In San Miguel Community Association v. State Farm Gen. Ins. Co. (No. G047738, filed 10/1/13), a California appeals court held that an insurer is not liable to reimburse defense fees incurred by its insured before plaintiffs amend their complaint to include a claim for monetary damages.
The San Miguel Community Association was insured under a general liability policy that also included directors and officers coverage for its board. The Association was sued by some members for breaching the development’s covenants, conditions and restrictions (“CC&Rs”), arising out of a dispute over parking policies.
The plaintiffs initially sought alternative dispute resolution, seeking only enforcement of the CC&Rs. When that failed, they sued alleging causes of action for breach of the CC&Rs and nuisance, but seeking only injunctive relief and punitive damages. The plaintiffs’ counsel told State Farm’s adjuster that the plaintiffs had incurred loss of use damages and postage in an insignificant amount, and said that the plaintiffs “weren’t actually looking for a payout on those damages.”
State Farm denied coverage on the grounds that the lawsuit only involved claims for enforcement of parking regulations, as well as for replacement of fire signage, and the Association’s failure to provide notice of election results, none of which qualified as bodily injury, property damage, personal injury or advertising injury, or sought recovery of money damages.
In a first amended complaint, plaintiffs subsequently alleged that they suffered damages “in an amount to be proved at trial or … nominal damages to the extent necessary.” State Farm then agreed to defend, but rejected the insured’s claim for reimbursement of past defense fees.
In the breach of contract and bad faith suit that followed, the insured argued that State Farm had a duty to reimburse the past fees, contending that a claim for money damages could have been implied in the underlying action from its outset. But the court rejected a rule that an insurer must infer the existence of additional allegations not actually included in the underlying complaint merely because the insurer is aware those additional claims might have been plausibly included.
The court also rejected a claim that State Farm had acted in bad faith during the claim process, holding that any errors or misconduct in the claim handling were not actionable until coverage had been triggered. The court quoted Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, for the proposition that there is no bad faith absent coverage: “[W]hen benefits are due an insured, delayed payment based on inadequate or tardy investigations, oppressive conduct by claims adjusters seeking to reduce the amounts legitimately payable and numerous other tactics may breach the implied covenant because they frustrate the insured’s right to receive the benefits of the contract in ‘prompt compensation for losses…. Absent that contractual right, however, the implied covenant has nothing upon which to act as a supplement, and should not be endowed with an existence independent of its contractual underpinnings.”
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