II. State Farm's Motion for Summary Judgment
State Farm moves for summary judgment on its claim that it has no duty either to defend or indemnify the Thomases in the state court suit. The Court tentatively ruled at the hearing held on January 17, 1991, that State Farm had a duty to defend the Thomases under the Freestone policy, but no duty under the Hayward policy. After a careful consideration of the arguments advanced by counsel at the hearing and further review of the Freestone policy, the Court concludes that there is no coverage under either policy.
Summary judgment is proper only when there is no genuine issue of material fact and the moving party is clearly entitled to prevail as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986); Fed. R. Civ. P. 56(c). State Farm's liability under its insurance policies is a question particularly well-suited for adjudication at summary judgment. If the interpretation of a written instrument lies at the heart of a dispute, as here, the question is invariably one of law, not fact. The only question before the Court is whether coverage for the injuries suffered by the Chans is excluded by express provisions in the Hayward and Freestone policies.
A. The Hayward Policy
State Farm contends that even if the state court complaint alleges "bodily injury" or "property damage" covered by the Hayward, it owes no duty to defend or indemnify because any such injury or damage occurred after the policy expired. The first item in the Conditions section of that policy provides: "This policy applies only to loss under Section I or bodily injury or property damage under Section II, which occurs during the period this policy is in effect." (emphasis in original). The policy does not define the term "occurs."
The Hayward policy expired with the Thomases' transfer of ownership to the Chans. The Chans suffered emotional distress and economic loss after they moved into the Hayward residence. Therefore, State Farm argues, although the Thomases engaged in their alleged tortious conduct during the policy period, the actual injury occurred after the expiration of the policy. The Thomases counter that since the term "occurs" is not defined within the policy, it was reasonable for them to assume coverage for injury-causing actions taken during the policy period, even if the damage did not ensue until after the policy's lapse. State Farm has the better of the arguments.
It is the general rule in California that an injury is deemed to have occurred at the time the complaining party is damaged, not at the time the wrongful act is committed. Remmer v. Glens Falls Indemnity Co., 140 Cal. App. 2d 84, 88, 295 P.2d 19 (1956). The courts follow this rule even when the policies fail to define such terms as "accident" or "occurrence." See, e.g., State Farm Mutual Auto Ins. Co. v. Longden, 197 Cal. App. 3d 226, 232, 242 Cal. Rptr. 726, 729-30 (1987). The cases cited by defendants in support of their position are either distinguishable or aberrational.
For example, in Insurance Co. of North America v. Sam Harris Construction Co., 22 Cal. 3d 409, 583 P.2d 1335, 149 Cal. Rptr. 292 (1978), the California Supreme Court construed such a provision against the insurer because the policy stated that it applied "only to occurrences or accidents which happened during the policy period." Id. at 412, 149 Cal. Rptr. at 293 (emphasis added). This disjunctive language implied a distinction between accidents and occurrences, thereby creating ambiguity. Id. The policy's failure to define either term militated in favor of adopting the insured's interpretation. Id.; see also Longden, 197 Cal. App. 3d at 232, 242 Cal. Rptr. at 730 (concluding that Harris departed from "the general rule" because of confusing disjunctive "occurrences or accidents" provision). Even Harris recognized the general rule that the time of an insured injury is not when the wrongful act is committed, but when the complaining party is damaged. Harris, 22 Cal. 3d at 411-12, 149 Cal. Rptr. at 293.
Similarly, defendants' reliance on Sylla v. United States Fidelity & Guaranty Co., 54 Cal. App. 3d 895, 900-02, 127 Cal. Rptr. 38, 40 (1976), is of no avail. In Sylla the court found coverage for an accident occurring after the policy period as a result of negligent repair during the policy period. This decision has been roundly rejected by a multitude of courts as aberrant. See, e.g., Hallmark Ins. Co. v. Superior Court, 201 Cal. App. 3d 1014, 1018-19, 247 Cal. Rptr. 638, 639-40 (1988); Longden, 197 Cal. App. 3d at 231, 242 Cal. Rptr. at 729; Highlands Ins. Co. v. Schrillo Co., 181 Cal. App. 3d 766, 772-76, 226 Cal. Rptr. 717, 720-22 (1986); Maples v. Aetna Casualty & Surety Co., 83 Cal. App. 3d 641, 645-50, 148 Cal. Rptr. 80, 82-85 (1978). In fact, one out-of-state court noted that "every jurisdiction, with the exception of Louisiana, has held that the time an accident 'occurs' is the time when the complaining party is actually injured, not the time when the wrongful act is committed." Stillwell v. Brock Bros., Inc., 736 F. Supp. 201, 205 (S.D. Ind. 1990) (expressly rejecting Sylla).
Finally, the language of the provision is unambiguous. It demands that bodily injury or property damage occur within the policy period. Such language leaves no room for the argument that the injury or damage need not occur within the policy period. Therefore, plaintiff has no duty to defend or indemnify based on the Hayward policy.
B. The Freestone Policy
Plaintiff further declares that it has no obligation to defend or indemnify under the Freestone policy because the Hayward residence was not an insured location under the Freestone policy. That policy excludes coverage for " bodily injury or property damage arising out of any premises owned or rented to any insured which is not an insured location. " (emphasis in original). According to the Thomases, the Freestone policy applies to those injuries arising during the Freestone policy period, after the Thomases vacated their Hayward residence. The Freestone policy, however, insured the Thomases' Freestone residence, not their former Hayward home.
The California Supreme Court's decision in Preston v. Goldman, 42 Cal. 3d 108, 720 P.2d 476, 227 Cal. Rptr. 817 (1986), leaves no room for defendants' position. The court in Preston refused to find coverage under a homeowners policy for injuries arising out of a previously owned residence. The exclusion under the policy in Preston was indistinguishable from that contained in the Freestone policy, excluding coverage for "any premises, other than an insured premises, owned, rented or controlled by any Insured." Id. at 120, 227 Cal. Rptr. at 824. The court concluded that since the alleged negligent acts of the insureds all "arose from" the uninsured, previously owned residence, those acts were not covered under the insureds' later policy. The court's reasoning bears repeating:
Were this not the case, the premises exclusion would essentially become meaningless as to any property over which the insured may have at any time had control. . . . "Generally speaking, the personal liability provisions of a homeowner's policy bind the insurer to pay damages for which the insured shall become liable as a result of accidents in and around his home."
Id. at 120-21, 227 Cal. Rptr. at 824-25 (emphasis in original) (citation omitted).
Both the Thomases' alleged misconduct and the Chans' resulting injuries "arose from" the Hayward residence. There was absolutely no connection between the Freestone policy and the acts and injuries complained of by the Chans. Defendants nonetheless interpret the exclusion as applying only to uninsured premises that are owned or rented by the insured during the policy period. Since they did not own the Hayward residence during the Freestone policy period, they argue that the exclusion does not apply or is at a minimum, ambiguous.
After much reflection, the Court concludes that this argument is unpersuasive. According to the logic of the Thomases' position, the Freestone policy would cover injuries caused by the Thomases arising out of any previously owned residence. No reasonable homeowner or insurer would expect such a result. As the California Supreme Court observed, "As a matter of 'accepted popular, as well as legal definition,' we believe that a renter or homeowner, and his insurer, would not ordinarily intend or reasonably expect coverage" for conduct arising out of a previously owned residence, absent explicit coverage to the contrary. Id. at 121, 227 Cal. Rptr. at 825 (citation omitted). With respect to the provision's so-called ambiguity, the Court observes that the exclusion is virtually identical to the one held to apply in Preston. State Farm owes no duty to defend or indemnify under the Freestone policy.
C. State Farm's Right to Discontinue its Insureds' Defense
The Thomases argue that in its reservation of rights letter, State Farm promised to continue defending them so long as the emotional distress claims remained in the state court action. The emotional distress claims withstood a motion to dismiss in state court; therefore, the insureds assert that by virtue of its "promise," State Farm is estopped from discontinuing its defense. The Court finds, however, that State Farm made no such promise. The letter states:
If the emotional distress damages are eliminated from plaintiffs' claims, it is this company's position that the only potential basis for coverage has been removed from the complaint. We feel that at that time we will be entitled to withdraw from further defense of the action and we would propose to do so.
This passage indicates merely that if the emotional distress damages were eliminated from the state court suit, then State Farm would seek to withdraw its defense. It does not state that if the claims remained, State Farm would necessarily continue the defense.
Any ambiguity as to the extent of State Farm's commitment to defend is resolved by resorting to the express reservation of rights made in that same letter.
Such language constitutes a sufficient reservation of rights. See, e.g., St. Paul Mercury Ins. Co. v. Ralee Eng'g Co., 804 F.2d 520, 522 (9th Cir. 1986).
D. State Farm's Right to Recover Attorney's Fees
Relying upon the above language in its reservation of rights letter, State Farm seeks a declaration that it is entitled to recover attorney's fees expended in defending the Thomases in the state court action. Plaintiff is not entitled to such relief. Although plaintiff's letter did state that State Farm reserved its right to seek attorney's fees, there was no understanding or agreement between the parties that State Farm would be entitled to such fees. The Thomases never responded to State Farm's declaration that it reserved its right to recover its expenses. In this context, their silence did not constitute acquiescence.
No case holds "as a matter of law that amounts expended by an insurance company in partial defense of an action are always reimbursable in the event that a court should find there was no duty to defend." Insurance Co. of the West v. Haralambos Beverage Co., 195 Cal. App. 3d 1308, 1322, 241 Cal. Rptr. 427, 434 (1987). In order for an insurance company to seek reimbursement after agreeing to defend a claim against its insured, the record must reflect "an understanding between the parties." St. Paul, 804 F.2d at 522; Haralambos, 195 Cal. App. 3d at 1322-23, 241 Cal. Rptr. at 434. Significantly, the court in Haralambos held that even if the insurer could establish the insured's knowledge of its intent to seek reimbursement, the insurer must nonetheless prove "the existence of an agreement or understanding between the parties on this point." Id. at 1323, 241 Cal. Rptr. at 434.
State Farm produces no evidence of such an agreement, save for the Thomases' failure to object to State Farm's reservation of its right to reimbursement. Because of the Thomases' silence, it cannot fairly be said that there was an "agreement" or "understanding" between the parties on this subject.
IT IS HEREBY ORDERED that:
(1) Defendants' motion for a stay is DENIED;
(2) Plaintiff's motion for summary judgment on its claim that it owes no duty to defend or indemnify is GRANTED; and
(3) Plaintiff's motion for a declaration that it is entitled to attorney's fees is DENIED.