The California Court of Appeal has held that a liability insurer had no duty to defend or indemnify its insured, a landlord, against claims that the landlord failed to maintain and repair premises leased to a tenant. ( Golden Eagle Insurance Company v. Cen-Fed, Ltd. (2007) WL 841117)
Facts
Cen-Fed, Ltd. leased part of an office building to Washington Mutual Bank for use as a bank branch. The lease contained an attorney’s fees clause which provided that in case of litigation, the prevailing party would be entitled to recover reasonable attorney’s fees from the losing party.
Washington Mutual later sued Cen-Fed for breach of lease, alleging that Cen-Fed had failed to maintain and repair the leased premises in accordance with the terms of the lease, and that as a result Washington Mutual was unable to use a portion of the leased premises. Washington Mutual also alleged that Cen-Fed did not properly maintain the building’s air conditioning, elevators, restrooms, common areas, paint, etc.
Cen-Fed tendered defense of the action to its general liability insurer, Golden Eagle Insurance Company. Golden Eagle agreed to defend Cen-Fed under a complete reservation of rights.
Ultimately, Washington Mutual obtained a judgment against Cen-Fed for approximately $505,000, representing the diminution in value of Washington Mutual’s leasehold interest. In addition, Washington Mutual as prevailing party was awarded costs of suit (including contractual attorney’s fees) against Cen-Fed.
Golden Eagle filed a declaratory relief action against Cen-Fed to determine the scope of Golden Eagle’s coverage obligations to Cen-Fed. The trial court ruled that Golden Eagle had no duty to indemnify Cen-Fed for the $505,000 judgment in favor Washington Mutual. However, the trial court also ruled that although Golden Eagle never had a duty to defend Cen-Fed against Washington Mutual’s claims, Golden Eagle had in fact defended Cen-Fed, and therefore Golden Eagle was obligated under the policy’s “supplementary payments” provision to indemnify Cen-Fed for all costs (including attorney’s fees) which had been awarded to Washington Mutual. Cen-Fed appealed and Golden Eagle cross-appealed.
Holding
The Court of Appeal resolved all issues in favor of Golden Eagle.
First, the court ruled that Golden Eagle’s coverage for “bodily injury and property damage liability” did not potentially cover Cen-Fed’s liability to Washington Mutual in the underlying action. According to the court, Washington Mutual only alleged injury to the value of its leasehold interest (an intangible property right ), and did not allege “property damage” (which the policy defined as “physical injury to … or loss of use of … tangible property” ). Further, the coverage for bodily injury and property damage liability required an “occurrence,” or “accident,” and Cen-Fed’s alleged failure to discharge its contractual maintenance obligations to Washington Mutual could not be characterized as an “accident.”
Next, the court found that Golden Eagle’s coverage for “personal injury liability” did not potentially cover Cen-Fed’s liability to Washington Mutual in the underlying action. Although the Golden Eagle policy did define personal injury so as to include “wrongful eviction from … a room, dwelling or premises that a person occupies…,” the clamant, Washington Mutual, was a corporate organization, not a person. Thus, the policy’s personal injury coverage did not apply.
Last, the court held that the Golden Eagle policy’s “supplementary payments” clause did not cover Cen-Fed’s obligation to pay attorney’s fees to Washington Mutual in the underlying action. It was true that the supplementary payments clause provided that Golden Eagle would pay all costs (including contractual attorney’s fees) assessed against the insured in “any suit … we defend .” However, while Golden Eagle had in fact defended Cen-Fed in the underlying action, Golden Eagle never had a legal duty to defend Cen-Fed in that action. According to the court, a supplementary payments clause must be read “as applying only to those cases where the insurer actually owed a duty to defend.”
Comment
The most significant thing about this case may be court’s ruling regarding the supplementary payments provision. This case makes it clear that, if the insurer never had a duty to defend the insured in the first place, the supplementary payments provision is not triggered. On the other hand, if the insurer does have a duty to defend the insured, the insurer may have an obligation to under the supplementary payments provision to pay any costs—including contractual or attorney’s fees—which are later assessed against the insured.