California Insurance - Directors and Officers Liability Coverage Does Not Include Breach of Contract Claims Against Condo Association
Oak Park Calabasas Condominium Association v. State Farm Fire & Casualty Company, No. B180743 (Cal. Ct. App., February 21, 2006)
California’s Second Appellate District (Los Angeles) held that the term "wrongful acts" in the Directors and Officers liability coverage portion of a policy issued to a condominium association limits coverage to negligent
– i.e., tortious – conduct, and does not provide coverage for breaches of contractual obligations.
Following the Northridge Earthquake in 1994, Oak Park Calabasas Condominium Association hired a construction company to repair the extensive damage to its buildings. The Association agreed to pay the construction contractor from the
proceeds of its earthquake coverage with State Farm, but later refused to hand over a substantial portion of those proceeds. The contractor sued the Association for both breach of contract and fraud.
The Association tendered the defense of the contractor’s suit to State Farm under the Directors and Officers liability portion of its policy. State Farm denied coverage on the ground that its policy covered only tort liabilities,
not contract liabilities. The contractor ultimately obtained a judgment against the Association for more than $7 million.
In the bad faith lawsuit that followed, the trial court held that the term "wrongful acts" in the Directors and Officers portion of State Farm’s policy limited coverage to negligent breaches of duty, and that contract
obligations weren’t covered.
In its decision, the Court of Appeal agreed. Starting from the policy’s definition of "wrongful act," which meant "any negligent acts, errors, omissions," the court reviewed federal decisions interpreting
similar language, and concluded that the term "negligent" modified each word in the definition – "act," "error" and "omission." Quoting from the Ninth Circuit Court of Appeal’s
decision in Group Voyagers, Inc. v. Employers Insurance of Wausau, 66 Fed.Appx. 740, the court reasoned that if negligent modified only the word "act," then any error or omission would be covered, whether negligent or intentional.
This, in turn, would make it impossible to set premiums for the policy, and would run afoul of California public policy that precludes coverage for intentional conduct. The court also was offended by the notion that State Farm already
paid the Association’s property loss claim, and that the Association kept those funds instead of paying them to the construction contractor. "It appears to this court that Oak Park in essence wanted to enrich itself by
forcing State Farm to pay twice for the same property loss. This court refuses to countenance such a result."