Insurer Not Obligated to Defend Underlying Action Seeking Only Injunctive Relief Even Though Amendment Added Damage Claim
By Christopher Wagner and admin on February 15, 2014
California has long recognized a liability insurer has no duty to defend lawsuits that seek nonmonetary relief such as injunctive relief actions. The trickier aspect is what happens if a damage claim is later sought? Does that mean the insurer had a duty to defend from the outset because a damage claim could be stated? The California Court of Appeal, Fourth Appellate District, says no.
In San Miguel Community Association, et al. v. State Farm General Insurance Co. (2013) 220 Cal.App.4th 798, the underlying action against the insured initially sought only injunctive relief. State Farm agreed to defend after the underlying plaintiffs amended their complaint to seek “damages.” The insured argued State Farm had a duty to defend from the outset because the original complaint implied a claim for “damages.” The trial court said no and the Court of Appeal affirmed adopting the simple test that, whether the underlying plaintiffs had sustained “damages” prior to the plaintiffs’ amendment was irrelevant because the earlier complaint did not seek recovery of “damages.”
The underlying lawsuit against the insured, San Miguel, involved a dispute over enforcement of parking restrictions in a condominium community. The underlying plaintiffs began complaining at board meetings that San Miguel was not enforcing the restrictions. They initially claimed distress, adverse effect on property values, and nominal out-of-pocket costs (such as for copying). San Miguel demanded mediation.
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 denied coverage with respect to both complaints. The court allowed the plaintiffs to file a second amended complaint in which the underlying plaintiffs alleged – 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.
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 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.
On Oct. 1, 2013, the Court of Appeal found 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 also was 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.