In Daniels v. Allstate Ins. Co., et al., 2014 WL 4954826 (N.D. Cal. Oct. 1, 2014), the United States District Court for the Northern District of California, applying California law, granted an insurer’s motion to dismiss, without leave to amend, holding the insurer had no duty to defend its insured in connection with underlying litigation involving neighbors’ complaints of potential future damage to their property from a dilapidated retaining wall located along a shared boundary line.
The underlying suit arose from the insureds’ refusal to repair or replace a twenty-year-old retaining wall, despite repeated requests from neighbors, and despite having been provided with an expert report confirming the distressed state of the wall and the risk of collapse, which could cause fill and soil to inundate the neighbors’ property. Id. at *1,2. The complaint alleged that the wall and trees along the wall constituted a private nuisance and that the insureds acted unreasonably in failing to take action to remedy these hazards. Id.
The insureds tendered defense of the underlying lawsuit to their insurer, Allstate Insurance Co. Id. Allstate denied coverage, stating that the policy only covered accidents resulting in bodily injury or property damage and specifically excluded damage to insureds’ own property. Id. The denial letter invited the insureds to provide additional information if they believed the insurer had unfairly or erroneously denied coverage, but the insureds did not supply any additional information. Id.
The neighbors prevailed in their lawsuit, with the court requiring the insureds to replace the wall, remove trees that were at risk of falling, and pay $8,000 to the plaintiffs for their discomfort and annoyance. Id. The insureds then sued Allstate for its failure to defend and for allegedly having failed to investigate adequately before denying coverage. Id.
Allstate filed a motion to dismiss, asserting that the complaint did not allege “accidental” conduct and that the underlying plaintiffs did not seek damages for “property damage.” Id. at *3. The district court granted the motion, finding that the insured had not alleged facts sufficient to state a claim because the conduct in the underlying complaint – i.e. the deterioration of the retaining wall and insureds' refusal to repair or replace the wall – was “expected,” “intentional,” and “not accidental.” Id.
Because the court had denied the insured’s motion with leave to amend, the insureds amended their complaint to include additional substantive allegations, including that they were not aware of the problems with the wall until the neighbors first approached them, that they thought the insurer would investigate further, and that they felt the neighbors’ demands were unreasonable. Id. at *4, 5. The insurer again moved to dismiss the complaint. Id. The district court found that the new allegations still did not establish the potential for coverage, since none showed that the conduct giving rise to the underlying litigation was in any way accidental. Id. The court thus granted the motion to dismiss, this time without leave to amend. Id.
The court also rejected the insureds’ claim that the insurer was required to conduct a more thorough investigation to discover facts in support of a duty to defend. Id. at *6. The court held that the insurer had discharged its duty by comparing the terms of the policy to the allegations in the underlying complaint and by taking into account all extrinsic facts provided by the insureds. Id. The court held that, contrary to the insureds’ suggestion, the insurer “was not required to inspect the site, speak to the [underlying plaintiffs], or discuss the claim in depth before making a determination regarding its duty to defend. So long as the allegations in the [underlying] complaint, the terms of the Policy, and extrinsic facts known to [the insurer] at the time did not ‘raise a single issue which could bring [the events] within the policy coverage,’ [the insurer] was relieved of its duty to defend.” Id. The court added that there was no “continuing duty” to investigate potential coverage once the insurer had refused to defend a lawsuit on the basis of the allegations in the underlying complaint and extrinsic facts known to the insurer at time of tender. Id.
The Daniels ruling shows that, under California law, an insurer does not breach a duty to defend where there is no potential for coverage based on a comparison of the underlying complaint to the policy terms and consideration of extrinsic facts known to the insurer at the time of its denial. It also shows that an insurer has no continuing duty to investigate, once it has denied coverage after conducting such analysis. This ruling thus demonstrates that the broad scope of an insurer’s duty to defend is not without limits and that whether a duty to defend exists can, under appropriate circumstances, be resolved in the early pleading stages.