Insurer had no duty to indemnify without damages determination, California court says

From Westlaw Journal Insurance Coverage: An insurer is not obligated to indemnify its policyholder because no legal action took place to determine damages, a California appeals court has ruled.

The 2nd District Court of Appeal upheld the Ventura County Superior Court’s summary judgment order in favor of Liberty Surplus Insurance Co.  It found that a contractor that retained subcontractors to renovate apartment interiors was not entitled to indemnification for water damage when the complex owner did not file a lawsuit, commence an arbitration proceeding or initiate an alternative dispute resolution.

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Liberty insured Mike Rovner Construction Inc. under a comprehensive general liability policy that covered property damage occurring during the Nov. 13, 2009, to Nov. 13, 2010, policy period, according to the appeals court’s opinion.  The policy provided that Liberty would defend Rovner against any suit seeking damages.

It defined “suit” as a civil proceeding alleging damages or an arbitration or “alternative dispute resolution” proceeding in which damages are claimed, the opinion says.

Rovner was retained to renovate apartment interiors at a complex in Costa Mesa, Calif., and employed two subcontractors to provide and install shower enclosures.  The subcontractors installed the showers between October 2007 and March 2009, the opinion says.  The showers were defective and improperly installed and began damaging the apartments before the inception of the Liberty policy, according to the opinion.

(Click here for the opinion on WestlawNext.)

Rovner sued its insurers July 27, 2011.  Subsequently, it repaired the apartment units from August 2011 to December 2011 at a $553,800 cost, some $367,533 of which insurers other than Liberty reimbursed, the opinion says.

Rovner’s first amended complaint alleged that Liberty breached its insurance contract and the implied covenant of good faith and fair dealing, according to the opinion.  Rovner additionally sought declaratory relief confirming coverage for the unpaid balance for repairs it voluntarily made.

In upholding the trial court’s order granting summary judgment in favor of Liberty and dismissing the complaint, the appellate court noted that Liberty’s policy language expressly linked its duty to indemnify to damages sought in a “suit” and that the owner of the apartments did not file a lawsuit, commence arbitration or initiate dispute resolution proceeding.

The appellate court found that Rovner could not obtain coverage under Liberty’s policy by “simply agreeing with the owner to make repairs and passing the bill along to its insurer.”

The court relied upon Certain Underwriters of Lloyd’s of London v. Superior Court, 24 Cal. 4th 945 (Cal. 2001), which held that the duty to indemnify an insured is limited to money ordered by a court.

The court additionally found that a “known injury or loss” provision in the Liberty policy explicitly excluded progressive damage that began prior to the policy’s inception date and was alleged to continue into the policy period.

Mike Rovner Construction Inc. v. Liberty Surplus Insurance Corp., No. B246877, 2014 WL 3752106 (Cal. Ct. App., 2d Dist. July 31, 2014).