220 Cal. App. 4th 798
Cal. Ct. App.2013Background
- San Miguel Community Association (insured) and its board president Beggs were sued by residents over enforcement of parking restrictions; initial pleadings sought injunctive relief and punitive damages but not compensatory damages.
- State Farm issued a liability policy promising to "defend any claim or suit seeking damages payable under this policy." The policy’s defense obligation is triggered only when the third party seeks damages covered by the policy.
- Early in the dispute plaintiffs demanded nonbinding mediation and filed initial and first amended complaints that characterized harms as "irreparable" and sought injunctive relief; they did not allege or pray for compensatory damages.
- State Farm investigated, learned (via a claims file entry) plaintiffs’ counsel had said plaintiffs had not suffered out‑of‑pocket damages, and denied coverage before plaintiffs later added a compensatory damages claim in a second amended complaint.
- After plaintiffs amended to seek compensatory (and nominal) damages, State Farm agreed to defend under a reservation of rights but refused to reimburse defense costs incurred before that amendment; San Miguel sued for breach of contract and bad faith. The trial court granted summary judgment for State Farm; the Court of Appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether insurer must defend when underlying suit seeks only injunctive relief (no compensatory damages) | The earlier complaints implicitly sought compensatory damages (nuisance, punitive damages require compensatory damages), so defense was required from the start | Defense obligation triggers only when a third party actually seeks damages covered by the policy; no such claim existed until second amended complaint | No duty to defend until plaintiffs affirmatively sought compensatory damages in the second amended complaint |
| Whether insurer must infer a missing damages claim from facts or potential damages | Insurer must infer elements necessary to find potential coverage; Travelers supports inferring coverage possibilities from pleadings | Insurer cannot be required to infer allegations not pled; potential for damages alone does not trigger defense | Court rejected inference argument; insurer need not speculate about unpled claims |
| Whether insurer’s reliance on plaintiffs’ counsel’s alleged statements (or misstatement) creates bad faith | State Farm misrepresented counsel’s statements to deny coverage, amounting to bad faith | Even if mischaracterized, evidence does not show fabrication; no coverage existed before compensatory damages were pled, so no actionable bad faith | No triable issue of bad faith; bad faith claim fails where no entitlement to coverage existed |
| Whether nominal damages constitute "money damages" under D&O optional coverage | Plaintiffs argued nominal/compensatory damages sought in second amended complaint were within coverage and retroactive to earlier stages | State Farm contended nominal damages are not covered earlier and coverage attaches only when damages are actually sought | Coverage (and defense duty) begins when compensatory damages are sought; State Farm need not reimburse pre‑amendment defense costs |
Key Cases Cited
- Aguilar v. Atlantic Richfield Co., 25 Cal.4th 826 (procedural standard for reviewing summary judgment)
- Gray v. Zurich Ins. Co., 65 Cal.2d 263 (insurer’s duty to defend turns on potential liability created by the suit, not the literal pleading)
- United Pacific Ins. Co. v. Hall, 199 Cal.App.3d 551 (insurer not obligated to defend proceedings where damages are not sought)
- Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969 (pleadings can be construed to accuse conduct that would trigger coverage; cannot be strictly confined to label)
- Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1 (bad faith/breach of implied covenant requires entitlement to coverage)