Court Chastises Claimant for Subterfuge in Pleadings

In denying National Union Fire Insurance Co. of Pittsburgh, PA’s Motion to Dismiss, the court in Market Lofts Community Assn. v. National Union Fire Ins. Co. of Pittsburgh, PA, No.: CV15-03093-RGK(MANx), 2015 U.S. Dist. LEXIS 100691 (C.D. Cal. July 30, 2015) granted Plaintiff, Market Lofts Community Association’s (“the Association”) Motion for Partial Summary Judgment, finding it was entitled to defense in the cross-complaint asserted against it by a developer.

At issue was whether the Association was entitled to free parking for its co-op at a parking structure in a separate building based on its understanding of its rights at the time that the Association members obtained their units.  The cross-complaint asserted that the covenants, conditions and restrictions (“CC&R’s”) referenced an obligation to pay parking costs outlined in the sublicense agreement.

The court determined that all the elements for coverage under the Association’s non-profit D&O policy were implicated as the underlying cross-complaint, despite solely naming the      individual association members alleged was a suit against the Association.  The Association, although not directly sued, has the statutory right to defend a suit names the Association members as defendants in an improper attempt to circumvent the Association’s interest or nonetheless claims made against the Association.

Cal. Civ. Code § 5980 granted the Association’s rights to defend the cross-complaint relating to the enforcement of the Association’s CC&R’s.  The policy was ambiguous as to the meaning of the term “made against” in this context because it was capable of two reasonable constructions, one of which implicated a duty to defend.  Critically, the policy did not include language limiting coverage in actions where the Association exercised its statutory right to defend, citing Fireman’s Fund Ins. Co. v. Atlantic Richfield Co., 94 Cal. App. 4th 842, 852 (2001) (“[A]n insurance company’s failure to use available language to exclude certain kinds of liability gives arise to the inference of the parties intent to not so limit coverage.”)  Market Lofts, 2015 U.S. Dist. LEXIS 100691, at *14-15.

The court also found it meaningful, id. at *15, that:

[A]n “insurer cannot avoid coverage simply because the complainant seeks a tactical advantage in the lawsuit.” Dobrin v. Allstate Ins. Co., 897 F. Supp. 442, 444 (C.D. Cal. 1995); see also Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1269 (9th Cir. 2010) (“The technical label on a cause of action does not dictate the duty to defend whether the claimed cause of action was omitted out of negligence or for strategic adversarial reasons.” . . .).

The court further observed at id. at *15-16:

Here, the facts indicate that the Cross-Complaint’s claims are directed toward the Association, but the Cross-Claimants named the Association Members for strategic adversarial reasons.

The cross-complainants’ decision to sue the individual members rather than the Association was held improper by the California Court of Appeals in the Underlying Action.  This was point contrary to the ruling of a court of appeals, referencing liability in the underlying action, which concluded id. at *16 that:

To allow Cross-Complainants to file a cross-complaint against almost each of the individual 319 members would run contrary to the [appellate court]’s determination that the Association is the real party in interest and has standing to defend the action brought against its members.

Rejecting insurer arguments premised on questions about the parties’ right to pursue coverage claims, the Western Polymer Technology, Inc. v. Reliance Ins. Co., 32 Cal.App. 4th 14, 28 (1995) court explained:

But here, unlike in Western Polymer, the unnamed party—the Association—has a right to defend the action on behalf of the named Association Members. Further, the Association is a party to the Underlying Action; it is the original plaintiff.

Market Lofts, 2015 U.S. Dist. LEXIS 100691, at *16-17.

Similarly, Alex Roberts & Co. v. Imperial Casualty Indem. Co., 8 Cal. App. 4th 338, 347 (1992) was of no moment because the Association was taking part in the litigation of the Underlying Action on behalf of the Association members, and would be bound by any resulting judgment.  Market Lofts, 2015 U.S. Dist. LEXIS 100691, at *17.  Nor was there any issue as to whether there was a claim arising out of actual or alleged wrongful acts.  The cross-complaint’s allegations were related to the Association’s failure to follow through on its promise to pay a parking fee to the cross-complainants.  Any claim potentially resulting in loss to the Association occurred in the Association’s representative capacity.  See Estate of Baumann, 201 Cal. App. 3rd 927, 935 (1988) (“When a party acts in a represented capacity, and is such lawfully authorized to litigate the questions at issue for those whom he represents, they as well as he are bound by the judgment.”). Market Lofts, 2015 U.S. Dist. LEXIS 100691, at *18.

As to the last element, “the Claim . . . made during the Policy Period and reported to Defendant” — the former board members gave written notice of the Association’s complaint in the Underlying Action defended on January 16, 2012, during the policy year.  Market Lofts, 2015 U.S. Dist. LEXIS 100691, at *20.  Claims in the cross-complaint arose under the same facts alleged in the Association’s complaint in the Underlying Action.  Both related to the parking licensing agreement between the Association and the cross-complainants.  As there was a duty to defend, the declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing claims survived the motion to dismiss.

Critically, the courts went past the subterfuge in the claimant’s attempt to despoil coverage options for the Association, penetrating to the true facts enlightened by the rulings of the Court of Appeal, clarifying that the Association itself was the real-party-of-interest, and so understanding the scope of its duties in light of the statutory obligations, found that a defense arose.

The Court used doctrines of ambiguity and reverse construction against an insurer who did not specify with more particularity limitations on the scope of its coverage to circumvent subterfuge by the claimant in the underlying case.  The claimant sought to avoid naming the Association and instead, named association members as part of a strategic ploy.  Exposing this stratagem as an attempt to avoid otherwise available coverage is an issue that recurs frequently in coverage disputes.

Indeed, in a case where the insurer colluded with the claimant to partially settle a suit, and then re-craft the Amended Complaint to denude it of pertinent fact allegations evidencing disparagement coverage in an antitrust lawsuit, the 7th Circuit nonetheless found a defense arose.  It further found that the settlement was improper and constituted bad faith, even though the underlying lawsuit had not yet articulated such a claim for relief. See Lockwood Int’l, B.V. v. Volm Bag Co., 273 F.3d 741 (7th Cir. (Wis.) 2001) (Gauntlett & Associates was counsel for Volm Bag in successfully challenging the partial settlement).



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