Scottsdale Insurance Company v. Darke

Background

Scottsdale issued two successive commercial general liability policies to Chitra and Prakash Darke. The dispute concerned Scottsdale’s duty to defend the Darkes in an underlying landlord-tenant action brought by Andrea Thomas-Paul. The parties’ agreement limited the motion to that action.

Thomas-Paul alleged that the apartment’s heater did not work, the property had mice and rats, hot water was often unavailable, the ceiling leaked, and the window security bars were unsafe or inoperable. She also alleged that the City of Oakland determined the property was not zoned for residential use and required her and her children to relocate. Her lawsuit asserted fourteen causes of action, including negligence, nuisance, habitability and zoning violations, constructive eviction, breach of contract, breach of the implied warranty of habitability, and breach of the implied warranty of quiet enjoyment.

Scottsdale had agreed to defend the Darkes while reserving its rights to seek a declaration of its rights and reimbursement of defense fees. Scottsdale then moved for summary judgment against State Farm on whether Scottsdale had a duty to defend.

Parties’ Positions

State Farm argued that the allegations that Thomas-Paul was forced out because the apartment was zoned for commercial rather than residential use raised a possible claim under Coverage A for “loss of use of tangible property not physically injured.” State Farm conceded that the constructive-eviction allegations would fall within a habitability exclusion in the policies.

Scottsdale argued that the underlying lawsuit did not allege the covered loss of use of tangible property. Scottsdale also argued that the alleged loss was not caused by an “occurrence” and that the habitability exclusion independently barred coverage. State Farm did not argue that Coverage B applied.

Applicable Law

Under California law, an insurer must defend an insured when the complaint or facts known to the insurer show a potential for coverage. The insured needs to show only a possibility of coverage; the insurer is entitled to summary judgment only if no potential for coverage exists as a matter of law. The court determines the duty to defend by comparing the policy with the allegations and considering relevant facts known to the insurer.

Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment under the law.

Court’s Analysis

The court treated the meaning of “loss of use of tangible property not physically injured” as the threshold issue. It considered Golden Eagle Insurance Corp. v. Cen-Fed, Ltd., a California appellate decision holding that a leasehold interest is not tangible property and that loss of rental income and loss of use of leased space constituted economic loss rather than loss of use of tangible property.

The court acknowledged that a later California appellate decision, Thee Sombrero, Inc. v. Scottsdale Insurance Co., questioned Golden Eagle’s reasoning. But the court noted that Thee Sombrero called its discussion of the issue dictum, meaning a statement not necessary to that decision. The court also relied on its earlier decision in the related legal issue, which concluded that, absent contrary authority from a higher court, Golden Eagle remained the applicable California law.

The court rejected State Farm’s proposed distinctions based on the type of lease, whether the tenant had moved out, and the nature of the damages. It concluded that Golden Eagle’s reference to economic loss was not limited to commercial tenants and that the damages alleged by Thomas-Paul, including relocation expenses and loss of exclusive use of the unit, fell within that concept.

Because the underlying action alleged loss of a leasehold interest rather than potentially covered loss of use of tangible property, the court held that the action did not raise a potentially covered claim under Coverage A. The court therefore did not analyze whether the loss was caused by an occurrence or whether the habitability exclusion independently precluded coverage. The court also stated that eliminating wrongful-eviction coverage from Coverage B did not determine whether Coverage A could apply, although it found no Coverage A claim here.

Disposition

The court granted Scottsdale’s motion for summary judgment. It found that the underlying action did not create potential liability covered by the policies and that Scottsdale did not have a duty to defend the Darkes in that action. Judge Yvonne Gonzalez Rogers ordered Scottsdale to submit a proposed form of judgment, approved as to form by State Farm, by December 3, 2019.