal, San Miguel did not dispute that State Farm’s policy required a claim for covered “damages” to trigger a duty to defend. But, despite the lack of an explicit claim for “damages,” San Miguel argued that the earlier allegations gave rise to the implication of “damages,” which triggered a defense obligation. The Court of Appeal disagreed, noting that an insurer cannot deny a defense merely because the allegations against the insured are not phrased in the precise language of the policy. However, this rule against strictly construing the underlying allegations does not mean the insurer must infer that other allegations exist where they are clearly not pleaded.
The Court of Appeal found that the specific allegations in the earlier versions of the complaint were inconsistent with an implication that the underlying plaintiffs sought to recover money “damages.” The court also rejected San Miguel’s argument that the request for punitive damages implied a claim for consequential “damages.” Even assuming the punitive damages claim was flawed (due to the absence of a “damages” claim), the court observed that there would be no need for demurrers if courts and other parties were required to infer the existence of missing allegations. The testimony of the underlying plaintiffs’ counsel was also consistent with State Farm’s view that San Miguel did not seek recovery of “damages” until its second amended complaint.
As to the allegation that State Farm fabricated a conversation with counsel for the underlying plaintiffs, the court found no evidence of misrepresentation or any reason State Farm would have reached a different conclusion about coverage had it handled the investigation differently. Finally, the court rejected San Miguel’s bad-faith claim based on the contention that State Farm manufactured evidence. Absent any right to recover additional benefits under the policy, San Miguel had no viable claim of bad faith.
Click here for the opinion in San Miguel Community Association v. State Farm General Insurance Co. (2013) 220 Cal.App.4th 798.
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