The United States District Court, applying California law, has ruled that a liability insurer had a duty to defend its insureds against a taxpayer lawsuit suit which sought both injunctive relief and monetary “damages.” ( The Los Osos Community Services Dist. v. American Alternative Ins. Corp. (C.D. Cal. 2008) — F.Supp.2d –, 2008 WL 4885680)
Facts
The Los Osos Community Services District (“District”) is a public entity which undertook plans to build a wastewater treatment facility in Los Osos, California. A number of people who lived in the area tried to stop construction of the treatment facility by placing a measure called “Measure B” on the ballot. In response, the District sued and obtained a court order declaring the measure illegal and barring it from the ballot.
Thereafter, a group of disgruntled residents succeeded in recalling three of the District’s Board members. The “new Board” then immediately took steps to stop the construction of the treatment facility. Among other things, the new Board dismissed the lawsuit brought to stop Measure B, which by then had reached the state appellate court. In addition, the new Board allegedly used $600,000 in state money to enter into a settlement with Measure B’s proponents, who were allied with the three new members of the Board.
In response, a group called Taxpayers Watch and two individual taxpayers (collectively “Taxpayers Watch plaintiffs”) sued the District and several Board members, alleging that the settlement was “a sham settlement with the Board’s cronies” and that ultimately District taxpayers “will be responsible for repaying those monies to the state of California.” The Taxpayers Watch plaintiffs sought relief under California Code of Civil Procedure section 526a, which provides that “[a]n action to obtain a judgment, restraining and preventing any illegal expenditure of, waste of, or injury to, the estate, funds, or other property of a county, town, [or] city … may be maintained against any officer thereof … by a citizen resident therein … who is assessed for and is liable to pay… a tax therein.” The Taxpayers Watch plaintiffs also sought “a judgment requiring and mandating that … the District’s individual Board members be held personally liable to repay the monies wasted as a result of their thoughtless and wasteful decisions, including return of the $600,000 paid to Measure B proponents in a collusive settlement.”
The District filed for bankruptcy protection. However, the District’s individual Board members tendered the defense of the lawsuit to the District’s liability insurer, American Alternative Insurance Company (“AAIC”). The AAIC policy provided that the insurer would indemnify an insured against “damages because of … ‘wrongful acts’,” and that the insurer would defend an insured against any suit seeking covered damages. AAIC denied the tender, on the ground that the Taxpayers Watch plaintiffs were not seeking monetary “damages” against the Board members.
Following the denial of coverage, the Board members filed a bad faith action against AAIC, alleging that AAIC had wrongfully refused to defend the Board members in the underlying action brought by the Taxpayers Watch plaintiffs. The Board members then moved for partial summary that AAIC had a duty to defend them in the underlying action.
Holding
The United States District Court, applying California law, held that AAIC did have a duty to defend the Board members in the underlying action brought by the Taxpayer Watch plaintiffs. The district court acknowledged that the Taxpayer Watch plaintiffs had sued the Board members under CCP section 526a, and that the text of section 526a only allows for injunctive relief— not monetary damages . However, the district court noted that despite the text of the statute, California state courts “have extended section 526a to allow taxpayers to obtain an order requiring officials to repay wasted funds to the public entity” and “have characterized this remedy as one for ‘damages.’” Under the circumstances, the Taxpayers Watch plaintiffs were seeking “damages” from the Board members, sufficient to trigger AAIC’s duty to defend. It did not matter that any damages recovered from the Board members would ultimately go back into the District’s coffers, as opposed to the Taxpayers Watch plaintiffs themselves.
Comment
The AAIC policy did not define the term “damages.” As such, the district court applied the case law definition of “damages” i.e., “‘compensation,’ in ‘money,’ ‘recovered’ by a party for ‘loss’ or ‘detriment’ it has suffered through the acts of another.”
Note that when a third-party claimant sues an insured under a statutory scheme that only allows for injunctive relief and does not allow for “damages,” the insurer may not have a duty to defend. (See, e.g., Cutler-Orosi Unified School District v. Tulare County School Districts Liability/Property Self-Ins. Authority (1994) 31 Cal.App.4th 617, 629-630.) Here, however, the Taxpayer Watch plaintiffs sued the Board members under a statute that has been interpreted to allow for both injunctive relief and “damages,” thus triggering AAIC’s duty to defend.