GOLDEN EAGLE INSURANCE CORP. v.CEN-FED, LTD.,

Filed 3/21/07

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

STORY CONTINUED FROM PART I..

This case is not like those relied on by Cen-Fed where the courts permitted a diminution in value of property as a measure of the plaintiffs claimed physical injury to tangible property. (See Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 565; Pruyn v. Agricultural Ins. Co. (1995) 36 Cal.App.4th 500, 510, fn. 6; Eichler Homes, Inc. v. Underwriters at Lloyds, London (1965) 238 Cal.App.2d 532, 538.) Here, diminution in value (of its leasehold interest) damages were awarded to the WMB for its economic loss in failing to receive the benefit of its lease, a nontangible property right. That was not covered by the terms of the Golden Eagle policies. (Waller, supra, 11 Cal.4th at pp. 17‑18.)

Moreover, Cen-Feds failure to discharge its contractual liabilities under the lease agreement was nothing more than a non-accidental act of breach of contract. That is, whatever the nature of the managerial decisions made by Cen-Fed which led to its failure to fulfill its promised maintenance obligations, they were not the result of a fortuitous accident; and they thus could not have resulted in an occurrence. (See e.g., Modern Development Co. v. Navigators Ins. Co. (2003) 111 Cal.App.4th 932, 941‑942.) Thus, in addition to the absence of property damage, it is also clear that the loss sustained by WMB was not caused by an occurrence. (See e.g., Stein-Brief Group, Inc. v. Home Indemnity Co. (1998) 65 Cal.App.4th 364, 372.)

It is true that merely because a claimant has framed its complaint to allege a breach of contract coverage will not necessarily be precluded. (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 840.) That is because coverage under a liability policy does not depend on the form of the action or the legal theories asserted by claimant. Rather, coverage is determined by the nature of the loss (e.g., property damage) and the risk that caused the loss (i.e., accident or occurrence). (Id., at p. 839.) Thus, irrespective of the form of the action or the theory asserted by the claimant, coverage under liability policy provisions, such as those before us (i.e., Coverage A), the existence of coverage will depend upon allegations charging property damage caused by an occurrence (Ray v. Valley Forge Ins. Co. (1999) 77 Cal.App.4th 1039, 1045‑1046.) No such claim or allegations were ever made or asserted by WMB nor were they otherwise raised or tried in the underlying action.[1]

We conclude, therefore, that there was no actual or potential coverage, as a matter of law, under the Coverage A provisions of the Golden Eagle policies.

4. Golden Eagle Had No Duty To Indemnify Cen-Fed Under Coverage B

Personal injury, is defined as an injury (other than bodily injury) that arises out of one or more of five designated offenses. Some of those five offenses specifically refer to offenses affecting a person, while others either refer to offenses affecting a person or organization or do not designate either.[2] The pertinent offense for our purposes here is the wrongful eviction/entry into/invasion of the right of private occupancy of a room, dwelling or premises, which the policy specifically makes applicable only to persons occupying the premises, not to persons and/or organizations. Here, of course, the lessee of the subject leased premises was WMB, and WMB is a corporate organization, not a person. Thus, by its very terms, that premises-based offense is not applicable to Cen‑Feds corporate lessee.

In Mirpad, LLC v. California Ins. Guarantee Assn. (2005) 132 Cal.App.4th 1058, 1070 et seq. (Mirpad), a case that also involved a wrongful eviction claim and the personal injury coverage in a commercial general liability policy with essentially identical language to the wrongful eviction language in the policies which we address here, we held that when an insurance policy consistently distinguishes between persons (natural persons) and organizations, the distinct meanings have to be applied by the courts. Based on the language of that policy, we held that the wrongful eviction offense was directed at victims who were natural persons, not organizations. The same result is compelled here. The Mirpad decision, which was filed after the entry of the trial courts judgment in this matter, makes it clear that there was no coverage, as a matter of law, available to Cen‑Fed under the Golden Eagle policy for WMBs wrongful eviction/entry/invasion of right of privacy claim. Since that was the sole clause upon which Cen‑Fed relied for its claim that there was coverage under the Coverage B provisions of the policy, the principles set out in Mirpad are dispositive of the matter of offense based coverage.[3]

In light of that conclusion, we need not reach or discuss the potential applicability of the exclusions to the Coverage B provisions.[4]

5. Golden Eagle Is Not Obligated to Pay the Costs and Fees
Imposed on Cen-Fed

In the underlying action, WMB was awarded costs of suit against Cen-Fed. This included attorneys fees awarded pursuant to the attorneys fee clause in the lease. (See Code of Civ. Proc.,  1033.5; Civ. Code, 1717, subd. (a).) In the instant action, the trial court ruled that, because Golden Eagle had in fact defended Cen-Fed in the underlying action, Golden Eagle had an obligation to pay those costs of suit in spite of the courts determination that there was no coverage under the policies and there never was a duty to defend.[5] Golden Eagle challenges that ruling.

Under the policies supplementary payments provisions for Coverage A and Coverage B, Golden Eagle promised to pay, with respect to . . . any suit against an insured we defend, [a]ll costs taxed against the insured in the suit. The policies define the word suit as a civil proceeding in which damages because of bodily injury, property damage, personal injury or advertising injury to which this insurance applies are alleged.

In support of its ruling, the trial court cited Prichard v. Liberty Mutual Ins. Co. (2000) 84 Cal.App.4th 890 (Prichard). In Prichard, the court addressed a supplemental payments provision for payment of an insureds defense costs that had the same language as the subject policies in the case before us. The Prichard court stated the supplementary payments provision is a function of the [Golden Eagles] defense obligation, not its indemnity obligation (Id., at pp. 911-912.). In that case, the insurer owed a duty to defend at least one of the claims asserted against its insured. That, of course, is not the case here; and that distinction makes all the difference.

The duty to defend depends on whether there is potential [indemnity] liability based on facts pled in the complaint or known to [Golden Eagle]. There is no duty where the only potential for liability turns on resolution of a legal question. . . .   [Citation.] (McLaughlin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, 1151; italics in original.) Thus, if the potential for indemnity liability in this case had turned on disputed factual issues, Golden Eagle would have been required to provide a defense at least until the facts were conclusively decided to show that there is no coverage and thus no duty to defend. (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 299.)

In contrast to an insurers duty to indemnify, which requires a determination of actual coverage (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 659, fn. 9), its duty to defend runs to claims that are merely potentially covered (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 295.) But there must be potential coverage for at least one of the claims asserted against the insured. In an action where none of the claims is even potentially covered, the insurer has no duty to defend. (Waller, supra, 11 Cal.4th at p. 29.) [T]he duty to defend goes to any action seeking damages for any covered claim. (Buss v. Superior Court, supra, 16 Cal.4th at p. 48; italics added.) Thus, the insurer has a duty to defend as to the claims that are at least potentially covered, but not as to those that are not. [Citation.] Even if the policys language were unclear, the hypothetical insured could not have an objectively reasonable expectation otherwise. (Id., at p. 49.)

Since, as we have held, Golden Eagle never had any duty, as a matter of law, to indemnify Cen‑Fed for the claims asserted by WMB, it likewise never had any duty to defend the action. What impact does that conclusion have on the enforcement of the supplementary payments provision of the Golden Eagle policies? Does it matter that Golden Eagle in fact provided a defense? The trial court answered these questions differently than we do.

The trial court relied on Prichard, supra, 84 Cal.App.4th 890 and San Diego Housing Com. v. Industrial Indemnity Co. (2002) 95 Cal.App.4th 669 (San Diego Housing). That reliance was misplaced. The trial court erroneously found those cases persuasive to support a rule which, even if correct based on their facts, would not apply to the case before us. The critical and dispositive distinction is that Prichard, supra, and San Diego Housing, supra, were cases, contrary to this case, where the insurer did owe a duty to defend the entire case.[6] Thus, Prichard and San Diego Housing are profoundly distinct from the instant action, where the trial court correctly determined that the insurer never had a duty to defend any cause of action or claim.

The Prichard court itself specifically distinguished its circumstances from those found in Ringler Associates Inc. v. Maryland Casualty Co. (2000) 80 Cal.App.4th 1165, where there never was a duty to defend, but the insurer mistakenly defended its insured. (Prichard, supra, 84 Cal.App.4th at pp. 902‑903.) The case before us is more closely analogous to Ringler in that here there never was a potential for coverage from the outset. WMBs pleadings in the underlying action did not raise a potential for coverage and no claims were asserted at any time except those for breach of the lease contract and the resulting contract damages. The case went to the jury on the same breach of contract theory that had been alleged in the initial complaint. The jury entered an award on WMBs breach of lease cause of action in the form of diminution of leasehold value; that is, economic harm arising from a breach of the lease and not for property damage.

In concluding that a supplementary payment obligation could exist even in the absence of a duty to defend, the trial court ignored analogous case law. In Amex Assurance Co. v. Allstate Ins. Co. (2003) 112 Cal.App.4th 1246, the court held that an Additional Protection provision in an Allstate homeowners policy, analogous to the supplementary payment provision found in the standard form liability policy, would not cover costs where there was no duty to defend. The court stated: Amex argues that the words any suit mean Allstate has a duty to pay for the cost of [the insureds] defense, regardless whether it had a duty to provide defense counsel or to indemnify. But Amex takes the words out of context. No reasonable insured would expect Allstate to pay defense costs for any and every suit, regardless whether the suit potentially seeks damages within the coverage of the policy. (Id., at p. 1253; see also Home Indemnity Co. v. Avol (C.D.Cal. 1989) 706 F.Supp.728, 729‑730 fn. 2 [which noted that supplementary payments coverage would not apply absent some underlying coverage].)

In addition, and perhaps most importantly, the trial courts decision failed to recognize the anomalous consequences that flow from a rule permitting the enforcement of the supplementary payments clause in circumstances such as those before us. The trial courts ruling, if taken to its logical conclusion, would lead to results which are inconsistent with the fundamental principles underlying the duty to defend. The trial courts decision would discourage, rather than encourage, an insurer to defend an insured in cases of doubtful coverage. An insurer that questions coverage is entitled to reserve its rights and then go ahead and provide its insured with a defense and obtain reimbursement of its defense costs where it is subsequently determined that no defense was ever owed. (Scottsdale Ins. Co. v. MV Transportation, supra, 36 Cal.4th at p. 657.)

The principles establishing this process are now settled. As the Supreme Court recently put it, we have made clear that where the third party suit never presented any potential for policy coverage, the duty to defend does not arise in the first instance, and the insurer may properly deny a defense. Moreover, the law governing the insurers duty to defend need not be settled at the time the insurer makes its decision. As several courts have explained, subsequent case law can establish, in hindsight, that no duty to defend ever existed. If the terms of the policy provide no potential for coverage, . . . the insurer acts properly in denying a defense even if that duty is later evaluated under case law that did not exist at the time of the defense tender. [Citations.]. . . .  [] . . . . These principles are equally true where, as here, the insurer does not deny a defense at the outset, but instead elects to provide one under a reservation of its right to reimbursement. By law applied in hindsight, courts can determine that no potential for coverage, and thus no duty to defend, ever existed. If that conclusion is reached, the insurer, having reserved its right, may recover from its insured the costs it expended to provide a defense which, under its contract of insurance, it was never obliged to furnish. (Scottsdale Ins. Co. v. MV Transportation, supra, 36 Cal.4th at pp. 657‑658; italics in original.). This is precisely what has occurred in this case.[7]

Because of the trial courts erroneous ruling, Golden Eagles decision to provide a defense to Cen-Fed while it sought declaratory relief as to the existence of coverage exposed it to an unfair and prejudicial burden. Had it denied coverage and refused to defend, Golden Eagle would have avoided incurring any defense costs on Cen‑Feds behalf; and at the same time, it would not now have exposure for the costs and attorneys fee award entered against Cen‑Fed under supplementary payments provision. By electing to err on the side of caution and prudence, and defending under a reservation of rights while seeking declaratory relief on the coverage issue, Golden Eagle incurred many thousands of dollars in defense costs; and, as if to demonstrate that no good deed goes unpunished, the result of its protective action has been exposure to a very substantial cost and attorneys fee burden under the policys supplementary payments clause.

The trial courts literal application of the supplementary payments clause to a case where no defense duty ever existed undermines the well settled policy of encouraging insurers to step forward and provide a defense even in those cases of doubtful or disputed coverage. To endorse the trial courts ruling would effectively penalize the insurer providing a conditional defense to its insured and would create a substantial disincentive for insurers to provide a conditional defense to do so.

The trial courts judgment regarding the supplementary payments clause is also inconsistent with an insurers right to seek reimbursement of defense costs where it is determined that no defense was owed and the insurer has provided a defense under a full reservation of rights. (Scottsdale Ins. Co. v. MV Transportation, supra, 36 Cal.4th at p. 657‑658.) If, as Scottsdale makes clear, Golden Eagle would be entitled to recoup from Cen‑Fed all of its properly reserved defense costs, then why would that not also extend to any supplementary payments obligation it might otherwise have under a literal reading of the policy. In this case, it seems worse than anomalous to allow Golden Eagle to recover its own defense costs, but then turn around and require it to pay the costs and attorneys fees awarded against Cen‑Fed. The liability for such supplementary payment is an integral part of the Golden Eagle defense burden. (See Insurance Co. of North America v. National American Ins. Co. (1995) 37 Cal.App.4th 195, 206‑207.)[8] Since no defense liability ever existed, Golden Eagle should likewise have no obligation under the supplementary payments provision. That clause must necessarily be read as applying only to those cases where the insurer actually owed a duty to defend. To read it otherwise conflicts with common sense, is contrary to the public policy of encouraging rather than discouraging liability insurers to provide a defense to an insured, and obviously would not be within the objectively reasonable expectations of any party to the policy.

DISPOSITION

The fourth paragraph of the judgment is amended to state, with respect to Golden Eagles request for declaratory relief on the issue of whether Golden Eagle has a duty to pay the costs of suit, including attorneys fees, awarded to WMB in the underlying action, that no such duty exists because there never was a duty to defend the underlying action and Golden Eagle is not liable to pay such costs and attorneys fees. As so amended, the judgment is affirmed. Golden Eagle shall recover its costs on appeal.

CERTIFIED FOR PUBLICATION

CROSKEY, J.

We Concur:

KLEIN, P. J. ALDRICH, J.

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Analysis and review provided by Escondido Property line Lawyers.

[1]Cen-Fed argues, in part, that the allegations of paragraph 21(j) of WMBs complaint in the underlying action were sufficient to raise the possibility of coverage. In that paragraph WMB alleged, as one of several specific instances of how Cen‑Fed had failed to fulfill its contractual obligations under the lease, that Cen-Feds employees or agents had threatened, harassed, and/or otherwise interfered with [WMBs] right of enjoyment of the [leased premises], and as a result thereof, [WMB] has incurred substantial expenses to protect itself from such threats and to mitigate the harm caused by this condition.

On its face, this allegation does not purport to do anything more than simply allege one of a number of alleged acts constituting a breach of the lease agreement by Cen‑Fed. It does not allege an accident nor an occurrence and it does not claim that such alleged acts of Cen-Feds employees resulted in any property damage. It thus does not assist Cen‑Feds argument for coverage under the Golden Eagle policy. (See fn. 2, ante.)

[2] The relevant specific policy language relating to Coverage B is as follows:  Personal Injury means injury, other than bodily injury, arising out of one or more of the following offenses:

a. False arrest, detention or imprisonment;

b. Malicious prosecution;

c. Wrongful eviction from, wrongful entry into, or invasion of the right private occupancy of a room, dwelling or premises that a person occupies by you and on behalf of its owner, landlord or lessor;

d. Oral or written publication of material that slanders or libels a person or organization or disparages a persons organizations goods, products or services; or

e. Oral or written publication of material that violates a persons right of privacy. (Italics added.)

The last of the five primary policies does not separately define personal injury. Instead it defines personal injury and advertising injury to include:

c. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor;  . . . .   (Italics added.)

The two umbrella policy similarly defines personal injury and personal and advertising injury to include the following:

c. The actual wrongful eviction from, actual wrongful entry into, or actual invasion of the right of private occupancy of a room, dwelling or premises that a person legally occupies by or on behalf of the owner, landlord or lessor . . . .   (Italics added.)

Thus, it is clear that each of the policies sets forth the relevant offense based coverage provision in substantially the same way.

[3]Cen-Fed addresses the impact of Mirpad on this case by arguing that its claim for coverage under Coverage B should still be viable because the flooding of the basement of WMBs leased premises resulted in the eviction of multiple safe deposit box holders who boxes had been located in the basement area and at least some of those holders were likely to have been natural persons. Apart from the speculative and factually unsupported nature of this argument, a similar contention was expressly rejected in Mirpad. (Mirpad, supra, 132 Cal.App.4th at p. 1075, fn. 15.)

[4] At trial, Cen-Fed proffered certain evidence as an aid to the trial court in the event the trial court needed the assistance in deciding the case. Cen-Fed sought to introduce the testimony of expert witness Pete Ligeros who would give an opinion on (1) whether there was CGL coverage for wrongful entry or eviction or other invasion of the right of private occupancy before the CGL Broad Form Endorsement was issued, (2) the nature and function of contractual liability coverage, and (3) the insurance industrys understanding and use of the phrase liability assumed in a contract or agreement and whether it is ever applied to situations other than indemnity and hold harmless agreements. The trial court declined the proffered evidence by ruling these were issues of law for the trial court to decide. Cen-Fed asserts the ruling was an abuse of discretion that (1) excluded relevant, admissible evidence that would provide historical background for the expansion and development of CGL coverage, and (2) excluded evidence of how the contractually assumed liability exclusion in Coverage B is applied by Golden Eagle. Cen-Fed also sought to introduce FC&S bulletins as evidence of the insurance industrys own construction of language in the subject insurance policies, and it contends the trial court abused its discretion in not admitting that evidence. In light of the conclusions we have reached as to the lack of coverage under either Coverage A or Coverage B, and the reasons therefore, we have no need to discuss this evidentiary contention raised by Cen-Fed.

[5] In the instant case, Golden Eagle purported to acknowledge, in its motion for summary adjudication of issues, that there was a potential for coverage based on facts alleged in WMBs complaint in the underlying suit, specifically a potential personal injury claim that WMB could be determined to have against Cen-Fed based on the policies wrongful eviction provisions, in the event the policies contractual liability exclusion was not applicable. However, that potential for coverage was decided against Cen-Fed as a matter of law by our decision in Mirpad, supra, 132 Cal.App.4th at p. 1070 et seq., where, as noted earlier, we held that when an insurance policy consistently distinguishes between natural persons and organizations, those distinct meanings have to be applied by courts, and thus there, as here, the wrongful eviction coverage in the policies was directed at victims who are natural persons, not organizations such as WMB. Therefore, whatever the facts were in the underlying action with respect to potential coverage if the lessee had been a natural person rather than WMB, as a matter of law under Mirpad, there was no potential for personal injury coverage in that suit.

Golden Eagle also stated in a written status conference summary of its case that it was not disputing its duty to defend. However, in the same breath, Golden Eagle stated it was disputing the extent of any possible indemnity obligation, and it set out its reasons for asserting that it has no indemnity liability under Coverage A or Coverage B. Thus, by asserting that there was no possibility of coverage, Golden Eagle necessarily was asserting that it did not have a duty to defend.

Moreover, Golden Eagle maintains in this appeal that it had no duty to defend. Cen‑Fed contends Golden Eagle is judicially estopped and equitably estopped from asserting on appeal that it had no duty to defend Cen-Fed in the underlying action because Golden Eagle took the opposite position in the trial court. The elements of judicial estoppel are not established here. Golden Eagle received no benefit from its earlier position (in this same case). Indeed, the absence of any duty to defend in fact was litigated in the trial court and the issue was resolved in Golden Eagles favor in spite of some of its initial inconsistent statements. The purpose of judicial estoppel is to protect the integrity of the judicial process, not the parties to the lawsuit. (International Engine Parts, Inc. v. Feddersen & Co. (1998) 64 Cal.App.4th 345, 350.)

[6]In San Diego Housing, it must be noted, the insurer did not provide a defense although it apparently owed one to its insured. The courts opinion primarily focused on the claimed right of the third party claimant who had obtained a default judgment against the insured and thereafter sought to enforce the insureds rights under the supplementary payments clause in a direct action against the insurer. (Ins. Code,  11580(b)(2).) The court held that a third party could not obtain such recovery absent an assignment of rights from the insured.

[7] In its briefs on appeal, Golden Eagle argues its entitlement to recover its defense costs. It does not appear, however, that it sought such relief in its complaint and thus the trial court never reached the issue. Whether it should be allowed to amend its complaint and whether it properly reserved its rights to recover such costs (see fn. 4, ante), are issues that we leave to the initial consideration of the trial court on remand.

[8] We disagree with what appears to be a suggestion to the contrary in Combs v. State Farm Fire & Casualty Co. (2006) 143 Cal.App.4th 1338, 1346.