Travelers Property Casualty Company of America v. 127 Bayo Vista Condominium…

Background

Travelers brought this insurance-coverage case concerning defense costs and a default judgment against its insured, 127 Bayo Vista Condominium Association (BVCA), in an underlying California state-court lawsuit. David Toda, who owned a unit at 127 Bayo Vista, alleged that a leaking roof caused water and mold damage to his unit and asserted claims for breach of contract, breach of fiduciary duty, and declaratory relief. BVCA did not file a responsive pleading, and the state court entered a default judgment for $384,852.93.

Travelers sought declarations that its policies should be rescinded because BVCA allegedly misrepresented or concealed information when applying for insurance, that Travelers had no duty to defend or indemnify BVCA, and that Farmers and Continental owed defense obligations and should contribute to Travelers’ defense costs. The court considered summary-judgment motions from Travelers, Continental Casualty Company, and Farmers Insurance Exchange.

Continental’s Motion

Travelers asserted declaratory-relief, estoppel, and equitable-contribution claims against Continental. The court granted Continental’s motion for summary judgment on all claims asserted against it by Travelers.

The Continental policy excluded losses connected with claims based on, arising from, or involving fungi or microbes, and the policy defined fungi to include mold. The court concluded that the underlying lawsuit involved mold because the complaint alleged that mold made Toda’s unit uninhabitable and sought, among other damages, lost rental income. The exclusion therefore eliminated any potential for coverage, meaning Continental had no duty to defend BVCA.

The court also rejected Travelers’ argument that Continental should be prevented from denying coverage based on estoppel. Under the rule applied by the court, estoppel cannot create coverage for risks that the policy expressly excludes. The court noted that Travelers did not contend that Continental had affirmatively represented that the underlying lawsuit was covered.

Travelers’ Motion

The court denied Travelers’ motion for summary judgment. It found genuine factual disputes concerning every element of Travelers’ rescission claim: whether BVCA misrepresented or concealed information, whether the information was material, and whether BVCA knew of the alleged misrepresentation or concealment. BVCA also disputed whether it had prepared, reviewed, or signed the application on which Travelers relied.

The court found factual disputes regarding Travelers’ coverage defenses and reservation of rights. Travelers relied on an email stating that it would defend under a reservation of rights and would send a position letter, while BVCA stated that no position letter was sent and disputed whether Travelers adequately reserved particular defenses or a right to reimbursement.

The court also denied summary judgment on Travelers’ late-notice defense. Travelers argued that BVCA’s delayed notice caused actual and substantial prejudice because a default judgment had been entered. The court held that Travelers had not established prejudice as a matter of law, noting that Travelers assumed the defense before briefing and a hearing on the motion to set aside the default judgment were completed and could have sought to challenge the state court’s jurisdiction based on defective service.

The court denied Travelers’ motion on equitable contribution because that claim required a finding of coverage under both the Travelers and Farmers policies, and factual disputes remained regarding coverage and estoppel under Travelers’ policies and coverage under Farmers’ policies. To the extent Travelers sought summary judgment against Continental, the court denied that request as moot because of its ruling granting Continental summary judgment.

Farmers’ Motion

The court denied Farmers’ motion for summary judgment on BVCA’s and Travelers’ claims against Farmers.

First, Farmers argued that BVCA violated a policy consent provision by filing a motion to set aside the default judgment under one California statute rather than another. The court rejected the argument, reasoning that Farmers cited no authority showing that filing an unsuccessful motion to set aside a default judgment amounted to assuming an obligation or that such a violation would eliminate Farmers’ duty to defend.

Second, the court denied Farmers’ late-notice and prejudice arguments for the same reasons it rejected Travelers’ arguments. Farmers received notice before the remaining briefing and hearing on the motion to set aside the default judgment, and it could have defended BVCA under a reservation of rights and challenged the default judgment on jurisdictional grounds.

Third, Farmers argued that its directors-and-officers policy did not cover the underlying lawsuit because it sought damages for property damage. The court held that Farmers had not shown there was no possibility of coverage. The policy excluded claims “for” property damage, but the underlying lawsuit also alleged breach of fiduciary duty, and Farmers did not address the policy’s insuring-agreement language sufficiently or identify cases analyzing similarly narrow wording. Because Farmers had not established that the policies provided no coverage, it also had not shown that it was entitled to summary judgment on Travelers’ claims.

Disposition

The court granted Continental Casualty Company’s motion for summary judgment and denied the motions for summary judgment filed by Travelers Property Casualty Company and Farmers Insurance Exchange. The order did not resolve the remaining coverage questions in favor of Travelers or Farmers on summary judgment.