Insurance Company that Issues Liability Policy does not need to Defend Insured Party Against a Non-Financial Claim

November 22, 2013 | Bulletin No. 1040675.1

In San Miguel Community Association v. State Farm General Insurance Company (2013) 220 Cal.App.4th 798), a third party's failure to seek compensatory damages against an insured rendered their dispute exempt from the insured’s liability policy as one not involving a claim for damages.  “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."

The dispute arose when two members of the San Miguel Community Association ("Association), sued the Association for allegedly failing to enforce its parking restrictions and sought an order to enforce them.  The members did not allege that the Association's non-enforcement had caused them any financial harm and did not initially seek compensatory damages other than minimal out-of-pocket costs.  In fact, the members did not claim to have suffered any financial harm from the parking problems and did not seek any compensation.  The Association sought reimbursement from its insurance company, State Farm, for the costs of defending against the parking-related lawsuit under its general liability insurance policy.  State Farm refused to pay, and the Association sued State Farm seeking payment.  After the trial court granted summary judgment to State Farm, the Association appealed.

The language of State Farm's policy covering the Association stated that State Farm agreed to pay for "any claim or suit seeking damages payable under this policy even though the allegations of the suit may be groundless."  Case law, the court noted, has settled that when a policy "plainly obligates the 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."

Further, the court rejected the Association's claim that the plaintiff's underlying claims, although not specifically seeking damages, "give rise to the implication of actual damages," and thus obligate State Farm to defend the claims.  Nowhere, the court said, does case law do what the Association claims: establish a rule that an insurer must infer the existence of additional allegations not actually included within the underlying complaint merely because it is aware those additional claims might have been plausibly included.  The mere fact that the plaintiffs could have sought recovery of some amount of damages does not obligate State Farm to infer that they had actually done so, the court added.

Here, the evidence indicated that the plaintiffs in the parking lawsuit were not seeking an award of covered damages.  Even when they amended their complaint to include their out-of-pocket costs, the plaintiffs acknowledged the amounts of those costs were insignificant.  Because plaintiffs were not "seeking damages," the language of State Farm's policy did not obligate it to pay the Association for the costs of defending itself against the non-financial relief sought.  Therefore, as the Association failed to show that State Farm had any obligation to provide it with a defense, the trial court’s judgment was affirmed.

Questions

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Mark E. Ellinghouse | 916.321.4500