This case presents an issue recently addressed by the Supreme Court in
Waller
v.
Truck Inc. Exchange, Inc.
(1995)
Factual and Procedural Background
Plaintiff and appellant American International Bank (AIB) was insured by defendant and respondent Fidelity and Deposit Company of Maryland (Fidelity). During the effective date of the policy, AIB was sued by Mike and Layla Boyajian. The complaint, as amended, alleged that the Boyajians had had a long-standing business relationship with AIB and a personal relationship with its president, James A. Dorian. In 1989, the Boyajians decided to build a new 12,000-square-foot “dream home” on property they had purchased in Laguna Beach. In December of 1989, the Boyajians and AIB entered into an oral contract for a $2.5 million construction loan. The terms of the agreement included provision for a loan fee of two points, an interest rate of two percentage points above prime, and terms extending six months after completion of construction. The loan was to be secured by a deed of trust on the Laguna Beach property. AIB agreed the Boyajians could draw on their existing credit line of $550,000 to cover preliminary expenses, and the Boyajians expended significant sums to pay for architectural and engineering work, and obtain permits from the City of Laguna Beach and Coastal Commission in reliance on obtaining the loan. AIB knew that if plaintiffs did not begin construction by August 1990, the Boyajians’ coastal development permit would expire, and because of changes in zoning laws, would not be renewed. In July of 1990, the bank’s loan committee met and offered a different loan which was contingent on a significant “ ‘cash injection’ ” from the Boyajians. The Boyajians rejected the alternative loan and, unable to
In the Boyajians’ claim for breach of contract, they sought as damages the lost profit which could have been derived from the improvement of the property. Alternatively, the complaint alleged that the Boyajians would have sold the property in 1989 or 1990 had they known their construction loan would not be approved and lost the profit which could have been obtained from selling before the real estate market depreciated. In the second cause of action, based on promissory estoppel, they sought reimbursement of sums needlessly expended on preparing the property for construction. In a claim for bad faith denial of the existence of a contract, the complaint alleged unspecified damages. The Boyajians also asserted causes of action for fraud and negligent misrepresentation based on the bank’s employees’ promise that the bank would fund the loan on the terms originally stated. Here, they sought the same damages as for breach of contract. Finally, there were claims seeking compensation for intentional infliction of emotional distress and negligence leading to emotional distress. The claim for intentional infliction stated that the bank’s behavior in encouraging the Boyajians to draw on their line of credit and keep their business with the bank was outrageous and caused the Boyajians “deep humiliation, mental anguish, and severe emotional distress . . . .” “Plaintiffs’ humiliation, mental anguish and severe emotional distress included, but were not limited to, mental anguish and severe emotional distress caused by the realization that they would not be able to build the dream house they had been led to believe that they could construct, mental anguish and severe emotional distress at the realization that they had been misled in spending considerable moneys towards that dream house, mental anguish and emotional distress at the realization that if Defendants had told them at the beginning of their negotiations that the Bank would not provide a loan, they could have sought and obtained a loan from another source, thereby being able to build their dream house, and humiliation at having been treated in the above fashion by the Bank with which they had a long-standing relationship and by their long-time social acquaintance Dorian, and in having represented to their friends and social circle that they would be able to build their dream house, and then having to inform their friends that such construction could not take place.”
After trial to a jury, the Boyajians were awarded: $115,000 on the breach of contract claim; $350,000 on the promissory estoppel cause of action; $115,200 for negligence; and $10,000 for Layla Boyajian’s emotional distress.
On appeal, Division Five of this court upheld the award of damages for breach of contract and promissory estoppel. The award for negligence was reversed because under that cause of action, the Boyajians had sought the identical damages as were awarded for breach of contract and promissory estoppel and there was no distinct and independent evidence of items of compensable damage flowing from the negligence theory of recovery. The court reversed the emotional distress damages on the grounds that they were not compensable in that the loss resulting from defendant’s conduct was economic only. According to the court, “[w]hen the direct loss resulting from a defendant’s merely negligent conduct is economic only, the consequential injury in terms of emotional distress is not compensable. . . . [^Q . . . Further, mere foreseeability that emotional distress might result from a defendant’s negligent conduct is not sufficient to support the recovery of emotional distress damages; stated differently, a plaintiff cannot recover for negligent infliction of severe emotional distress based on a claim the defendant assumed a duty, arising out of a preexisting relationship, not to cause such psychic injury. . . .”
The trial in the AIB/Fidelity action was on stipulated facts and the court took judicial notice of the pleadings and findings of the court in the Boyajian matter. According to the stipulated facts, Fidelity insured AIB under a commercial package policy and an umbrella policy. In November of 1992, Fidelity was sent a copy of the amended complaint in the Boyajian litigation and understood that AIB was making a claim for coverage of the claims contained therein. One of Fidelity’s employees reviewed and analyzed the pleading and the insurance policies. He concluded that there was no potential for coverage under the policy. That conclusion was affirmed by his superior,
The policy, attached to the stipulation of facts, stated: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. . . . The ‘bodily injury’ or ‘property damage’ must be caused by an ‘occurrence.’ ” “Bodily injury” is defined as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.” “Property damage” is defined as “[pjhysical injury to tangible property, including all resulting loss of use of that property” or “[ljoss of use of tangible property that is not physically injured.” “Occurrence” is defined to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The coverage does not extend to “ ‘[bjodily injury’ or ‘property damage’ expected or intended from the standpoint of the insured.”
In its judgment and order, the trial court found that Fidelity’s review of the complaint and the policy constituted an adequate investigation under California law. The court further found that the Boyajians’ losses did not meet the definition of “ ‘property damage’ ” and their claims for “ ‘humiliation, mental anguish and severe emotional distress’ ” did not constitute “ ‘bodily injury’ ” as those terms are defined in the policy. In reaching the latter decision, the court relied in part on the decision in
Aim Insurance Co.
v.
Culcasi
(1991)
Relying on Culcasi, the trial court “conclude[d] the damages being sought do not potentially constitute ‘bodily injury’ or ‘property damage’ as defined in the . . . Policy.” Because of this ruling, the trial court did not “decide the question of whether the Boyajian claim raises a potential for an ‘occurrence’ . . . .” AIB appealed from the judgment.
Discussion
I
In its appeal, AIB contends that the provisions of the policy covering third party claims for “bodily injury” applies to the Boyajians’ claims. AIB believes that this case is distinguishable from
Aim Insurance Co.
v.
Culcasi, supra,
In
Waller,
the policy under review covered “ ‘all damages which the insured becomes legally obligated to pay because of . . . bodily injury to any person, and . . . damage to property ... to which this insurance applies, caused by an occurrence.’ ” (
The claim in
Waller
involved a minority shareholder in a small corporation who had sued his fellow officers and directors (who were also the majority shareholders), claiming they had engaged in fraud and mismanagement. The underlying complaint included a cause of action for intentional infliction of emotional distress and alleged that the plaintiff had suffered “ ‘humiliation, mental anguish, and emotional and physical distress.’” (
The Court of Appeal had relied on three cases which resolved the same or similar issues:
Keating
v.
National Union Fire Ins.
(9th Cir. 1993)
“In
Chatton,
several investors sued the directors and officers of Technical Equities, an investment services company, for fraud, negligent misrepresentation, breach of fiduciary duty and negligence. The investors prevailed on their negligence and fraud causes of action and were awarded damages for both their economic losses and resulting emotional distress, as well as punitive damages. Following their success at trial, the investors filed a declaratory relief action against the company’s liability insurer to adjudicate coverage. The trial court held, among other things, that there was coverage under the bodily injury clause because the investors’ emotional distress constituted ‘bodily injury’ under the CGL policy, and that the wrongful activities of Technical Equities (i.e., security manipulations, note fraud, etc.) were ‘occurrences’ within the meaning of the same policy. HD The Court of Appeal reversed, holding that any emotional distress suffered by the investors due to their economic losses was not covered by the liability policy even though those losses were caused by the negligent misrepresentations of Technical Equities officers and directors. [Citations.] This is so, the court held, because the ‘bodily injury’ clause under a CGL policy ‘provides coverage for bodily injury to the person and for physical injury to, or destruction or loss of use of,
tangible property.' (Chatton, supra,
“[I]n
McLaughlin
[one issue] was whether the insurer had a duty to defend against an action alleging that the insureds’ conduct had caused the investor plaintiffs to suffer economic damages and resultant mental, physical and emotional distress. [
Following its review of these three relevant authorities, the Supreme Court expressed agreement with the Court of Appeal that they had been properly decided and were controlling.
(Waller
v.
Truck Ins. Exchange, Inc., supra,
The decision of the Supreme Court in
Waller
is directly relevant because here, as in
Waller,
the occurrence or series of occurrences which gave rise to the Boyajians’ losses damaged their economic interests, not their tangible property or their corporeal selves. Because of this economic injury, they suffered emotional distress, or so the jury found, and the emotional distress may or may not have had a physical manifestation—that fact was disputed at trial and not resolved by the special verdict. But the distinction would make no difference. As the Supreme Court explained in
Waller.
“[W]hen the third party complaint alleges emotional and/or physical distress flowing from economic losses—as was the case in
Chatton, Keating,
and
McLaughlin
as well as in the present lawsuit—the occurrence or event that causes damages is an economic loss. There is no separate ‘bodily injury’ occurrence within the terms of the policy. Thus, the injured party’s claim that he suffered incidental emotional distress flows directly from the economic occurrence and, hence, is not covered by the CGL policy.”
(Waller
v.
Truck Ins. Exchange, Inc., supra,
As the Supreme Court held, where the “occurrence” giving rise to the claim causes only economic loss, the fact that such intangible losses cause the victim to later suffer emotional distress and attendant physical injury cannot be used to convert an uncovered claim for economic loss into a covered claim for bodily injury. The occurrence itself must directly cause the bodily injury, the injury to tangible property, or the loss of use of the property. The Boyajians’ physical distress, if any, derived from uncovered economic losses. Fidelity’s policy “w[as] never intended to cover emotional distress damages that flow from an uncovered ‘occurrence,’ and the parties could not reasonably have expected that coverage would be expanded merely because a claim of emotional or physical distress is alleged as a result of the economic loss. [Citation.]”
(Waller
v.
Truck Ins. Exchange, Inc., supra,
II
AIB contends that whether or not Fidelity had a duty to indemnify, as an insurer it had a duty to thoroughly investigate AIB’s claim before rejecting it. According to AIB, Fidelity breached its duty to investigate because it did no more than review the amended complaint and the policy (and later the special verdicts) and did not perform a full factual investigation. As we understand it, AIB believes that a failure to conduct a reasonable
AIB misunderstands the insurer’s duty and the risk it runs if it fails to undertake an adequate investigation. The risk that an insurer takes when it denies coverage without investigation is that the insured may later be able to prove that a reasonable investigation would have uncovered evidence to establish coverage or a potential for coverage. In that case, the insurer will be liable for the costs of defense already incurred by the insured
(Amato
v.
Mercury Casualty Co.
(1993)
More importantly, here there was no failure to investigate. The trial court expressly found that Fidelity’s investigation was reasonable and that finding is supported by the evidence on the record. The evidence showed that Fidelity reviewed the Boyajians’ complaint and the insurance policy. The duty of the insurer may be fully met by such a review. “The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy.”
(Horace Mann Ins. Co.
v.
Barbara B.
(1993)
AIB argues that there was a potential for liability because the Boyajians could have amended their complaint to assert, as they testified at trial, that the emotional injury had physical manifestations. As we have seen, under Waller, an allegation of physical injury would not have led to a different outcome on coverage.
Alternatively, AIB points out that the Boyajians recovered the cost of building a retaining wall on the property which later proved useless. According to AIB, the building of the wall constitutes physical damage to the
As we have noted, the policy defined property damage to mean “ [physical injury to tangible property, including all resulting loss of use of that property”; or “[l]oss of use of tangible property that is not physically injured.” It is abundantly clear that construction of the retaining wall on the Boyajians’ beachfront property did not damage the property; it was an “improvement” as that term is usually defined: “A valuable addition made to property (usually real estate) or an amelioration in its condition, . . . costing labor or capital, and intended to enhance its value, beauty or utility or to adapt it for new or further purposes.” (Black’s Law Diet. (6th ed. 1990) p. 757, col. 2.) “All works which are directed to the creation of homes for families, or are substantial steps towards bringing lands into cultivation, have in their results the special character of ‘improvements,’ and under the land laws of the United States and of the several states, are encouraged.”
(Simpson
v.
Robinson
(1881)
Likewise, their inability to construct a dream home was not physical damage to the property, it was an inability to make “[a] valuable addition . . . intended to enhance [their property’s] value . . . .” (Black’s Law Diet.,
op. cit. supra,
at p. 757, col. 2.) Just as the construction of an unnecessary improvement is a solely economic event, the inability to construct an improvement results in only economic loss. And “strictly economic losses like lost profits, loss of goodwill, loss of the anticipated benefit of a bargain, and loss of an investment, do not constitute damage or injury to tangible property covered by a comprehensive general liability policy. [Citations.]”
(Giddings
v.
Industrial Indemnity Co.
(1980)
Ill
At oral argument, AIB stressed that the Boyajians’ complaint purported to state a claim for negligence and not just negligent infliction of emotional distress, apparently under the misapprehension that all claims for negligence must at least potentially come within the policy and therefore give rise to a duty to defend. That is not so. As we have noted, the policy covers bodily injury or property damage caused by an “occurrence,” defined
The analysis applies equally here. The Boyajians’ negligence cause of action stated that “Defendants had a legal duty to use due care in making representations and promises to Plaintiffs regarding a construction loan for construction of the House, in monitoring Plaintiffs’ use of their Bank line of credit for funding preconstruction costs, and to inform Plaintiffs if the Bank was not going to fund the construction loan so that Plaintiffs could seek funding elsewhere.” It was these alleged misrepresentations and failures to disclose that purportedly caused the losses suffered by the Boyajians. The described conduct was not an occurrence under the policy definition because the results were not unintended or unexpected as they would be in the case of a true accident. Therefore, there was no insured against occurrence and no reason for Fidelity to suspect that one existed.
AIB contends the policy should be read to cover the Boyajians’ claim because under section II, entitled “Who Is An Insured,” the policy states: “If you are designated in the Declarations as: [f] .... [f] ... An organization other than a partnership or joint venture, you are an insured. Your executive officers and directors are insureds, but only with respect to their duties as your officers or directors.” (Italics added.) AIB’s president, Dorian, and another officer made the promises on which the Boyajians relied, and were accused of negligence in the complaint. 3 AIB argues that since the complaint was based on acts and omissions of these officers, the policy reference to officers and directors and their “duties as your officers or directors” must result in coverage. According to AIB, its position is strengthened by the fact that an umbrella policy, also issued by Fidelity, expressly excludes “ ‘injury arising out of the rendering or failure to render any professional services’ ” and “ ‘any claim arising out of any error or omission or a mistake committed by you or on your behalf in the conduct of your business activities,’ ” while the main policy contains no such exclusion.
We do not agree with AIB’s analysis. By its express terms, the quoted provision offers a description of who is covered and does not purport to expand the scope of coverage. If in the performance of their duties the officers and directors of AIB caused an “occurrence” which led to “bodily injury” or “property damage,” as those terms are defined in the policy, then AIB is covered. That is the plain and only meaning that can be ascribed to the provision. It did not transform the policy into professional liability insurance. “Had these insureds desired to obtain a professional liability policy to protect them from charges resulting from the performance of professional services, such insurance could have been obtained. The premium would likely have been higher than the $317 annual premium charged here for general business liability insurance. But the insurer who issues a policy for errors and omissions insures against a far different risk than that insured against here. More important, just as an insurer would not reasonably expect that a business liability policy would cover claims for securities fraud, these insureds could not reasonably expect that such claims would be covered under this policy.”
(Allstate Ins. Co.
v.
Interbank Financial Services
(1989)
Turning to AIB’s other point, the lack of an express exclusion in the policy has no significance unless the description of the scope of coverage
Disposition
For all the foregoing reasons, the judgment is affirmed.
Vogel (C. S.), P. J., and Aranda, J., * concurred.
A petition for a rehearing was denied October 2, 1996, and appellant’s petition for review by the Supreme Court was denied December 11, 1996.
Notes
These facts were alleged in the complaint and proven at trial. In addition, the Boyajians established at trial that when it became clear that construction costs would exceed $2.5 million, the vice-president of AIB told the Boyajians that the bank could not loan more than $2.5 million, but promised to find a participating bank to loan them the necessary funds in excess of that amount. Ultimately, no other lender became involved and AIB refused to lend the $2.5 million, although they offered the loan for a lesser amount on less favorable terms which the Boyajians rejected.
Whether or not this condition could be tied to the failure to fund the loan was apparently not resolved in the underlying action.
The individual defendants were voluntarily dismissed by the Boyajians in 1993.
Judge of the Municipal Court for the South Bay Judicial District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.