Down To Cases

The woman bought a "condominium owners" insurance policy. With respect to coverage for real property, it stated in part: "We will cover items of real property pertaining directly to your resident premises which are your insurance responsibility as expressed or implied under the governing rules of the condominium."

In March 2002, the insured submitted a claim, seeking coverage for water damage to the interior of her condominium unit that resulted from a water leak in a neighboring unit. The carrier denied the claim, stating that the homeowners association was responsible for obtaining insurance for the claimed loss. The woman sued the insurer for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud.

At a hearing before the trial court, the woman's counsel clarified that she initially made a claim for the water damage to the homeowners association's insurer but that it denied the claim, based on its assertion that its policy "doesn't cover floods." Her lawyer stated that the woman could amend the complaint to reflect these facts. The trial court, however, did not allow this amendment.

The trial court ultimately concluded that even if the woman were allowed to amend her complaint, it would not state a basis for recovery, because the homeowners association's regulations unambiguously placed sole responsibility for insuring her unit's interior structures on the association itself. Accordingly, the court sustained the insurer's demurrer (a plea in response to an allegation that admits its truth but also asserts that it is not sufficient as a cause of action). The woman appealed.

The appeals court said it would review the case de novo (as if for the first time), thus exercising its own judgment about whether the woman's complaint stated a cause of action.

Two sections of the condominium's CC&Rs addressed the matter of insurance for real property and improvements. They read in part as follows:

"Section 8.2: Fire and Extended Coverage Insurance. The Association also shall obtain and maintain a master or blanket policy of fire insurance for the full insurable value of all of the improvements within the Development. The form, content, and term of the policy and its endorsements and the issuing company must be satisfactory to all institutional first mortgagees."

"Section 8.3: Individual Fire Insurance Limited. Except as provided in this Section, no Owner can separately insure his Unit or any part of it against loss by fire or other casualty covered by any insurance carrier under Section 8.2. If any Owner violates this provision, such Owner will be liable for any diminution in insurance proceeds otherwise payable.... Any Owner can, however, insure his personal property against loss. In addition, any improvements made by an Owner within his Unit may be separately insured by the Owner, but the insurance is to be limited to the type and nature of coverage commonly known as tenant's improvements. All such insurance that is individually carried must contain a waiver of subrogation rights by the carrier as to other Owners, the Association and Declarant."

The court observed that both the insurer and the insured recognized that the primary purpose of these provisions was to avoid double coverage. "If both the master and individual policy cover the same loss, the unit owner may be compelled to pay twice for the same insurance-once through homeowners association dues and then again through individual policy premiums. Additionally, double coverage can lead to disputes over control of proceeds and to the risk of subrogation disputes, the court noted.

Because the carrier incorporated the homeowners association rules into its policy, the appeals court said that it was necessary to "not only determine the meaning of the words contained in the four corners of the insurance policy, but also to determine the meaning of the language used in the CC&Rs.... Unless the relevant language in these two documents is clear and unambiguously establishes that (the insured's) claim is not covered, the demurrer should have been overruled."

The insurer argued there was no coverage under its policy because it could be triggered only by real-property damage that was the woman's responsibility to insure. But under the CC&Rs, the responsibility for insuring this property was solely the homeowners association's, the insurer said. The court, however, declined to conclude that the only reasonable interpretation of the policy's coverage for real property was that it had "no potential value to a condominium owner."

The question, the appeals court said, was whether the insured alleged-or could amend her complaint to allege-that she had the implied responsibility under Sec. 8.3 to insure the property that was damaged.

The insured first argued that the interior structure of the condominium constituted an "improvement" within the meaning of Sec. 8.3. The appeals court, however, held that her interpretation was "unsupported by the plain language of the insurance policy and the (homeowners association's) CC&Rs." Sec. 8.2, the court noted, made the homeowners association responsible for obtaining fire insurance, extended coverage, and a special form endorsement for "all of the improvements within the Development." However, Sec. 8.3 then makes an exception for "improvements made by an Owner," the court said, but limits the word "improvements" to those additions "commonly known as tenant's improvements." This more limited definition is further qualified by the statement in Sec. 8.3 that those "improvements" must have been added "by an Owner." This interpretation, the court observed, also was consistent with a provision of (the insurer's) policy stating that covered real property includes "fixtures...installations or additions...only when situated within that portion of the premises used exclusively by you and made or acquired at your expense." The insured did not allege damage to improvements "made or acquired at (her) own expense," the court said, only that the water had damaged a portion of the premises that she used exclusively.

The court also rejected the insured's argument that since the CC&Rs imposed responsibility on individual owners to repair and maintain the interior surfaces of their units, they also made individual owners responsible for insuring these interior structures. There was nothing in the CC&R's, the court said, that "equates maintenance responsibility with insurance coverage responsibility."

The appeals court found, however, that the insured met her burden to show "a reasonable probability she could amend her original complaint to show damages to 'improvements' under Section 8.3." In her appellate brief, she clarified that the water damage required her to repaint walls and replace carpet pads. The court held that paint and/or a carpet pad could conceivably constitute the type of improvement commonly known as a "tenant's improvement" within the meaning of Sec. 8.3. Moreover, based on the insured's counsel's comments at oral argument, it appeared reasonably probable that the insured could allege that these real property items were added to the unit by a condominium owner and thus "made or acquired at (the insured's) expense" within the meaning of the applicable insuring clause.

The insured also argued the trial court erred in sustaining the demurrer because the alleged damages were not covered under the homeowners association's insurance policy. That made them her responsibility, she said, and thus covered by her policy. The appeals court said that "because the insured never alleged the lack of Homeowners Association insurance coverage or even mentioned the Homeowners Association's policy in her complaint, these facts were not before the trial court and thus the court could not have overruled the demurrer on this basis." The appeals court agreed that the insured should have been allowed to amend her complaint to include these allegations. With these amendments, the complaint would state an actionable claim at the pleading stage, the court said.

The appeals court ruled that if the insured could amend her complaint, the litigation could proceed beyond the pleading stage. That would permit the parties to present any extrinsic evidence relevant to resolving the ambiguities in the policy and then enable the trial court to apply settled insurance construction rules to determine the meaning of the insurance clause and any applicable exclusions. This would have to be done before the fraud and bad-faith claims against the insurer could be resolved. The appeals court sent the case back to the trial court with an order to vacate its order sustaining the insurer's demurrer and to enter a new order sustaining the insurer's demurrer but allowing the insured to amend her complaint.

Palacin vs. Allstate Insurance Co., No. D042813 (Cal.App. Dist.4 06/22/ 2004) 2004.CA.0005487 (www.versuslaw.com).

Readers may fax Don Renau at (502) 897-1533. His e-mail address is drenau@thepoint.net.