Insurer Owes Duty to Defend and Indemnify Nuisance Litigation

A federal district court, applying California law, has held that an insurer owed a duty to defend and indemnify an insured in an underlying nuisance litigation under a not-for-profit D&O policy, as the policy’s pollution, property damage, breach of contract, and prior acts exclusions were not implicated.  The Crosby Estate at Rancho Santa Fe Master Ass’n. v. Ironshore Specialty Ins. Co., 2022 WL 64767 (S.D. Cal. Jan. 6, 2022).

In 2015, the insured, a homeowners association, was sued by a neighboring community for breaching its duties under the parties’ written easement agreement to repair, maintain, and enforce the speed limits on a road owned by the neighboring community.  After the judicial referee issued a report in 2016 finding that the insured had the responsibility and the duty to enforce the speed limit on that road, the court in this first action reduced the report to a judgment.

In 2018, the same neighboring community again filed suit against the insured for breaching the parties’ easement agreement by removing speedbumps installed on the road, interfering with the “quiet use and enjoyment” of the neighboring community’s residents by instigating a coordinated effort called “Operation Honk” amongst the insured’s residents to honk any time they passed over the speedbumps, and intentionally destroying and removing speedbumps to allow the insured’s residents to drive “as fast as they can through the easement without regard for the safety or well being of the residents and guests” of the neighboring community.  After initially denying coverage, the insurer ultimately agreed to defend the insured under a reservation of rights, including the right to seek reimbursement of defense costs relating to non-covered claims. 

After the insurer assumed the defense of the second lawsuit, the neighboring community amended its complaint to include additional allegations regarding the insured’s efforts to encourage its residents to throw food and trash from their cars.  The neighboring community later filed a second amended complaint that summarized the first 2015 lawsuit, the conclusions of the judicial referee, and the judgment entered by the court in that 2015 action.  The insured and the neighboring community settled the second lawsuit in August 2019.

Subsequently, the insured filed a breach of contract and bad faith action against the insurer.  The court granted the insured’s motion for summary judgment on the first claim for breach of contract, concluding that the insurer had breached the terms of the policy by failing to defend the insured from the date of its original tender.  The court determined that the original complaint in the underlying 2018 action—the operative complaint at the time of tender—included allegations that the insured had interfered with the “quite use and enjoyment” of the neighboring community’s residents by instigating “Operation Honk,” and that these allegations triggered the insurer’s duty to defend.  The court rejected the insurer’s assertions that the noise allegations were excluded from coverage by the policy’s pollution exclusion.  As such, the court held that the insurer had breached its duty to defend by failing to immediately assume the defense.

Thereafter, the insured filed a first amended complaint against the insurer, asserting the same causes of action as the original complaint but including additional factual allegations.  The insurer filed a motion for partial summary judgment, arguing that the second amended complaint in the underlying 2018 action released it from its defense and indemnity obligations.

The court denied the insurer’s motion for summary judgment.  First, the court noted that the insurer owed a defense obligation notwithstanding the filing of the second amended complaint because that complaint asserted two causes of action for nuisance and sought an injunction prohibiting the insured from engaging in harassing behavior, including but not limited to Operation Honk.  The court thus concluded that it was not clear that the potential for coverage no longer existed upon the filing of the second amended complaint. 

Second, the court ruled that the insurer still owed a duty to indemnify.  The insurer had argued that the second amended complaint arose from the insured’s alleged destruction of the neighboring community’s property and duties under the easement agreement, both of which were excluded from coverage by the policy’s property damage and breach of contract exclusions.  The insurer also maintained that the entire underlying 2018 action was a single “Claim” that related back to the first 2015 lawsuit, and was thus excluded from coverage by the policy’s prior acts exclusion.  Finally, the insurer contended that the policy did not afford indemnification for the settlement of the underlying 2018 action, as there was no allocation between uncovered and covered claims.  

In rejecting all of these arguments, the court again emphasized that the second amended complaint included two causes of action for nuisance and requested an injunction prohibiting the insured from engaging in harassing behavior, included but not limited to Operation Honk and throwing food and trash from cars.  Because these allegations did not pertain to damage to or destruction of tangible property, the court ruled that the property damage exclusion did not apply.  The court further held that the breach of contract exclusion did not bar coverage because the requested relief from Operation Honk and throwing food and trash could exist irrespective of the easement agreement between the parties.  After explaining that the term “Claim” as used in an exclusion is limited to the relevant claims within the underlying action, the court concluded that the prior acts exclusion was not implicated because the first 2015 action did not include any allegations regarding noise or throwing food and trash.  Finally, the court determined that the settlement of the underlying 2018 action included compensation for claims that were covered by the policy, as it did not limit the settlement to claims asserted in the second amended complaint and did not attribute any settlement payment to any particular claim.  As such, the court concluded that the policy’s required allocation analysis had been considered, and concluded that no allocation was necessary.