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San Miguel Community Association v. State Farm General Insurance Co.

California Court of Appeals, Fourth District, Third Division

October 1, 2013

SAN MIGUEL COMMUNITY ASSOCIATION et al., Plaintiffs and Appellants,
v.
STATE FARM GENERAL INSURANCE COMPANY, Defendant and Respondent

Pub. order 10/16/13

Appeal from a judgment of the Superior Court of Orange County, Super. Ct. No. 30-2011-00478236 Ronald L. Bauer, Judge.

Samuels, Green & Steel, Orlando F. Cabanday and Frederick H. Choi for Plaintiffs and Appellants.

LHB Pacific Law Partners, Michael J. McGuire and Matthew F. Batezel for Defendant and Respondent.

OPINION

RYLAARSDAM, ACTING P. J.

Question: 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.

Here, appellants San Miguel Community Association and William Beggs sued State Farm General Insurance Company, alleging it breached obligations to them under a liability insurance policy by refusing to reimburse them for the cost of defending the early stages of a lawsuit in which the plaintiffs had initially sought only injunctive relief to enforce parking restrictions within the community, plus an award of punitive damages. When the third party plaintiffs later amended their pleading to include a claim for recovery of compensatory damages, State Farm agreed to assume appellants’ defense, but refused to reimburse it for any defense costs incurred prior to the amendment. The trial court entered summary judgment in favor of State Farm.

Appellants challenge the judgment, arguing State Farm had an obligation to provide them with a defense even in absence of any express claim for damages in the earlier versions of the third party complaint, because those earlier versions implied the third parties had suffered compensable damages as a result of appellants’ wrongdoing and thus demonstrated appellants had potential liability for damages covered under the policy. We affirm.

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 it 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. Finally, because coverage is triggered by a third party claim for damages, the allegation that State Farm also misrepresented that the attorney for the third parties had denied they sustained damages adds nothing to the cause of action. Whether or not those third parties believed they had sustained damages, the record demonstrates they made no effort to recover any from appellants until their second amended complaint.

FACTS

San Miguel, a nonprofit residential community association, is the named insured under the State Farm policy at issue in this case and Beggs is the president of San Miguel’s board of directors. State Farm’s policy provided San Miguel with “comprehensive business liability” coverage. Under that coverage, State Farm agreed to “pay those 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.” And 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....”

The policy also offered optional coverage for “Directors and Officers Liability, ” which was defined as “those sums the insured becomes legally obligated to pay as damages because of ‘wrongful acts’ committed by an insured solely in the conduct of their management responsibilities for the Condominium/Association.” “Wrongful acts” was defined as “any negligent acts, errors, omissions or breach of duty directly related to the operations of the Condominium/Association.” However, the Directors and Officers Liability coverage did not apply to “any dishonest, fraudulent, criminal or malicious act, including fines or penalties resulting from these acts”; did not apply to “bodily injury, property damage, personal injury or advertising injury liability”; or “damages other than monetary damages.”

Additionally, 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.” (Italics added.) A “suit” is 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.” (Italics added.)

The underlying suit arose out of a dispute regarding enforcement of parking restrictions within the San Miguel community. The third party plaintiffs are two San Miguel residents who briefly served as members of its board of directors. During their tenure on the board, these plaintiffs sought enforcement of parking restrictions within the community, and promulgated new policies governing parking. They were later recalled from the board in an election which also resulted in Beggs becoming a board member. The newly comprised board of directors rescinded the parking policies.

In late 2008, the third party plaintiffs began complaining at board meetings that San Miguel was not enforcing the parking restrictions contained in the community’s governing Declarations, Conditions, Covenants and Reservation of Easements (CC&R’s) and that the failure to do so was causing the plaintiffs distress and affecting their property values. The plaintiffs also alleged they had incurred out-of-pocket costs (in the form of copying costs and fees) as part of their effort to persuade the board to enforce the CC&R’s.

San Miguel rejected the plaintiff’s complaints, and in December 2008, the plaintiffs made a demand for nonbinding mediation of the dispute concerning enforcement of the CC&R’s. The notice identified several issues to be addressed in the mediation, but did not identify any damages allegedly suffered by plaintiffs, or demand compensation. After receipt of the plaintiff’s alternate dispute resolution (ADR) demand, San Miguel tendered its defense to State Farm.

The plaintiffs’ attorney testified in deposition that if he had been asked in December 2008 about damages, he would have said that the “gravamen” of plaintiffs’ complaint “would have been to fix the wrongs that were occurring.” While he had done an analysis of money damages stemming from San Miguel’s violation of the CC&R’s, and concluded there were “loss-of-use damages” and “postage damages, ” he concluded they “were not of a significant amount.” He stated that “my clients weren’t actually looking for a payout ...


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