Insurer’s Allegations that Declaratory and Injunctive Relief Are Not Covered Loss Survive Motion to Dismiss

The United States District Court for the Northern District of California has denied an insured’s motion to dismiss an umbrella insurer’s declaratory judgment action.  Great American Ins. Co. v. Quintana Homeowners Ass’n., 2017 WL 3453394 (N.D. Cal. Aug. 11, 2017).  The insurer alleged that it had no duty to defend or indemnify after exhaustion of the primary policy.  The court concluded that the insurer’s complaint sufficiently alleged that the claims for declaratory and injunctive relief in the underlying action did not constitute covered “Loss” under the policy.

The plaintiff in the underlying action sued the insureds, a homeowner’s association and an association board member/developer, seeking declaratory and injunctive relief, punitive damages, and attorney’s fees related to a breach of contract for failure to enforce the association’s “covenants, conditions and restrictions” and for fraud and misrepresentation by the developer.  The umbrella insurer filed an action for declaratory judgment, seeking a declaration that it had no obligation under its policy to defend or indemnify the insureds after the primary policy was exhausted.  The insurer alleged that because the underlying action sought only relief excluded from the definition of “Loss,” no defense or indemnity obligation could arise.  In addition, the insurer alleged that it had no obligation to defend and indemnify the developer based on the application of a “Builder, Developer or Sponsor” Wrongful Act exclusion.

The insureds argued in their motion to dismiss that (1) the underlying complaint alleged numerous “Wrongful Acts” within the meaning of the policy, triggering defense obligations, (2) the policy did not exclude claims for injunctive relief and required only that a claim be made for a “Wrongful Act,” (3) attorney’s fees accompanying injunctive relief are compensable losses, and (4) the underlying complaint identified the developer as a “volunteer,” and therefore the “Builder/Developer” exclusion did not apply.

The court denied the insureds’ motion to dismiss.  The court found that the declaratory and injunctive relief sought is “not predicated upon the absence of a ‘claim’ or ‘wrongful act’ in the underlying state court action”; rather the insurer “alleges that the state law claims for injunctive and declaratory relief do not constitute a covered ‘Loss’ within the meaning of the [umbrella policy].”  Next, the court found that although “Loss” includes “attorney fees,” an award of attorney’s fees as to a prevailing party falls outside of the scope of insurable “Loss.”  Finally, the court found that the insurer’s allegations regarding the application of the “Builder/Developer” exclusion were sufficient at the pleading stage.