General liability policies that covered “occurrences” and “wrongful acts” during the policy period did not potentially cover an insured’s alleged tortious conduct that took place before the policy period. ( City of Buenaventura v. Insurance Company of the State of Pennsylvania (2013) WL 3198485)
Facts
The City of San Buenaventura (“City”) hired a developer to construct condominium units for low income people. In connection with the project, the City established income level ceilings for purchasers, as well as maximum sale and resale prices for the units. In 2001, the developer sold the units to buyers.
Later, in 2004, numerous condominium buyers filed a lawsuit against various defendants, including the City. The buyers alleged that when they bought the low-income condominiums units in 2001, the City failed to tell them that their units were subject to low-income ceilings. The buyers also alleged that they had paid prices higher than the ceilings set by the City. The buyers sought damages and equitable relief against the City.
The City tendered defense of the lawsuit to both Great Lakes Reinsurance (UK) PLC (“Great Lakes”), which had issued a general liability policy to the City for the period of July 2002 to July 2003, and Insurance Company of the State of Pennsylvania (“ICSOP”), which had issued a general liability policy to the City for the period of July 2003 to July 2004. Both insurers denied the City’s tender, asserting that the City’s alleged negligence and wrongful conduct in connection with the sales occurred prior to the insurers’ policy periods.
The City then sued Great Lakes and ICSOP in federal court for breach of contract and bad faith. The district court ruled in favor of both insurers, reasoning that any occurrence or wrongful act by the City took place prior to the policy periods. The City appealed.
Holding
The Ninth Circuit Court of Appeals, applying California law, affirmed the judgment in favor of Great Lakes and ICSOP.
The appellate court noted that the Great Lakes policy contained non-standard language covering loss because of property damage “first arising out of an Occurrence during the Policy Period ,” and defined an “occurrence” as an “accidental happening .” Likewise, the ICSOP policy covered loss because of “property damage arising out of an occurrence during the Policy Period ,” and defined an “occurrence” as an “accident.” Thus, unlike standard general liability policies which only require that injury or damage take place during the policy period, the Great Lakes and ICSOP policies required that the occurrence causing the injury or damage take place during the policy period. Here, the condominium buyers did not allege any “occurrence” or “accident” by the City during the Great Lakes or ICSOP policy periods. Rather, the buyers alleged that the City was negligent at the time the buyers purchased their units in 2001, over a year before inception of the 2002-2003 Great Lakes policy and two years before inception of the 2003-2004 ICSOP policy. While the City’s alleged negligence in applying the affordable housing program at the time of the sales would constitute an “occurrence,” the City’s act of keeping the program in place during the policy periods was not an “occurrence.”
The ICSOP policy also covered “loss arising out of [the insured’s] wrongful act that takes place during the Policy Period ,” and defined a “wrongful act” as “any actual or alleged error or misstatement, omission, negligent act, or breach of duty including misfeasance, malfeasance, and nonfeasance by [the insured]….” However, according to the appellate court, the City’s alleged “wrongful act” occurred when the City negligently applied the affordable housing program in 2001, before the ICSOP policy period. The City’s subsequent conduct in leaving the affordable housing restrictions in place could not be deemed to be a “wrongful act” that took place during the ICSOP policy period.
Comment
The Ninth Circuit in this case concluded that the City’s alleged negligence occurred in 2001, prior to the policy periods. Relying on Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, the City argued that because the condominium buyers continued to suffer under the burden of having overpaid and having their resale prices restrained by a ceiling, the “occurrence” or “wrongful act” continued into the policy periods. However, the Ninth Circuit felt that the City was “stretching Montrose too far.” This was especially true because the policy language in this case was more restrictive than that used in the Montrose case.