When a condominium association finds itself defending a claim asserted by a unit owner, it is imperative to understand what is the association’s liability insurance carrier’s duty to defend the claim.
The Ninth Circuit Court of Appeal recently addressed an insurer’s duty to defend in Premier Construction and Remodel, Inc. v. Mesa Underwriters Specialty Insurance Company.1
In this case, there was an underlying construction defect lawsuit filed by a homeowner against Premier Construction and Remodel, Inc. (“Premier”) and Robert Deville (“Deville”), who contracted with them to remodel his condominium unit. Mesa Underwriters Specialty Insurance Company (“MUSIC”) insured Premier and Deville insured Premier and Deville under a general liability insurance policy that provided coverage for “property damage” caused by an “occurrence.” The policy defined “property damage” as “physical injury to tangible property, including all resulting loss of use of that property.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
Former customers sued Premier and Deville, in part, for breach of contract arising out of the renovation of a residence in Palm Springs, California. The complaint asserted that Premier and Deville failed to complete their work and “failed to return to the job-site personal property, including but not limited to (the owners’) keys to the residence, their garage door opener, and construction materials….”
MUSIC denied coverage contending that the claims were not caused by an “occurrence” under the policy.
Premier argued that the allegations raised the potential for coverage under provisions of the MUSIC policy offering coverage for “property damage” caused by an “occurrence” (i.e., an accident).
On a motion for summary judgment, the district court held that the complaint “cannot by any conceivable theory raise a single issue” that would trigger coverage under the applicable policy.
The Ninth Circuit Court of Appeal affirmed the district court’s grant of summary judgment, reasoning there is no duty to defend when the potential for liability is “tenuous and farfetched”:
The First Amended Complaint (FAC) in the underlying action alleged that Premier had failed to return keys and a garage door opener to the owner of a condominium that Premier had been contracted to remodel. Premier argues that these allegations raised the potential for coverage under provisions of the MUSIC insurance policy offering coverage for “property damage” caused by an “occurrence” (i.e., an accident).
Specifically, Premier argues that its failure to return the keys and garage door opener may have caused the condo’s owner to be locked out of his property in a manner constituting a ‘[l]oss of use’ of the condo.
Because the FAC here “cannot by any conceivable theory raise a single issue” that would trigger coverage under the applicable policy, the district court properly granted summary judgment to MUSIC on Premier’s breach of contract claim. See id. at 438–39. While Premier argues that a “loss of use” can be reasonably inferred from separate allegations in the FAC that Premier had unreasonably delayed work on the project, causing building permits to expire and subjecting the condo’s owner to fines from the homeowners’ association, we have previously held that an insurer need not defend the insured when the potential for liability is ‘tenuous and farfetched.’ Lassen Canyon Nursery, Inc. v. Royal Ins. Co. of Am., 720 F.2d 1016, 1018 (9th Cir. 1983) (quoting Giddings v. Indus. Indemn. Co., 112 Cal. App. 3d 213, 220 (1980)). Nor does an insurer’s duty to defend encompass liability that would only exist if new facts were alleged. See Upper Deck Co., LLC v. Fed. Ins. Co., 358 F.3d 608, 615–16 (9th Cir. 2004).2
For additional blogs on the topics of duty to defend and duty to indemnify by Merlin Law Group, please see the following:
1 Premier Construction and Remodel Inc. v. Mesa Underwriters Specialty Ins. Co., No. 21-55496 (9th Cir. Feb. 7, 2023).