San Miguel Community Assoc. v. State Farm General Insurance Company

(Because Initial Complaint And Amended Complaint Only Requested Injunctive Relief, Rather Than Compensatory Damages In Connection With Underlying Action For Enforcement Of CC&Rs Against Condominium HOA, Insurer Was Not Liable For Bad Faith Denial Of The Tender Of Defense Of Such Complaints)

In San Miguel Community Assoc. v. State Farm General Ins. Co., 220 Cal.App.4th 798 (October 16, 2013), the California Fourth District Court of Appeal affirmed the trial court’s entry of summary judgment in favor of State Farm in connection with its denial of the defense of an initial and amended complaint tendered by the San Miguel Community Association (“San Miguel”). The parties' dispute arose out of an initial complaint filed by members of the homeowners association for enforcement of CC&Rs governing enforcement of parking restrictions within the community.

Initially, the plaintiffs submitted a demand for non-binding mediation. San Miguel tendered the demand to State Farm. In r(Because Initial Complaint And Amended Complaint Only Requested Injunctive Relief, Rather Than Compensatory Damages In Connection With Underlying Action For Enforcement Of CC&Rs Against Condominium HOA, Insurer Was Not Liable For Bad Faith Denial Of The Tender Of Defense Of Such Complaints)esponse, State Farm investigated the demand and determined that the plaintiffs were not seeking any potential damages from San Miguel. Rather, they were seeking to compel enforcement of the parking restrictions for the community. Subsequently, State Farm denied San Miguel’s tender of the non-binding mediation. Thereafter, the plaintiffs filed an initial complaint against the president of the community only, alleging causes of action for breach of the CC&Rs and nuisance and seeking injunctive relief. The plaintiffs requested an award of punitive damages but did not request the recovery of any compensatory damages. The initial complaint was tendered to State Farm. However, before State Farm could respond, the plaintiffs had filed a first amended complaint. The amended complaint added San Miguel as a defendant and added a third cause of action for breach of fiduciary duty. However, such complaint did not include any allegations requesting recovery of compensatory damages. However, the complaint requested injunctive relief and an award of punitive damages. The amended complaint was also tendered by San Miguel to State Farm. In response, State Farm denied San Miguel’s tender of defense of the amended complaint based on the argument that it did not allege potential damages triggering a duty to defend under the State Farm policy.

Subsequently, in response to a demurrer, plaintiffs filed a second amended complaint alleging that they had sustained damages in an amount to be proved at trial for nominal damages based on San Miguel’s breach of fiduciary duty and failure to enforce CC&Rs. San Miguel tendered the defense of the second amended complaint to State Farm. In response, State Farm agreed to defend San Miguel against such complaint. However, State Farm refused to reimburse San Miguel for defense costs incurred prior to the tender of the second amended complaint. As a result, San Miguel filed a complaint for breach of contract and bad faith against State Farm arguing that State Farm had breached its obligations by failing to pay for defense of the plaintiff’s underlying claim prior to the filing of the second amended complaint as well as fraud relative to misrepresenting certain statements made by plaintiff’s counsel regarding the relief sought by plaintiff’s complaint.

In affirming the trial court’s entry of summary judgment in favor of State Farm, the Court of Appeal held as follows:

But what Travelers does not do is what San Miguel claims: establish a rule that insurers must infer the existence of additional allegations not actually included within the underlying third party complaint, merely because it is aware those additional claims might have been plausibly included. And that is what San Miguel is arguing for here.

In effect, San Miguel is asserting that because the third party plaintiffs in the underlying case purportedly sustained some actual damage as a result of San Miguel's alleged wrongs - albeit in an amount that plaintiffs' own attorney characterized as "de minimus" - and thus couldhave sought recovery of those damages from San Miguel in earlier pleadings, State Farm was obligated to infer they had actually done so. We reject the assertion.

First, we note that in their earlier pleadings, the third parties' description of the alleged harm inflicted on them by San Miguel was actually inconsistent with the implication they were seeking money damages. They characterized that harm as "irreparable," and they purported to be "without an adequate remedy at law" to redress it. Standing alone, such allegations imply that an award of money damages is not sought, because monetary damages are the quintessential remedy at law. Further, as our Supreme Court has explained: "irreparable injuries ones that cannot be adequately compensated in damages." (Intel Corp. v. Hamidi (2003) 30 Cal.4th 1342, 1352.) Until the plaintiffs filed their second amended complaint, expressly claiming a right to recover compensatory damages flowing from San Miguel’s wrongs, there was no reason to infer that any such claim was intended.

Second, we reject San Miguel's claim that the underlying plaintiffs' request for punitive damages in the earlier pleadings necessarily implied that an award of compensatory damages - a prerequisite for the desired punitive damages - was also being sought in those complaints. In general, whether such damages are sought can be discerned from the face of the complaint. Just as the plaintiffs' first two complaints clearly sought punitive damages - they just as clearly did notseek compensatory ones. And the fact that the plaintiffs' claim for punitive damages was flawed in the earlier complaints does not require anyone to infer they pleaded something different than they did. If defendants (and courts) were required to infer the existence of allegations missing from a complaint merely because those allegations are necessary to the success of a claim, there would be little purpose to demurrers.

And of course, San Miguel did demur - and successfully - to the first amended complaint in the underlying case, pointing to the plaintiffs' failure to seek actual damages as a significant flaw in both their claim for punitive damages and their cause of action alleging breach of fiduciary duty. Clearly, then, San Miguel did not "infer" the missing allegations already existed in the first amended complaint. State Farm was not obligated to do so either.

And third, the testimony offered by the plaintiffs' attorney supports the conclusion they were not initially seeking an award of covered damages in the underlying case - expressly or impliedly. While the attorney completed a damage analysis, very early in the dispute, his conclusion was that the damages incurred by the plaintiffs "were not of a significant amount." At another point, he described their damages as "de minimus." Perhaps more important, the attorney made it clear that the plaintiffs' goal - the "gravamen" of their underlying case - was to obtain injunctive relief, and he thus acknowledged that the plaintiffs "weren't actually looking for a payout on those monetary damages . . ." (Italics added.) And even when the plaintiffs’ attorney finally did include a claim for compensatory damages in their second amended complaint, in an attempt to shore up their other challenged claims, he was refreshingly honest in acknowledging that the damages they were entitled to recover might only be "nominal." (See Heritage Pacific Financial, LLC v. Monroy (2013) 215 Cal.App.4th 972, 1006 [“The award of only nominal damages highlighted the plaintiff's failure to prove actual injury or any basis for awarding punitive damages"]; Silk v. Feldman (2012) 208 Cal.App.4th 547, 556 [“In the absence of proof of actual damages, nominal damages are awarded”].)

In light of the foregoing, we conclude San Miguel failed to demonstrate the existence of even a triable issue of fact to support its contention that the plaintiffs in the underlying case were seekingan award of damages that might be covered by State Farm’s policy prior to the filing of their second amended complaint – and thus failed to demonstrate State Farm had any obligation to provide San Miguel with a defense in the underlying case prior to that time.