San Miguel Community Assn. v. State Farm General Ins.

 

 

 

 

 

 

 

 

Filed 10/1/13
San Miguel Community Assn. v. State Farm General Ins. CA4/

 

 

 

 

 

 

 

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

 

 

California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b).  This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.

 

 

IN THE COURT OF
APPEAL OF THE STATE OF CALIFORNIA

 

FOURTH APPELLATE
DISTRICT

 

DIVISION THREE

 

 
>

SAN MIGUEL COMMUNITY ASSOCIATION et al.,         Plaintiffs and Appellants,               v.   STATE FARM GENERAL INSURANCE COMPANY,         Defendant and Respondent.

G047738            (Super. Ct. No. 30-2011-00478236)            O P I N I O N

 

                        Appeal from a judgment
of the Superior Court
of href="http://www.adrservices.org/neutrals/frederick-mandabach.php">Orange
County, Ronald L. Bauer, Judge.  Affirmed.

                        Samuels, Green &
Steel, Orlando F. Cabanday and Frederick H. Choi for Plaintiffs and Appellants.

                        LHB Pacific Law
Partners, Michael J. McGuire and Matthew F. Batezel for Defendant and
Respondent.

 

*                *                *

                        Question:  When an insurance company issues a liability
policy, agreeing to indemnify its insured against a third party claim for
damages covered under the policy, and to defend the insured against any such
claim, does the insurer have a duty to defend the insured against a third party
lawsuit seeking injunctive relief but
no compensatory damages?  Answer:  No. 
The third party’s failure to seek compensatory damages against the
insured means the dispute is not a claim for damages under the policy.  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 it in resolving a nonmonetary dispute.

                        Here, appellants San
Miguel Community Association and William Beggs sued State Farm General
Insurance Company, alleging it breached obligations to them under a liability
insurance policy by refusing to reimburse them for the cost of defending the
early stages of a lawsuit in which the plaintiffs had initially sought only
injunctive relief to enforce parking restrictions within the community, plus an
award of punitive damages.  When the
third party plaintiffs later amended their pleading to include a claim for
recovery of compensatory damages, State Farm agreed to assume appellants’
defense, but refused to reimburse it for any defense costs incurred prior to
the amendment.  The trial court entered
summary judgment in favor of State Farm.

                        Appellants challenge the
judgment, arguing State Farm had an obligation to provide them with a defense
even in absence of any express claim for damages in the earlier versions of the
third party complaint, because those earlier versions implied the third parties had suffered compensable damages as a
result of appellants’ wrongdoing and thus demonstrated appellants had potential
liability for damages covered under the policy. 
We affirm.

                        In the abstract, 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.  What matters is whether the third party has >sought to recover damages from the
insured.  It is only when the third party
does that, that it has it made a claim which triggers even potential coverage under
a liability policy.  That did not occur
here until the third party plaintiffs amended their pleading to include a claim
for compensatory damages.  Finally,
because coverage is triggered by a third party claim for damages, the
allegation that State Farm also misrepresented that the attorney for the third
parties had denied they sustained
damages adds nothing to the cause of action. 
Whether or not those third parties believed they had >sustained damages, the record
demonstrates they made no effort to recover
any from appellants until their second amended complaint.

 

FACTS

 

                        San Miguel, a nonprofit
residential community association, is the named insured under the State Farm
policy at issue in this case and Beggs is the president of San Miguel’s board
of directors.  State Farm’s policy
provided San Miguel with “comprehensive business liability” coverage.  Under that coverage, State Farm agreed to
“pay those sums that the insured becomes legally obligated to pay as damages
because of bodily injury, property damage, personal injury or advertising
injury” caused by an “occurrence.”

                         The policy defined an “occurrence” as either
“an accident . . . which result[s] in bodily injury or property damage,” or
“the commission of an offense, or a series of similar or related offenses,
which results in personal injury or advertising injury.”  And the policy defined “property damage”
as:  (1) “physical injury to or
destruction of tangible property, including all resulting loss of use of that
property . . . [; and (2)] [¶] loss of use of tangible property that is
not physically injured or destroyed, provided such loss of use is caused by
physical injury to or destruction of other tangible property. . . .”

                        The policy also offered
optional coverage for “Directors and Officers Liability,” which was defined as
“those sums the insured becomes legally obligated to pay as damages because of
‘wrongful acts’ committed by an insured solely in the conduct of their
management responsibilities for the Condominium/Association.”  “Wrongful acts” was defined as “any negligent
acts, errors, omissions or breach of duty directly related to the operations of
the Condominium/Association.”  However,
the Directors and Officers Liability coverage did not apply to “any dishonest,
fraudulent, criminal or malicious act, including fines or penalties resulting
from these acts”; did not apply to “bodily injury, property damage, personal
injury or advertising injury liability”; or “damages other than monetary
damages.”

                        Additionally, State Farm
agreed to “defend any claim or suit seeking
damages payable under this policy even though the allegations of the suit
may be groundless.”  (Italics
added.)  A “suit” is defined as “a civil
proceeding in a court of law in which damages . . . to which this insurance
applies are alleged,” and includes
“an arbitration proceeding in which such damages are claimed” and “any other alternative dispute resolution
proceeding in which such damages are
claimed and to which you submit with our consent.”  (Italics added.)

                        The underlying suit
arose out of a dispute regarding enforcement of parking restrictions within the
San Miguel community.  The third party
plaintiffs are two San Miguel residents who briefly served as members of its
board of directors.  During their tenure
on the board, these plaintiffs sought enforcement of parking restrictions
within the community, and promulgated new policies governing parking.  They were later recalled from the board in an
election which also resulted in Beggs becoming a board member.  The newly comprised board of directors
rescinded the parking policies.

                        In late 2008, the third
party plaintiffs began complaining at board meetings that San Miguel was not
enforcing the parking restrictions contained in the community’s governing
Declarations, Conditions, Covenants and Reservation of Easements (CC&R’s)
and that the failure to do so was causing the plaintiffs distress and affecting
their property values.  The plaintiffs
also alleged they had incurred out-of-pocket costs (in the form of copying
costs and fees) as part of their effort to persuade the board to enforce the
CC&R’s.

                        San Miguel rejected the
plaintiff’s complaints, and in December 2008, the plaintiffs made a demand for
nonbinding mediation of the dispute concerning enforcement of the CC&R’s.  The notice identified several issues to be
addressed in the mediation, but did not identify any damages allegedly suffered
by plaintiffs, or demand compensation. 
After receipt of the plaintiff’s alternate dispute resolution (ADR)
demand, San Miguel tendered its defense to State Farm.

                        The plaintiffs’ attorney
testified in deposition that if he had been asked in December 2008 about
damages, he would have said that the “gravamen” of plaintiffs’ complaint “would
have been to fix the wrongs that were occurring.”  While he had done an analysis of money
damages stemming from San Miguel’s violation of the CC&R’s, and concluded
there were “loss-of-use damages” and “postage damages,” he concluded they “were
not of a significant amount.”  He stated
that “my clients weren’t actually looking
for a payout on those monetary damages . . . as much as they were looking
for the injunctive relief to correct the problems that were occurring.”  (Italics added.)

                        Upon receipt of the ADR
demand, a State Farm representative noted in the claim file that it was
“[u]nclear if [the] demand for non-binding mediation seeks either [bodily
injury, property damage, personal injury or advertising injury] under Cov. L;
or money [damages] under [optional directors and officers].  The allegations are vague as to resulting
[damages] or prayer for relief.”  The
representative also noted that a letter from the plaintiffs’ attorney outlining
their claims includes “no mention of money [damages.]”  A State Farm supervisor suggested to the
claims representative that he find out “what other information [San Miguel] has
about this matter that could shed some light on the nature of the damages
claim.  You may also need to talk with
the plaintiff attorney about this.”

                        According to the State
Farm claim file, the representative spoke to the plaintiffs’ attorney on
January 27, 2009.  The file reflects that
in addition to providing other information about the claim, the attorney
indicated the plaintiffs “have not suffered any [personal injury] at this time
or out of pocket expense.”  The
plaintiffs’ attorney testified he did not recall that “first conversation” with
the State Farm representative in January 2009, although he did not specifically
deny it occurred.  He did note it was his
usual practice not to take calls from insurance company representatives who
were not attorneys.

                        On January 29, State
Farm sent San Miguel a letter stating it was continuing to investigate the
claim and was reserving its rights to deny coverage.  On March 9, State Farm’s claim representative
recommended denial of the claim, based on the fact the plaintiffs had asserted
no claim for damages covered by the policy, and on March 23, State Farm
formally denied the claim on that basis. 
The letter explained there was no coverage under the business liability
policy because “the claimants’ allegations involve alleged failure of the
Association to enforce parking regulations, replace fire signage, or the
Association’s failure to provide notice of election results.  Such claims do not qualify as bodily injury,
property damage, personal injury or advertising injury . . . .”  As for coverage under the optional directors’
and officers’ coverage, the letter noted “the claims do not seek recovery of
money damages.”

                        The nonbinding mediation
did not resolve the matter, and in April 2009 the plaintiffs filed their
initial complaint against Beggs only, alleging causes of action for breach of
the CC&R’s and nuisance, and seeking injunctive relief.  Although the cause of action for nuisance
included an allegation that Beggs’ conduct was “intentional and/or grossly
willful,” and “despicable” and on that basis justified an award of punitive
damages, it neither alleged the plaintiffs’ sustained, nor sought recovery of,
any compensatory damages.

                        Beggs once again
submitted the claim to State Farm, but before State Farm had taken formal
action on the claim, the plaintiffs filed their first amended complaint.  In that amended complaint, the
plaintiffs added San Miguel as a defendant, and added a third cause of action
for breach of fiduciary duty.

                        Again, the First Amended
Complaint contained no allegation the plaintiffs’ sustained compensatory
damages as a result of defendants’ alleged wrongs, nor sought recovery of any
such damages.  Instead, it alleged the effect
of the defendants’ violations of the CC&Rs was to cause them “>irreparable injury due [to] the actions
alleged herein and depriv[e] them of the benefit of the CC&Rs” which
“cannot be fully compensated in damages.” 
(Italics added.)  Hence, the sole
remedy the plaintiffs sought for the alleged breach of the CC&R’s was an
injunction.  In their nuisance cause of
action, the plaintiffs again claimed they “cannot be fully compensated for the
damages caused” and were “without an adequate remedy at law,” and they again
sought the remedy of an injunction.  In
their cause of action for breach of fiduciary duty, the plaintiffs alleged they
“have been harmed” by defendants’ breaches, but again “cannot be fully
compensated for the damages caused” and again characterized the harm as
“irreparable” and sought an injunction. 
And once again, the plaintiffs included an allegation that defendants’
conduct was intentional and despicable, and on that justified an award of
punitive damages.

                        San Miguel again
tendered the defense of the first amended complaint to State Farm, and on May
26, 2009, State Farm denied the claim. 
Once again, State Farm based its denial on the fact “the action does not
seek damages that would be covered under the policy.”

                        San Miguel demurred to
the plaintiffs’ first amended complaint and moved to strike the punitive
damages allegation on the basis the plaintiffs had failed to allege any
entitlement to compensatory damages.  In
opposition to the demurrer, the plaintiffs argued they could amend the complaint
to allege entitlement to an award of such damages, including “‘diminution in
value to Plaintiff[s]’ homes and annoyance’” caused by San Miguel’s failure to
enforce the parking regulations, and costs incurred by plaintiffs in attempting
to resolve the matter short of litigation. 
The court sustained the demurrer with leave to amend, and the plaintiffs
filed their second amended complaint in August 2009.

                        The second amended
complaint alleged for the first time that as a result of San Miguel’s alleged
wrongs, the plaintiffs had sustained damages “in an amount to be proved at
trial or . . . nominal damages to the extent necessary.”  In their prayer for relief, the plaintiffs
sought, in addition to declaratory and injunctive relief, an award of
“compensatory damages, according to proof at the time of trial or alternatively
. . . an award of nominal damages.”

                        San Miguel once again
tendered the claim to State Farm, pointing out that “unlike the previous
complaints, [the second amended complaint] seeks damages.”  State Farm once again denied coverage.  In its letter, State Farm stated “plaintiffs
have made no claims for money damages,” and pointed out “[n]ominal damages are
not money damages arising out of a wrongful act.”  State Farm also reiterated in its letter that
the plaintiffs’ attorney had advised State Farm the plaintiffs had incurred no
out-of-pocket costs.  The letter did not
state when the plaintiffs’ attorney had made that statement.

                        However, San Miguel’s
attorney apparently interpreted State Farm’s denial letter as reflecting a
statement made by the plaintiffs’ attorney following
the filing of the second amended complaint. 
He thus contacted the plaintiffs’ attorney and inquired whether the
attorney had denied to State Farm that plaintiffs had incurred damages in
connection with the second amended complaint. 
According to a confirming letter written by San Miguel’s attorney, the
plaintiffs’ attorney replied that he had not spoken to anyone from State Farm >within the past three to four months and
reiterated that his clients had incurred the damages as set forth in the second
amended complaint.  San Miguel’s attorney
then wrote a letter to State Farm, informing it that the plaintiffs’ attorney
was in fact claiming they had incurred compensable damages, and accusing State
Farm of making a “material misstatement[] of fact to support its letter
declining . . . tender.”

                        A State Farm
representative then contacted the plaintiffs’ attorney.  The attorney did recall that conversation,
which he described as “a second phone call I believe I did have with [a State
Farm representative], after I had been advised . . . that apparently there was
a claim we had made some sort of an admission there were no damages.  Which was not our position.  [¶] 
Our position was the monetary damages were de minimus, but there are
damages.”  The attorney acknowledged that
“[i]t may be an issue that those damages will go away if we settle the main
part of the action, but not that they don’t exist.”  He stated, however, that he had no recollection
of what he actually told the representative during that second call, “and I
probably hung up on the gentleman.”

                        Following that
conversation, State Farm reversed its decision and agreed to provide San Miguel
with a defense of the plaintiffs’ lawsuit under a reservation of rights.  However, it concluded that its obligation to
provide a defense commenced on August 27, 2009, when San Miguel tendered the
second amended complaint – the first complaint seeking recovery of compensatory
damages and thus the first to reflect the potential for coverage under the
policy.  Consequently, State Farm refused
to compensate San Miguel for the costs incurred in defending the underlying
case prior to that time.

                        This lawsuit
followed.  San Miguel alleged a cause of
action for breach of the insurance contract, and a cause of action for breach
of the covenant of good faith and fair dealing. 
Both causes of action were based on the identical assertions that State
Farm had breached its obligations by (1) failing to pay for defense of the
plaintiffs’ underlying claim prior to the filing of their second amended
complaint, and (2) misrepresenting the statements of the plaintiffs’ attorney
concerning their purported lack of damages in an effort to avoid paying
benefits under the policy.  San Miguel
specifically alleged the plaintiffs’ complaint in the underlying lawsuit >had included a claim for money damages
within the coverage of the optional Directors and Officers Liability provision
of State Farm’s policy from the outset, and thus that State Farm was obligated
to pay the cost of defending that suit from the outset.  State Farm successfully moved for summary
judgment, and the court entered a final judgment in its favor.

 

DISCUSSION

 

                        We employ a de novo
standard of review on appeal from a summary judgment.  (Aguilar
v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 860.)  We are not bound by the trial court’s stated
reasons for granting summary judgment, and will affirm the judgment if correct
on any theory advanced.  “The trial
judge’s stated reason for granting summary judgment is not binding on us
because we review its ruling, not its rationale.”  (Reliance
Nat. Indemnity Co. v. General Star Indemnity Co. (1999) 72 Cal.App.4th
1063, 1074.)

                        In
our analysis, “[w]e apply the same three-step analysis required of the trial
court.  First, we identify the issues
framed by the operative complaint and answer since it is these allegations to
which the motion must respond.  Second,
we determine whether the moving party’s showing establishes facts which negate
the opponent’s claim and justifies a judgment in the moving party’s favor.  When the moving party makes a prima facie
showing, the third and final step is to determine whether the opposition demonstrates
the existence of a triable issue of material fact.  [Citation.] 
[¶] In performing these steps, we view the evidence in the light most
favorable to the party opposing the motion, liberally construe the opposing
party’s evidence, strictly construe the moving party’s evidence, and resolve
all doubts in favor of the opposing party.” 
(Minish v. Hanuman Fellowship (2013)
214 Cal.App.4th 437, 444.)

                        State Farm’s motion for
summary judgment was based on the assertion that the policy it issued to San
Miguel did not obligate it to provide a defense to any claim unless “covered
damages” were sought, and that contrary to San Miguel’s allegation, no such
damages had been sought by the plaintiffs in the underlying case until they
filed their second amended complaint. 
The trial court agreed with that analysis, despite San Miguel’s vigorous
assertion that a claim for covered damages was implicit in the earlier versions
of the complaint.

>1. 
Implied Claim for Recovery of Damages in the Underlying Case

                        On
appeal, San Miguel does not dispute that a claim for covered damages by the
third party plaintiffs was necessary to trigger State Farm’s duty to defend
under the policy.  That is appropriate,
as the policy clearly specifies the obligation to defend applies to “any claim
or suit seeking damages payable under
this policy even though the allegations of the suit may be
groundless.”  (Italics added.)  As pointed out in United Pacific Ins. Co. v. Hall (1988) 199 Cal.App.3d 551, 556,
“[w]here the language of an insurance policy plainly obligates an insurer to >defend an action for damages against the insured, the insurer has no
obligation to defend an insured in . . . proceedings where damages are not sought.”

                        Instead, San Miguel
essentially repeats the argument it made below, and indeed characterizes the main
question to be resolved on appeal as: 
“Do the [underlying plaintiffs’] allegations asserting claims for
nuisance, breach of fiduciary duty, irreparable damage, and praying for
punitive damages, which in turn would require proof of actual damages, give
rise to the implication of actual damages
and [thus] obligat[e] State Farm to defen[d] the claims?”  (Italics added.)

                        San Miguel’s argument
that a claim for actual damages was implied in the allegations of the
underlying case relies significantly on Travelers
Property Casualty Co. of America v. Charlotte Russe Holding, Inc. (2012)
207 Cal.App.4th 969 (Travelers).  According to San Miguel, Travelers stands for the proposition that an insurer “shall [infer]
the elements necessary to find a possibility of coverage and may not decline a
defense simply because the pleading does not expressly state the conditions for coverage.”  (Italics added.)  In our view, however, Travelers expresses a different rule, and is thus inapposite.

                        Travelers involved a third party claim made by a clothing
manufacturer, which alleged that the insured, a retailer, had harmed the
manufacturer’s brand reputation by severely discounting the manufacturer’s
clothing in its stores.  The retailer
sought insurance coverage for the dispute on the theory that the allegations
amounted to a claim the retailer had disparaged
the manufacturer’s goods.  While the
trial court rejected the argument, the Court of Appeal did not.  The court explained “it is not essential that
the underlying claims must be expressly
phrased in terms of ‘disparagement’ or trade libel” in order to trigger
coverage.  (Travelers, supra, 207 Cal.App.4th at 978.)  Rather, it was sufficient if the third party
allegations “may be understood to accuse” the retailer of such conduct.  (Ibid.)

                        In other words, >Travelers reminds us we cannot strictly
construe the allegations of a third party complaint, and allow the insurer to
deny coverage merely because those existing allegations are not phrased in strict accordance with the language of the
policy.  Thus, Travelers merely reinforces the well-established notion espoused in
Gray v. Zurich Insurance Co. (1966)
65 Cal.2d 263, 276-277, that an insurer “cannot construct a formal fortress of
the third party’s pleadings and retreat behind its walls.  The pleadings are malleable, changeable and
amendable. . . .  [C]ourts do not examine
only the pleaded word but the potential liability created by the suit. . . .  [¶] . . . [¶] . . . An insurer, therefore,
bears a duty to defend its insured whenever it ascertains facts which give rise
to the potential of liability under the policy.”

                        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 could have 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 [are] 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 not seek 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 seeking an 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.

>2. 
The Alleged Misrepresentation

                        San Miguel’s second
contention is that State Farm’s attempt to avoid coverage by “making up the
phone call” in which the attorney for the plaintiffs in the underlying case
purportedly stated they had sustained no damages, constitutes actionable bad
faith and thus precluded summary judgment in State Farm’s favor.  We find the contention unpersuasive for
several reasons.

                        First, we find no
evidence in the record that the phone call was “made up.”  The evidence in the record demonstrates State
Farm’s case file reflects that one of its representatives spoke to the
plaintiffs’ attorney in December 2008, when the case was in the early ADR
stage, and the attorney’s position was that his clients “have not suffered any
[personal injury] at this time or out of pocket expense.”  While the attorney later testified he did not
remember the call, and that his belief at the time was that his clients had
suffered some “de minimus” amount of damages, he did not actually deny >having the conversation.  Moreover, in a conversation with San Miguel’s
counsel in the wake of his filing the second amended complaint in August 2009,
the attorney stated he had not spoken with a State Farm representative about
the case in the past three to four months
– thus implying he had spoken to one at a prior date.

                        It was San Miguel’s
counsel who assumed – apparently erroneously – that the statement contained in
State Farm’s letter denying a defense for the second amended complaint in the
underlying case, to the effect that the plaintiffs’ attorney denied they had
sustained damages, referenced a new
denial.  But the letter does not specify
the date of the attorney’s statement, and does not reflect there were multiple
conversations with the plaintiffs’ attorney. 
In short, a careful reading of the letter does not support the idea that
State Farm made any misrepresentations about having a conversation with the
attorney for the plaintiffs in the underlying case.

                        Second, even if the
phone call took place, but the State Farm representative mischaracterized what
the attorney said, we could not find a triable issue of fact.  San Miguel points to evidence in the record
suggesting the State Farm representative who initially spoke to the plaintiffs’
attorney did not specifically ask him about whether they incurred damages, but
instead inferred they had none from the attorney’s description of their
“asserted claims.”  Based on the
attorney’s later testimony about the plaintiffs’ claims, and the relief they
were seeking at that time, this was an accurate inference.  As the attorney explained, the plaintiffs’
“out of pocket” damages were insubstantial, and they were not making any effort
to recover them.  Instead, what the
plaintiffs wanted from San Miguel was enforcement of the CC&R’s.  From the insurance company’s perspective, the
third party’s disavowal of any claim for
damages is tantamount to an acknowledgement they have sustained none.  The inaccuracy, if any, was insignificant.

                        Third, the fact State
Farm did not engage in significant additional efforts to investigate the claim
following the initial phone call to the plaintiffs’ attorney creates no triable
issue of fact.  Although there was
evidence suggesting the plaintiffs had sustained
some miniscule amount of compensable damage, the record is absolutely clear
they were making no effort to recover
those damages from San Miguel prior to the filing of their second amended complaint.  Moreover, that damage claim was made only
after San Miguel backed the plaintiffs into a corner by demurring to the first
amended complaint, and even then, the plaintiffs acknowledged that the damages
they sought might be purely nominal. 
There is simply no evidence that if State Farm had engaged in a more
rigorous investigation, it would have led to any conclusion other than that no
covered claim existed until the plaintiffs in the underlying case filed their
second amended complaint.

                        Finally, San Miguel’s
claim for liability based on State Farm’s alleged bad faith in manufacturing
evidence fails for the most basic reason of all:  As our Supreme Court held in >Waller v. Truck Ins. Exchange, Inc.
(1995) 11 Cal.4th 1, a claim for liability based on an insurer’s alleged breach
of the implied covenant of good faith and fair dealing cannot be maintained
unless the insured was entitled to coverage under the insurer’s policy.  As the Court explained, “when 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.’ 
[Citation.]  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.’”  (>Id. at p. 36.)

                        Here, because the
plaintiffs in the underlying case were not seeking damages against San Miguel
prior to the filing of their second amended complaint, there was no potential
for coverage under State Farm’s policy prior to that filing, and thus no
contractual requirement that it provide San Miguel with a defense.  It consequently follows that even if State
Farm had engaged in questionable tactics to support the denial of San Miguel’s
claim in the early stages of the underlying litigation, those tactics would not
provide a basis upon which to impose liability for breach of the covenant of
good faith and fair dealing.  We find no
error in the trial court’s grant of summary judgment in State Farm’s favor.

 

DISPOSITION

 

                        The judgment is
affirmed.  State Farm is to recover its
costs on appeal.

 

 

 

                                                                                   

                                                                                    RYLAARSDAM,
ACTING P. J.

 

WE CONCUR:

 

 

 

MOORE, J.

 

 

 

IKOLA, J.