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

APPEAL from a judgment of the Superior Court of Los Angeles County, Alan G. Buckner, Judge. Judgment amended and, as so amended, affirmed.

Jacob N. Segura for Defendants and Appellants.

Haight Brown & Bonesteel, Jules S. Zeman, Valerie Ann Moore and Christopher Kendrick for Plaintiff and Respondent.

In its appeal, defendant Cen-Fed, Ltd. (Cen‑Fed)[1] challenges the decision of the trial court that its commercial general liability insurer, plaintiff Golden Eagle Insurance Corporation (Golden Eagle), owed neither a defense nor an obligation to indemnify Cen‑Fed for damages awarded against it in the underlying action filed by Washington Mutual Bank (WMB). That action was based on the breach of a lease for commercial premises between Cen‑Fed as lessor and WMB as lessee. In its cross‑appeal, Golden Eagle, which had provided Cen‑Fed a defense to the underlying action under a reservation of rights, challenges the trial courts ruling that it was obligated to pay (pursuant to the supplementary payments provisions of its policy) the costs (including attorneys fees) awarded against Cen‑Fed in WMBs underlying action in spite of the trial courts determination that Golden Eagle had neither a duty to defend nor indemnify the claims asserted in that action.

We conclude that the trial court correctly determined that Golden Eagle was not liable to indemnify Cen‑Fed for the damages awarded against it in the underlying action. Moreover, since there was no coverage under the Golden Eagle policy for the WMB claims, as a matter of law, a duty to defend the underlying action never arose. As a result, Golden Eagle had no obligation to pay or reimburse Cen‑Fed for the costs of suit and attorneys fees awarded to WMB because Golden Eagles burden under the supplementary payments clause is an integral part of, and can be no broader than, its duty to defend. We therefore will amend the judgment by striking the order requiring such payment and, as so amended, the judgment will be affirmed.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Underlying Action

Cen‑Fed leased property to WMB in a commercial building in North Hollywood, California. The leased premises were portions of the basement and first floor of the building. The lease ran from November 1979 to November 2004, and WMB had an option to extend the lease.

The lease required Cen‑Fed to maintain the structural elements of the building in a first class condition, keep the leased premises and the common areas in a clean and sanitary condition, and maintain, for WMB, a certain number and type of parking spaces. Under the lease, WMB was entitled to cure or cause to be cured any failure by Cen‑Fed to comply with its lease obligations, and deduct the cost thereof from WMBs rental obligation. Paragraph 26(i) of the lease contained an attorneys fee clause: In the event of any action or proceeding brought by either party against the other under this Lease, the prevailing party shall be entitled to recover all costs and expenses, including the fees of its attorneys in such action or proceeding, in such amount as the court may adjudge reasonable.

WMB sued Cen-Fed for breach of the lease and declaratory relief,[2] alleging that Cen‑Fed had failed to maintain and repair the [leased premises] in accordance with the terms and conditions of the lease thereby depriving WMB of a part of its leased space, which required WMB to move its safe deposit boxes from the basement to the first floor, decreased the number of boxes WMB was able to rent out, and deprived WMB of the use of that first floor space for other purposes. WMBs complaint also alleged that the air conditioning, elevator service, and basement restrooms were not in good working order; the landscaping, common areas, interior walls and painting were not maintained to the extent required by the lease; and Cen-Fed did not meet its obligations regarding parking.

2. The Insurance Policies

Beginning in September 1997 and ending in September 2002, Golden Eagle insured Cen-Fed with policies of insurance that included general liability and commercial general liability coverage.[3] Additionally, Golden Eagle issued umbrella coverage policies to Cen-Fed, covering the period September 2000 to September 2002. Cen-Fed tendered the defense of the underlying suit to Golden Eagle, and it undertook the defense of Cen-Fed under a complete reservation of rights.[4]

3. The Instant Action

While the underlying action was pending, Golden Eagle filed this suit against Cen‑Fed, seeking a declaratory judgment that Golden Eagle had no duty to indemnify Cen‑Fed for damages that might be awarded to WMB in connection with (1) Cen‑Feds alleged breach of its duty to maintain the air conditioning in proper working order (first cause of action); (2) repair costs incurred by WMB because of Cen-Feds alleged breach of the subject lease (second cause of action); and (3) future restoration costs WMB would incur to restore and maintain the leased premises in the condition required by the lease agreement (third cause of action). Golden Eagle also sought a determination that it had no obligation to indemnify Cen-Fed for contractual attorneys fees that might be awarded to WMB in the underlying action. Finally, Golden Eagle sought a declaration that it had no duty to defend the underlying action.[5]

4. The Verdict and Judgment in the Underlying Action

WMBs case against Cen-Fed was tried to a jury, which determined that Cen‑Fed had breached the lease by failing to properly maintain (1) the air conditioning in a first class condition, (2) the basement from January 1, 1999 to December 31, 2001 in the condition required by the lease, and (3) the first floor leased space and all common areas, from September 26, 1996 to May 5, 2003, in the condition required by the lease.

The jury determined that these breaches of the lease, with respect to the first floor leased space and common areas, caused WMB to suffer a diminution in the value of its leasehold interest in the sum of $505,440. The jury, however, awarded zero damages for WMBs various individual claims of damages, including WMBs cost of maintaining a temporary air conditioning system, a refund of rent for the leased basement space, the cost to WMB to repair or restore first floor leased space and common areas to the conditions required by the lease, the cost of WMBs prior repairs and expenses, and any other claim.

Judgment was thereafter entered on that verdict. As a part of that judgment, WMB, as the prevailing party, was awarded its costs of suit, including an award of attorneys fees, pursuant to the terms of the attorneys fee clause in the lease.

5. The Trial Courts Decisions in the Instant Case

The trial court granted Golden Eagles motion for summary adjudication of issues on Golden Eagles first three causes of action. The remainder of the case, with respect to Golden Eagles prayer for a declaratory judgment that it (1) had no obligation to pay the attorneys fees awarded against Cen‑Fed and (2) owed no duty to defense to Cen‑Fed, was tried to the court. It concluded that Golden Eagle had no duty to indemnify Cen‑Fed for any part of the judgment because the damages awarded to WMB were not due to property damage or to an occurrence and furthermore, the owned property exclusion in the policies would preclude liability for indemnification. The court also concluded that to the extent that the jury verdict award (in WMBs underlying action) was based on a personal injury offense, and might otherwise be subject to indemnification under the primary policies, the liability assumed in a contract exclusion applicable to each policies personal injury coverage would apply to eliminate any indemnity obligation.

Finally, the trial court determined that even though Golden Eagle had no duty to defend Cen‑Fed in the underlying action, it was nonetheless liable (under the Supplementary Payments clause in the policies), for paying the costs of suit (including attorneys fees) awarded to WMB. The reason for this ruling (which is the sole subject of Golden Eagles cross‑appeal) was, in the words of the trial court, [b]ecause Golden Eagle in fact defended the underlying action[,] the [supplementary payments provisions] in its policies obligate[ ] it to pay any cost award against its insureds, regardless of the courts determination that no duty to defend the underlying action was ever [owed].

CONTENTIONS ON APPEAL

As already noted, Cen-Fed appealed from the judgment in the instant case and Golden Eagle cross‑appealed. Cen-Fed contends (1) WMBs damages occurred because of property damage caused by an occurrence, (2) the personal injury exclusion for liability assumed in a contract does not apply here, (3) the owned property exclusion for property damage does not apply here, and (4) the trial court abused its discretion when it excluded the relevant and admissible testimony of an expert witness regarding the drafting history of ISO CGL forms, and FC&S bulletins that articulate the insurance industrys own construction of relevant policy language.[6]

Golden Eagle disputes each of these arguments and further contends that, as a matter of law, there was no property damage caused by an occurrence and, due to a recent clarification of relevant case law, the personal injury provisions of the policy, as a matter of law, can provide no coverage in this case. In addition, Golden Eagle argues that the trial court erred when it imposed on Golden Eagle the requirement that it pay the costs (including attorneys fees) awarded to WMB and against the Cen-Fed in the underlying action.

DISCUSSION

1. General Principles Applicable to Coverage Issues

When determining whether a particular policy provides a potential for coverage and a duty to defend, we are guided by the principle that interpretation of an insurance policy is a question of law. [Citation.] The rules governing policy interpretation require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it. [Citations.] (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18 (Waller).) It is the burden of the insured to bring the claim within the basic scope of coverage, and the burden of Golden Eagle to prove exclusions to the coverage. (Id. at p. 16.)

With respect to the issue of an insurers duty of defense, the applicable law is well settled. An insurer must defend its insured against claims that create a potential for indemnity under the policy. [Citation] . . .  [] . . . The defense duty arises upon tender of a potentially covered claim and lasts until the underlying lawsuit is concluded, or until it has been shown that there is no potential for coverage. ([Citations.]) When the duty, having arisen, is extinguished by a showing that no claim can in fact be covered, it is extinguished only prospectively and not retroactively. [Citations.] [] On the other hand, in an action wherein none of the claims is even potentially covered because it does not even possibly embrace any triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer does not have a duty to defend. [Citation.] . . .  [] From these premises, the following may be stated: If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurers duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage. On the other hand, if as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance. (Scottsdale Ins. Co. v. MV Transportation (2005) 36 Cal.4th 643, 654‑655; first italics in original, second italics added [Scottsdale].)

2. Pertinent Policy Terms[7]

a. Definitions

The policies at issue in this case include the following relevant definitions:

 Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. (Italics added.)

 Personal injury means injury, other than bodily injury, arising out of [among other things], . . . [t]he wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor. (Italics added.)[8]

 Property damage means: [] a. Physical injury to tangible property, including all resulting loss of use of that property. . . . or [] b. Loss of use of tangible property that is not physically injured. (Italics added.)

b. Coverage A Indemnity (Occurrence Based Coverage)

Pursuant to the Coverage A terms of the policies (bodily injury and property damage liability), Golden Eagle was obligated to pay, on behalf of Cen‑Fed, those sums that the [Cen‑Fed] becomes legally obligated to pay as damages because of . . . property damage to which this insurance applies. This insurance applies to . . . property damage only if: [] 1) The . . . property damage is caused by an occurrence . . . .   (Italics added.)

b. Coverage B Indemnity(Offense Based Coverage)

Pursuant to the Coverage B provisions (personal and advertising injury liability), Golden Eagle was obligated to pay those sums that the insured becomes legally obligated to pay as damages because of personal injury or advertising injury to which this insurance applies. This insurance applies to: [] 1) Personal injury caused by an offense arising out of your business, excluding advertising, publishing, broadcasting or telecasting done by or for you; . . .[9]

3. Golden Eagle Had No Duty To Indemnify Cen-Fed Under Coverage A

Coverage A in the commercial general liability policy is occurrence based coverage. It applies to property damage that is caused by an occurrence. As noted above, that term is defined in the policy as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. And property damage is defined in the policy as a physical injury to tangible property, including all resulting loss of use of that property or the loss of use of tangible property that is not physically injured.

In light of WMBs claim, any applicable occurrence based coverage depends on the existence of some property damage. However, a review of the allegations in WMBs complaint shows that there was no claim for any physical injury to tangible property or for any loss of use of tangible property that was not physically injured. Rather, WMBs claim rested entirely on Cen-Feds alleged breach of the lease and the resulting economic damage, including the need to replace its safe deposit boxes to the first floor leased premises, which resulted in fewer boxes being rented and the consequent denial of the use that first floor space for other purposes (that is, a loss of rental income and loss of use of leased space). The jury determined Cen‑Feds breaches of the lease constituted a diminution in the value of the lease, that is, the difference between the fair market value of WMBs leasehold interest if the leased premises were in the promised condition and the fair market value of those premises in their actual condition. WMBs leasehold interests were not tangible property; and WMBs claim against Cen‑Fed did not seek to recover for damage to or the loss of use of tangible property.

Thus, WMBs complaint and theory of recovery against Cen‑Fed did not constitute claims for physical injury to tangible property and therefore they did not constitute claims for property damage. Rather, they amounted to claims for economic harm suffered by WMB due to Cen‑Feds failure to perform its contractual obligations. As stated in Waller: The property loss section of the standard policy provides coverage for physical injury or destruction of tangible property which occurs during the policy term. The focus of coverage for property damage is therefore the property itself, and does not include intangible economic losses, violation of antitrust laws or nonperformance of contractual obligations. (See, e.g., Gulf Ins. Co. v. L.A. Effects Group, Inc. (9th Circ. 1987) 827 F.2d 574, 578 [no coverage under business general liability policy for insureds alleged nonperformance of contractual obligations . . . ]; . . . Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 303 [recognizing that a suit seeking recovery for injuries to intangible economic interests is not a suit of the nature and kind covered by a CGL policy]. . . .  As Giddings observed [v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 217] . . . 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. . . .   (Waller, supra, 11 Cal.4th at p. 17; italics in original; see also Miller v. Western General Agency, Inc. (1996) 41 Cal.App.4th 1144 [suit based upon sellers' failure to disclose defective plumbing was not an action seeking recovery for property damage].)

Conceptually, Cen-Fed's claim that the failure to maintain its building in the condition in which it contracted to maintain it is no more a property damage claim than the claim of any property buyer who fails to obtain tangible property in the condition promised or warranted. Such claims are for economic loss, not property damage. For example, in St. Paul Fire & Marine Ins. Co. v. Coss (1978) 80 Cal.App.3d 888, 892, the court held the insureds failure to construct and provide a home in a workmanlike manner did not constitute property damage. Similarly, in Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co. (1977) 76 Cal.App.3d 272, the court held claims against the insured dealer arising from the lease and sale of cars allegedly in breach of implied warranties and express representations as to their condition were not property damage claims. The court explained: There are no allegations suggesting that appellants representations caused injury or damage to the automobiles. To the contrary, the damage was to the plaintiffs pecuniary interests the out‑of‑pocket loss caused by the fact that plaintiffs did not receive full value for the money paid for the purchase and lease of the automobiles. Such loss of anticipated value does not constitute an injury to or destruction of tangible personal property as defined in the policy. (Id., at p. 279; see also Warner v. Fire Ins. Exchange (1991) 230 Cal.App.3d 1029, 1034.)

Although Cen-Fed attempts to do so, it is not entitled to justify an argument for coverage based on speculation about claims that have not been alleged or asserted. (Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1114; see also Friedman Prof. Management Co., Inc. v. Norcal Mutual Ins. Co. (2004) 120 Cal.App.4th 17, 35 [the potentiality rule for duty to defend depends on possibility of actual indemnity coverage, not the mere existence of a plausible argument]; Hurley Construction Co. v. State Farm Fire & Casualty Co. (1992) 10 Cal.App.4th 533, 538 [insureds counsel sought to justify coverage by arguing that the third party complaint might be amended to allege property damage].)

TO BE CONTINUED AS PART II..

Publication Courtesy of California lawyer directory.

Analysis and review provided by Escondido Property line Lawyers.

[1] Cen-Fed is a limited partnership. Its partners, Edward Israel who does business as Wilshire Pacific Properties, Victor Israel, Albert Collins, and Wilshire Pacific Investments, were also sued by Golden Eagle. However, the partners were dismissed from the suit without prejudice.

[2] WMB also alleged a third cause of action for the negligent hiring and supervision of one George Perez who, it was alleged, had committed or threatened to commit certain intentional tortious acts against WMB employees. This claim, however, was at some point, severed from WMBs other two causes of action and has been entirely ignored by the parties as a basis for any claim of coverage under the Golden Eagle policy. Cen-Fed does not argue that Golden Eagle had any duty to defend or indemnify the underlying action based upon this third cause of action in WMBs complaint. We will likewise disregard it in our consideration of the issues actually raised by the parties.

[3]The parties submitted to the trial court a joint abstract of policy provisions. We discuss the relevant provisions below in the Discussion section of this opinion.

[4] Unfortunately, it appears that the reservation of rights letter issued by Golden Eagle is not contained in the record on appeal. There are simply references to a complete reservation of Golden Eagles right to deny coverage which Cen‑Fed apparently does not dispute. Thus, it is not clear to us whether, in addition to reserving its right to assert any and all coverage defenses, Golden Eagle also reserved its right to seek reimbursement from Cen‑Fed for the defense costs and expenses incurred by Golden Eagle in the conduct of its defense of the underlying action. (See Buss v. Superior Court (1997) 16 Cal.4th 35, 61, fn. 27). Whether or not a reservation of rights sufficient to embrace such right of reimbursement was provided to Cen‑Fed will be a matter that the trial court may examine on remand.

[5] It does not appear, however, that Golden Eagle expressly alleged in its complaint any claim for reimbursement of defense costs nor did it seek any declaration of its right to obtain such relief.

[6] In light of our analysis of this case and the conclusions that we reach, we have no need to discuss all of the issues raised by Cen‑Fed.

[7] These policy provisions are reflective of the relevant terms in all of the policies involved in this case and, as already indicated, were presented to the trial court in the form of an agreed Abstract of Coverage Provisions.

[8]The two umbrella policies involved in this matter had slightly different wording. The relevant offense was described as [t]he 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.)

[9] Certain exclusions apply to Coverage B, including that coverage B does not apply to personal injury [f]or which the insured has assumed liability in a contract or agreement. This exclusion does not apply to liability for damages that the insured would have in the absence of the contract or agreement.