Why it matters: A California federal court denied an insurer's motion to dismiss that was asserting that it had no duty to defend an underlying lawsuit because it was related to a prior claim that was made but not reported during a prior policy period. A resident filed suit against a homeowner's association alleging various negligence and breach of fiduciary duty claims. The association sought defense from its insurer, who initially stepped up to the plate. However, the insurer then changed its mind, arguing that the resident had requested a meeting with the association board more than a year prior to filing the lawsuit. The insurer argued that this meeting constituted a "claim" under the policy, which was not reported during the required time period, and, therefore, it had no defense obligation. But the judge disagreed, holding that the court needed more information. Whether or not the resident's meeting with the association was a related claim "necessarily entails a factual inquiry, which is premature for the Court to conduct on a motion to dismiss," the court said.
Detailed discussion: Wendell Bonner owned a residential property in Rancho Tehama and was a member of the Rancho Tehama Association. In July 2012, Bonner requested a meeting with the Association's Board of Directors. After the meeting, Bonner expressed his satisfaction with the response of the Board to his concerns and indicated that he did not plan to file suit against the Association.
One year later, Bonner apparently changed his mind, filing a complaint against the Association in California state court in September 2013. Seeking damages for negligence and breach of fiduciary duty, Bonner claimed that the Association failed to enforce the Tehama Rancho Association Covenants, including allowing temporary outbuildings to be erected and permitting "noxious and offensive activities" to be carried on throughout the various lots.
Pursuant to a policy purchased from Federal Insurance Company for 2013-2014, the Association requested defense from the insurer. Although Federal initially advised that it would provide a defense, the insurer reversed its position just two months later. No coverage existed for the underlying action, Federal said, because the policyholder failed to timely report Bonner's claim.
The Association then filed suit against Federal seeking declaratory relief that Federal had an obligation to provide a defense and breached the contract between the parties.
Federal held fast to its position that Bonner's 2012 contact with the Association was a "Claim" under the 2012-2013 policy, which was in effect from March 1, 2012, through March 1, 2013, that the policyholder failed to timely report. The policy provided coverage for " 'Claims' first made during the 'policy period,' or any extended reporting period," with a "Claim" defined as any "written demand for monetary damages."
The policy required that the "Insured shall, as a condition precedent to exercising rights under this Coverage Section, give to [Defendant] written notice as soon as practicable of a Claim, but in no event later than sixty (60) days after the end of the Policy Period," or May 1, 2013. And the 2012-2013 policy also provided that all "Related Claims will be treated as a single Claim made when the earliest of such Related Claims was first made."
According to Federal, Bonner's 2012 contact with the Association constituted a "Claim," making the 2012 claim and the later-filed lawsuit "Related Claims" that must be treated as a single claim. That single claim was deemed to have first been made in 2012, meaning that when the Association provided notice of the lawsuit in October 2013, it was well past its May 1, 2013, reporting deadline—and no coverage was required.
U.S. District Court Judge John A. Mendez told the insurer to slow down.
Whether the 2012 contact between Bonner and the Association was a "Claim" under the policy and the lawsuit was a "Related Claim" entailed a factual inquiry, premature for the court to conduct on a motion to dismiss. A motion to dismiss presents the narrow, threshold question of whether the plaintiff has stated sufficient facts that, if true, entitle it to relief, the court explained.
"To determine whether the 2012 Claim and the Underlying Action are related, the Court would first need to determine the scope of each claim," Judge Mendez wrote. "However, the Court cannot reliably determine the scope of either claim based solely on the allegations and documents attached to—and referenced in—the Complaint. With regard to the 2012 Claim, the Complaint merely alleges that Bonner made a 'request for a meeting' with Plaintiff, and that Plaintiff's Board of Directors 'met with Mr. Bonner.' No further details are evident from the face of the Complaint."
The court rejected Federal's requests to consider additional documents, such as letters written by Bonner to the Association and the minutes from the meeting between Bonner and the Board of Directors. The documents were not attached to the complaint, were not referenced in the complaint, and their contents were not alleged in the complaint, the court said. A reference to the documents in an attachment to a complaint was insufficient.
Even if the documents were considered, "the analysis would be complicated by their poor quality and the ambiguity of their contents," Judge Mendez added. The letter from Bonner "is as confusing as it is lengthy," and some of the text was faded to the extent that entire phrases were illegible. "Further development of the evidentiary record is necessary to determine the scope of the 2012 Bonner claim," the court said, as well as the scope of the underlying action.
"The entirety of Defendant's motion depends on a finding that these claims are related," the court wrote. "If the claims are not related, then Plaintiff's tender of the Underlying Action to Defendant was timely and Defendant's argument fails. Also, Defendant's argument concerning the third cause of action (breach of the implied covenant of good faith and fair dealing) requires the Court to evaluate the objective reasonableness of Defendant's determination that coverage for the Underlying Act did not exist. An inquiry into the reasonableness of this determination, in turn, requires the Court to determine the reasonableness of Defendant's conclusion that the claims were related. Without a fully developed evidentiary record, the Court cannot find that such a conclusion was objectively reasonable. Thus, Defendant's motion fails with respect to each of Plaintiff's causes of action."
To read the order in The Rancho Tehama Association v. Federal Insurance Company, click here.