Daily Blast October 17, 2013

Today, the California Court of Appeal, Fourth Appellate District, Division Three (Orange County) issued an opinion in San Miguel Community Assn. v. State Farm Gen. Insurance Co. (Oct. 17, 2013, G047738) ___ Cal.App.4th___, analyzing whether the insurer has “a duty to defend the insured against a third party lawsuit seeking injunctive relief but no compensatory damages.” (Slip opn., p. 2.) The Court of Appeal held that the “insurer’s defense obligation requires it to provide the insured with a defense against a claim seeking damages potentially payable under the policy, not to defend the insured’s honor or otherwise assist in resolving a nonmonetary dispute.” (Ibid., emphasis in original.)

Plaintiff insured sued defendant insurer alleging breach of its obligation to reimburse plaintiff for costs associated with the defense of a claim seeking injunctive relief. (Slip opn., 2.) The third parties’ initial complaint against the insured alleged causes of action for breach of the community’s governing declarations, conditions, covenants and reservation of easements (CC&R’s) and nuisance. The complaint also sought injunctive relief. (Id. at p. 6.) Although the nuisance cause of action included allegations justifying an award of punitive damages, the initial complaint and first amended complaint did not seek compensatory damages. (Id. at pp. 6-7.) The insurer denied plaintiff’s tender of the defense of the initial complaint and the first amended complaint. (Id. at p. 7.) The second amended complaint, for the first time, sought compensatory damages. (Id. at p. 8.) The insurer agreed to provide the insured with a defense commencing on the day the plaintiff filed the second amended complaint. (Id. at p. 9.) The insurer refused to reimburse the insured for its costs in defending the initial complaint and first amended complaint. (Ibid.) The trial court granted summary judgment in favor of the insurer. (Id. at pp. 2, 10-11.)

The Court of Appeal affirmed determining that “[the] third party’s failure to seek compensatory damages against the insured means the dispute is not a claim for damages under the policy.” (Slip opn., p. 2.) The appellate court refused to 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.” (Id. at p. 12, emphasis in original.) The third party plaintiffs’ request for punitive damages in the earlier pleadings did not imply that an award of compensatory damages was sought. (Id. at p. 13.) “[It] is irrelevant that the third party might have suffered harm that could give rise to a claim for damages covered under the insured’s policy.” (Id. at p. 2.) Accordingly, the insurer did not have “any obligation to provide [the insured] with a defense in the underlying case prior to” the second amended complaint. (Id. at p. 15.)

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