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AMERICAN STATES INS. CO. v. CANYON CREEK

June 26, 1991

AMERICAN STATES INSURANCE COMPANY and AMERICAN ECONOMY INSURANCE COMPANY, Plaintiffs,
v.
CANYON CREEK dba NAPA ESTATES VENTURE, DR. MICHAEL PASHLEY, JOSEPH PASHLEY, ELEANOR BENDER, PATRICIA VAN ABRAHAM, HAL BECKSTROM, HOMEOWNERS FOR HONESTY IN REAL ESTATE, an unincorporated association composed of: RICHARD ADAMS, CATHY DE ROSE, PATRICK FREDRIKSSON, MARY FREDRIKSSON, ROGER GILBERTSON, CLARA GILBERTSON, CHRISTOPHER HYLTON, HERBERT JENSON, JACKIE JENSON, MICHAEL READ, GLEN RUSSELL, SUPHOORA RUSSELL, GERALD SEEGMILLER, MARCIE SEEGMILLER, C.D. SEEGMILLER, F. L. SEEGMILLER, NATHANIEL SIMMS, EMMA SIMMS, CHARLES WHITE, DEE WHITE, JOSEPH WINTERBURN, KATHARYNE WINTERBURN, ALBERTO CALVILLO, THERESA CALVILLO, DANNY R. RENO, KATHERYN A. RENO, ALBERTO REYES, ROSARIO REYES, and THE PEOPLE OF THE STATE OF CALIFORNIA, Defendants.



The opinion of the court was delivered by: WILLIAM H. ORRICK

 In this declaratory relief action filed in federal court, plaintiffs, American States Insurance Company and American Economy Insurance Company ("American States"), seek a declaration as to their rights and obligations under two insurance policies issued to defendants Canyon Creek, doing business as Napa Estates Venture, Dr. Michael Pashley, Joseph Pashley, and Eleanor Bender (collectively "NEV"). Specifically, NEV has been sued in the Superior Court for the County of Napa by four different groups of homeowners and the Napa County District Attorney's office for intentional and negligent misrepresentation and unfair business practices arising out of its involvement in the sale of manufactured housing in the Napa area. *fn1"

 American States filed a motion for summary judgment in this Court, claiming that under the terms of the policies it issued it has no duty to defer or indemnify NEV in the underlying state court actions. NEV responded to American States' motion by filing a motion to dismiss or stay the proceedings and by filing a cross-motion for summary judgment contending that American States does owe NEV a duty to defend and indemnify under the policies.

 Having considered the pleadings and oral argument of counsel, the Court, for the reasons discussed herein, finds that American States does have a duty to defend NEV under one of the policies. The Court, therefore, denies NEV's motion to dismiss or stay this action, grants American States' motion for summary judgment in part and denies it in part, and grants NEV's cross-motion for summary judgment in part and denies it in part.

 I.

 NEV is a California general partnership engaged in the sale of manufactured housing in Napa, California. In the underlying state court litigation, four different groups of homeowners filed essentially identical complaints alleging that NEV knowingly or negligently made false statements in connection with the sale of manufactured housing that materially affected the value of their bargain. In addition, the District Attorney for Napa County has alleged a cause of action against NEV for violation of California's unfair competition statute (California Business and Professional Code ยง 17200), seeking injunctive relief and restitution.

 When NEV was served with the complaints in the underlying actions, it tendered defense of the actions to American States. American States assumed the defense of NEV under a reservation of rights. It then filed the instant action seeking a declaration of its rights and obligations under the policies at issue.

 The first policy at issue ("Policy 1"), a comprehensive general liability policy, was issued on October 29, 1985, and expired one year later. Upon its expiration, American States issued a new policy ("Policy 2") that contained a few differences in the insuring provisions. Both policies are applicable to these proceedings.

 Policy 1 provides that American States "will pay on behalf of [NEV] all sums which [NEV) shall become legally obligated to pay as damages because of . . . bodily injury or . . . property damage . . . caused by an occurrence. . . ." Exhibits in Support of Motion for Summary Judgment filed Dec. 18, 1990, Exh. A ("Policy 1") at 25. An "occurrence" is defined as an "accident . . . which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." Id. at 11.

 Additionally, an expanded coverage endorsement to Policy 1 provided coverage for personal injury or advertising injury. Personal injury is defined as "injury arising out of one or more of the following offenses committed during the policy period: (1) false arrest, detention, imprisonment, or malicious prosecution; (2) wrongful entry or eviction or other invasion of the right of private occupancy. . . ." Id. at 34 (emphasis added). In Policy 2, however, the phrase "or other invasion of the right of private occupancy" was deleted. As will be shown, this is of great significance.

 Advertising injury is defined under Policy 1 as "injury arising out of . . . libel, slander, defamation, violation of right to privacy, piracy, unfair competition, or infringement of copyright, title or slogan." Policy 1 at 34 (emphasis added)

 The only differences in coverage under Policy 1 and Policy 2 germane to these proceedings is that the definition of advertising injury in Policy 2 does not provide coverage for "unfair competition," and the definition of personal injury does not contain the phrase "or other invasion of property."

 II.

 NEV contends first that the Court should either dismiss or stay American States' declaratory relief action because proceeding in this matter will prejudice it in its state court proceeding. NEV relies on the generally accepted rule that a federal court should decline to exercise diversity jurisdiction over declaratory relief actions when the same issues of state law will necessarily be determined in a pending state suit. See, Brillhart v. Excess Ins. Co., 316 U.S. 491, 86 L. Ed. 1620, 62 S. Ct. 1173 (1942). Here, however, the issues necessary to decide this motion are not the same as those necessary to adjudicate the pending state court actions.

 III.

 Because the action is here on the basis of diversity jurisdiction, the substantive law of California applies. St. Paul Fire & Marine Ins. Co. v. Weiner, 606 F.2d 864 (9th Cir. 1979). To determine whether an insurer has a duty to defend under California law, the Court must look at the complaints in the underlying actions to determine whether any of the allegations in that complaints state facts even potentially within the coverage of the insurance policy. Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 54 Cal. Rptr. 104, 419 P.2d 168 (1966). Additionally, the Court must also consider facts outside the ...


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