Opinion
CROSKEY, J.
In its appeal, defendant Cen-Fed, Ltd. (Cen-Fed)
challenges the decision of; the trial court that its commercial general liability insurer, plaintiff Golden Eagle Insurance Corporation (Golden Eagle), owed neither a defense nor an obligation to indemnify Cen-Fed for damages awarded against it in the underlying action filed by Washington Mutual Bank (WMB). That action was based on the breach of a lease for commercial premises between Cen-Fed as lessor and WMB as lessee. In its cross-appeal, Golden Eagle, which had provided Cen-Fed a defense to the underlying action under a reservation of rights, challenges the trial court’s ruling that it was obligated to pay (pursuant to the supplementary payments provisions of its policy) the costs (including attorney’s fees) awarded against Cen-Fed in WMB’s underlying action in spite of the trial court’s determination that Golden Eagle had neither a duty to, defend nor indemnify the claims asserted in that action.
We conclude that the trial court correctly determined that Golden Eagle was not liable to indemnify Cen-Fed for the damages awarded against it in the underlying action. Moreover, since there was no coverage under the Golden Eagle policy for the WMB claims, as a matter of law, a duty to defend the underlying action never arose. As a result, Golden Eagle had no obligation to pay or reimburse Cen-Fed for the costs of suit and attorney’s fees awarded to WMB because Golden Eagle’s burden under the supplementary payments clause is an integral part of, and can be no broader than, its duty to defend. We therefore will amend the judgment by striking the order requiring such payment and, as so amended, the judgment will be affirmed.
FACTUAL AND PROCEDURAL BACKGROUND
1.
The Underlying Action
Cen-Fed leased property to WMB in a commercial building in North Hollywood, California. The leased premises were portions of the basement and first floor of the building. The lease ran from November 1979 to November 2004, and WMB had an option to extend the lease.
The lease required Cen-Fed to maintain the structural elements of the building in a first class condition, keep the leased premises and the common areas in a clean and sanitary condition, and maintain, for WMB, a certain number and type of parking spaces. Under the lease, WMB was entitled to cure or cause to be cured any failure by Cen-Fed to comply with its lease obligations, and deduct the cost thereof from WMB’s rental obligation. Paragraph 26(i) of the lease contained an attorney’s fee clause: “In the event of any action or proceeding brought by either party against the other under this Lease, the prevailing party shall be entitled to recover all costs and expenses, including the fees of its attorneys in such action or proceeding, in such amount as the court may adjudge reasonable.”
WMB sued Cen-Fed for breach of the lease and declaratory relief,
alleging that Cen-Fed had “failed to maintain and repair the [leased premises] in accordance with the terms and conditions of the lease” thereby depriving WMB of a part of its leased space, which required WMB to move its safe deposit boxes from the basement to the first floor, decreased the number of boxes WMB was able to rent out, and deprived WMB of the use of that first floor space for other purposes. WMB’s complaint also alleged that the air conditioning, elevator service, and basement restrooms were not in good working order; the landscaping, common areas, interior walls and painting were not maintained to the extent required by the lease; and Cen-Fed did not meet its obligations regarding parking.
2.
The Insurance Policies
Beginning in September 1997 and ending in September 2002, Golden Eagle insured Cen-Fed with policies of insurance that included general liability and commercial general liability coverage.
Additionally, Golden Eagle issued umbrella coverage policies to Cen-Fed, covering the period September 2000 to September 2002. Cen-Fed tendered the defense of the underlying suit to Golden Eagle, and it undertook the defense of Cen-Fed under a complete reservation of rights.
3.
The Instant Action
While the underlying action was pending, Golden Eagle filed this suit against Cen-Fed, seeking a declaratory judgment that Golden Eagle had no duty to indemnify Cen-Fed for damages that might be awarded to WMB in connection with (1) Cen-Fed’s alleged breach of its duty to maintain the air conditioning in proper working order (first cause of action); (2) repair costs incurred by WMB because of Cen-Fed’s alleged breach of the subject lease (second cause of action); and (3) future restoration costs WMB would incur to restore and maintain the leased premises in the condition required by the lease agreement (third cause of action). Golden Eagle also sought a determination that it had no obligation to indemnify Cen-Fed for contractual attorney’s fees that might be awarded to WMB in the underlying action. Finally, Golden Eagle sought a declaration that it had no duty to defend the underlying action.
4.
The Verdict and Judgment in the Underlying Action
WMB’s case against Cen-Fed was tried to a jury, which determined that Cen-Fed had breached the lease by failing to properly maintain (1) the air conditioning in first class condition, (2) the basement from January 1, 1999 to December 31, 2001 in the condition required by the lease, and (3) the first floor leased space and all common areas, from September 26, 1996 to May 5, 2003, in the condition required by the lease.
The jury determined that these breaches of the lease, with respect to the first floor leased space and common areas, caused WMB to suffer a diminution in the value of its leasehold interest in the sum of $505,440. The jury, however, awarded zero damages for WMB’s various individual claims of damages, including WMB’s cost of maintaining a temporary air conditioning system, a refund of rent for the leased basement space, the cost to WMB to
repair or restore first floor leased space and common areas to the conditions required by the lease, the cost of WMB’s prior repairs and expenses, and “any other claim.”
Judgment was thereafter entered on that verdict. As a part of that judgment, WMB, as the prevailing party, was awarded its costs of suit, including an award of attorney’s fees, pursuant to the terms of the attorney’s fee clause in the lease.
5.
The Trial Court’s Decisions in the Instant Case
The trial court granted Golden Eagle’s motion for summary adjudication of issues on Golden Eagle’s first three causes of action. The remainder of the case, with respect to Golden Eagle’s prayer for a declaratory judgment that it (1) had no obligation to pay the attorney’s fees awarded against Cen-Fed and (2) owed no duty to defend Cen-Fed, was tried to the court. It concluded that Golden Eagle had no duty to indemnify Cen-Fed for any part of the judgment because the damages awarded to WMB were not due to “property damage” or to an “occurrence” and furthermore, the “owned property” exclusion in the policies would preclude liability for indemnification. The court also concluded that to the extent that the jury verdict award (in WMB’s underlying action) was based on a “personal injury” offense, and might otherwise be subject to indemnification under the primary policies, the “liability assumed in a contract” exclusion applicable to each policies’ “personal injury” coverage would apply to eliminate any indemnity obligation.
Finally, the trial court determined that even though Golden Eagle had no duty to defend Cen-Fed in the underlying action, it was nonetheless liable (under the supplementary payments clause in the policies), for paying the costs of suit (including attorney’s fees) awarded to WMB. The reason for this ruling (which is the sole subject of Golden Eagle’s cross-appeal) was, in the words of the trial court, “[bjecause Golden Eagle in fact defended the underlying action[,] the [supplementary payments provisions] in its policies obligated it to pay any cost award against its insureds, regardless of the court’s determination that no duty to defend the underlying action was ever [owed].”
CONTENTIONS ON APPEAL
As already noted, Cen-Fed appealed from the judgment in the instant case and Golden Eagle cross-appealed. Cen-Fed contends (1) WMB’s damages occurred because of “property damage” caused by an “occurrence,” (2) the personal injury exclusion for liability assumed in a contract does not apply
here, (3) the owned property exclusion for property damage does not apply here, and (4) the trial court abused its discretion when it excluded the relevant and admissible testimony of an expert witness regarding the drafting history of ISO CGL (Insurance Services Office, Inc., commercial general liability) forms, and FC&S (fire, casualty and surety) bulletins that articulate the insurance industry’s own construction of relevant policy language.
Golden Eagle disputes each of these arguments and further contends that, as a matter of law, there was no “property damage” caused by an “occurrence” and, due to a recent clarification of relevant case law, the personal injury provisions of the policy, as a matter of law, can provide no coverage in this case. In addition, Golden Eagle argues that the trial court erred when it imposed on Golden Eagle the requirement that it pay the costs (including attorney’s fees) awarded to WMB and against the Cen-Fed in the underlying action.
DISCUSSION
1.
General Principles Applicable to Coverage Issues
“When determining whether a particular policy provides a potential for coverage and a duty to defend, we are guided by the principle that interpretation of an insurance policy is a question of law. [Citation.] The rules governing policy interpretation require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it. [Citations.]”
(Waller v. Truck Ins. Exchange, Inc.
(1995) 11 Cal.4th 1, 18 [44 Cal.Rptr.2d 370, 900 P.2d 619]
(Waller).)
It is the burden of the insured “ ‘to bring the claim within the basic scope of coverage,’ ” and the burden of Golden Eagle to prove exclusions to the coverage.
(Id.
at p. 16.)
With respect to the issue of an insurer’s duty of defense, the applicable law is well settled. “An insurer must defend its insured against claims that create a
potential
for indemnity under the policy. [Citations.] . . . HD • • • fiD The defense duty arises upon tender of a potentially covered claim and lasts until the underlying lawsuit is concluded, or until it has been shown that there is no potential for coverage. [Citation.] When the duty, having arisen, is extinguished by a showing that no claim can in fact be covered, ‘it
is extinguished only prospectively and not retroactively.’ [Citations.] H] On the other hand, ‘in an action wherein none of the claims is even potentially covered because it does not even possibly embrace any triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer does not have a duty to defend. [Citation.]’ . . . [f] From these premises, the following may be stated: If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage.
On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first
instance.”
(Scottsdale Ins. Co. v. MV Transportation
(2005) 36 Cal.4th 643, 654-655 [31 Cal.Rptr.3d 147, 115 P.3d 460], first italics in original, second italics added
(Scottsdale).)
2.
Pertinent Policy Terms1
a.
Definitions
The policies at issue in this case include the following relevant definitions:
“ ‘Occurrence’ means an
accident,
including continuous or repeated exposure to substantially the same general harmful conditions.” (Italics added.)
“ ‘Personal injury’ means injury, other than ‘bodily injury,’ arising out of [among other things], . . . [t]he wrongful eviction from, wrongful entry into, or
invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or
lessor.” (Italics added.)
“ ‘Property damage’ means: [f] a. Physical injury to
tangible
property, including all resulting loss of use of that property. . . . or [f] b. Loss of use of
tangible
property that is not physically injured.” (Italics added.)
b.
Coverage A Indemnity (“Occurrence Based” Coverage)
Pursuant to the “coverage A” terms of the policies (“bodily injury and property damage liability”), Golden Eagle was obligated to pay, on behalf of
Cen-Fed, “those sums that the [Cen-Fed] becomes legally obligated to pay as damages because of . . . ‘property damage’ to which this insurance applies.” “This insurance applies to . . . ‘property damage’ only if: [][] 1) The . . . ‘property damage’ is caused by an ‘occurrence’ . . . .” (Italics added.)
c.
Coverage B Indemnity (“Offense Based” Coverage)
Pursuant to the “coverage B” provisions (“personal and advertising injury liability”), Golden Eagle was obligated to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal injury’ or ‘advertising injury’ to which this insurance applies.” “This insurance applies to: [f] 1) ‘Personal injury’ caused by an offense arising out of your business, excluding advertising, publishing, broadcasting or telecasting done by or for you____”
3.
Golden Eagle Had No Duty To Indemnify Cen-Fed Under Coverage A
Coverage A in the CGL policy is occurrence based coverage. It applies to property damage that is caused by an “occurrence.” As noted above, that term is defined in the policy as “an
accident,
including continuous or repeated exposure to substantially the same general harmful conditions.” And “property damage” is defined in the policy as a physical injury to tangible property, including all resulting loss of use of that property or the loss of use of tangible property that is not physically injured.
In light of WMB’s claim, any applicable occurrence based coverage depends on the existence of some “property damage.” However, a review of the allegations in WMB’s complaint shows that there was no claim for any physical injury to tangible property or for any loss of use of tangible property that was not physically injured. Rather, WMB’s claim rested
entirely on Cen-Fed’s alleged breach of the lease and the resulting economic damage,
including the need to replace its safe deposit boxes to the first floor leased premises, which resulted in fewer boxes being rented and the consequent denial of the use that first floor space for other purposes (that is, a loss of rental
income
and loss of
use
of leased space). The jury determined
Cen-Fed’s breaches of the lease constituted a diminution in the value of the lease, that is, the difference between the fair market value of WMB’s leasehold interest if the leased premises were in the promised condition and the fair market value of those premises in their actual condition. WMB’s leasehold interests were not tangible property; and WMB’s claim against Cen-Fed did not seek to recover for damage to or the loss of use of tangible property.
Thus, WMB’s complaint and theory of recovery against Cen-Fed did not constitute claims for “physical injury to tangible property” and therefore they did not constitute claims for “property damage.” Rather, they amounted to claims for
economic harm
suffered by WMB
due to Cen-Fed’s failure to perform its contractual obligations.
As stated in
Waller:
“The property loss section of the standard policy provides coverage for ‘physical injury or destruction of tangible property which occurs during the policy term.’ The focus of coverage for property damage is therefore the property itself, and does not include intangible economic losses, violation of antitrust laws or nonperformance of contractual obligations. (See, e.g.,
Gulf Ins. Co.
v.
LA. Effects Group, Inc.
(9th Cir. 1987) 827 F.2d 574, 578 [no coverage under business general liability policy for insured’s alleged nonperformance of contractual obligations ...];...
Montrose Chemical Corp.
v.
Superior Court
(1993) 6 Cal.4th 287, 303 [24 Cal.Rptr.2d 467, 861 P.2d 1153] [recognizing that ‘a suit seeking recovery for injuries to intangible economic interests is not a suit “of the nature and kind” covered by a CGL policy’] .... As
Giddings
[v.
Industrial Indemnity Co.
(1980) 112 Cal.App.3d 213, 217, 169 Cal.Rptr. 278] observed . . . ‘strictly economic losses like lost profits, loss of goodwill, loss of the anticipated benefit of a bargain, and loss of an investment, do not constitute damage or injury to tangible property covered by a comprehensive general liability policy....’ ”
(Waller, supra,
11 Cal.4th at p. 17, citations omitted; see also
Miller v. Western General Agency, Inc.
(1996) 41 Cal.App.4th 1144 [49 Cal.Rptr.2d 55] [suit based upon sellers’ failure to disclose defective plumbing was not an action seeking recovery for “property damage”].)
Conceptually, Cen-Fed’s claim that the failure to maintain its building in the condition in which it contracted to maintain it is no more a “property damage” claim than the claim of any property buyer who fails to obtain tangible property in the condition promised or warranted. Such claims are for economic loss, not “property damage.” For example, in
St. Paul Fire &
Marine Ins. Co. v. Coss
(1978) 80 Cal.App.3d 888, 892 [145 Cal.Rptr. 836], the court held the insured’s failure to construct and provide a home in a workmanlike manner did not constitute “property damage.” Similarly, in
Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co.
(1977) 76 Cal.App.3d 272 [142 Cal.Rptr. 681], the court held claims against the insured dealer arising from the lease and sale of cars allegedly in breach of implied warranties and express representations as to their condition were not “property damage” claims. The court explained: “There are no allegations suggesting that appellant’s representations caused injury or damage to the automobiles. To the contrary, the damage was to the plaintiffs’ pecuniary interests—the out-of-pocket loss caused by the fact that plaintiffs did not receive full value for the money paid for the purchase and lease of the automobiles. Such loss of anticipated value does not constitute an ‘injury to or destruction of tangible personal property’ as defined in the policy.”
(Id.
at p. 279; see also
Warner
v.
Fire Ins. Exchange
(1991) 230 Cal.App.3d 1029, 1034 [281 Cal.Rptr. 635].)
Although Cen-Fed attempts to do so, it is not entitled to justify an argument for coverage based on speculation about claims that have not been alleged or asserted.
(Gunderson v. Fire Ins. Exchange
(1995) 37 Cal.App.4th 1106, 1114 [44 Cal.Rptr.2d 272]; see also
Friedman Prof. Management Co., Inc. v. Norcal Mutual Ins. Co.
(2004) 120 Cal.App.4th 17, 35 [15 Cal.Rptr.3d 359] [the potentiality rule for duty to defend depends on “possibility of actual indemnity coverage, not the mere existence of a plausible argument”];
Hurley Construction Co. v. State Farm Fire & Casualty Co.
(1992) 10 Cal.App.4th 533, 538 [12 Cal.Rptr.2d 629] [insured’s counsel sought to justify coverage by arguing that the third party complaint might be amended to allege property damage].)
This case is not like those relied on by Cen-Fed where the courts permitted a diminution in value of property as a measure of the plaintiffs’ claimed physical injury to
tangible
property. (See
Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co.
(1959) 51 Cal.2d 558, 565 [334 P.2d 881];
Pruyn
v.
Agricultural Ins. Co.
(1995) 36 Cal.App.4th 500, 510, fn. 6 [42 Cal.Rptr.2d 295];
Eichler Homes, Inc.
v.
Underwriters at Lloyd’s, London
(1965) 238 Cal.App.2d 532, 538 [47 Cal.Rptr. 843].) Here, diminution in value (of its leasehold interest) damages were awarded to the WMB for its
economic
loss in failing to receive the benefit of its lease, a nontangible property right. That was not covered by the terms of the Golden Eagle policies.
(Waller, supra,
11 Cal.4th at pp. 17-18.)
Moreover, Cen-Fed’s failure to discharge its contractual liabilities under the lease agreement was nothing more than a nonaccidental act of breach of contract. That is, whatever the nature of the managerial decisions made by Cen-Fed which led to its failure to fulfill its promised maintenance obligations, they were not the result of a fortuitous accident; and they thus could not have resulted in an “occurrence.” (See, e.g.,
Modern Development Co.
v.
Navigators Ins. Co.
(2003) 111 Cal.App.4th 932, 941-942 [4 Cal.Rptr.3d 528].) Thus, in addition to the absence of “property damage,” it is also clear that the loss sustained by WMB was not caused by an “occurrence.” (See, e.g.,
Stein-Brief Group, Inc. v. Home Indemnity Co.
(1998) 65 Cal.App.4th 364, 372 [76 Cal.Rptr.2d 3].)
It is true that merely because a claimant has framed its complaint to allege a breach of contract coverage will not necessarily be precluded.
(Vandenberg v. Superior Court
(1999) 21 Cal.4th 815, 840 [88 Cal.Rptr.2d 366, 982 P.2d 229].) That is because coverage under a liability policy does not depend on the form of the action or the legal theories asserted by claimant. Rather, coverage is determined by the nature of the loss (e.g., “property damage”) and the risk that caused the loss (i.e., “accident” or “occurrence”).
(Id.
at p. 839.) Thus, irrespective of the form of the action or the theory asserted by the claimant, coverage under liability policy provisions, such as those before us (i.e., coverage A), the existence of coverage will depend upon allegations charging “property damage” caused by an “occurrence.”
(Ray v. Valley Forge Ins. Co.
(1999) 77 Cal.App.4th 1039, 1045-1046 [92 Cal.Rptr.2d 473].) No such claim or allegations were ever made or asserted by WMB nor were they otherwise raised or tried in the underlying action.
We conclude, therefore, that there was no actual or potential coverage, as a matter of law, under the coverage A provisions of the Golden Eagle policies.
4.
Golden Eagle Had No Duty To Indemnify Cen-Fed Under Coverage B
“Personal injury,” is defined as an injury (other than bodily injury) that arises out of one or more of five designated “offenses.” Some of those five offenses specifically refer to offenses affecting “a person,” while others either refer to offenses affecting “a person or organization” or do not designate either.
The pertinent offense for our purposes here is the wrongful eviction or entry into or invasion of the right of private occupancy of a room, dwelling or premises, which the policy specifically makes applicable only to
persons
occupying the premises, not to
persons and/or organizations.
Here, of course, the lessee of the subject leased premises was WMB, and WMB is a corporate organization, not a person. Thus, by its very terms, that premises-based offense is not applicable to Cen-Fed’s
corporate
lessee.
In
Mirpad, LLC v. California Ins. Guarantee Assn.
(2005) 132 Cal.App.4th 1058, 1070 et seq. [34 Cal.Rptr.3d 136]
(Mirpad),
a case that also involved a wrongful eviction claim and the personal injury coverage in a CGL policy with essentially identical language to the wrongful eviction language in the policies which we address here, we held that when an insurance policy consistently distinguishes between persons (natural persons) and organizations, the distinct meanings have to be applied by the courts. Based on the language of that policy, we held that the wrongful eviction offense was directed at victims who were
natural persons,
not organizations.
The same result is compelled here. The
Mirpad
decision, which was filed after the entry of the trial court’s judgment in this matter, makes it clear that there was no coverage, as a matter of law, available to Cen-Fed under the Golden Eagle policy for WMB’s wrongful eviction or entry or invasion of right of privacy claim. Since that was the
sole
clause upon which Cen-Fed relied for its claim that there was coverage under the coverage B provisions of the policy, the principles set out in
Mirpad
are dispositive of the matter of “offense based” coverage.
In light of that conclusion, we need not reach or discuss the potential applicability of the exclusions to the coverage B provisions.
5.
Golden Eagle Is Not Obligated to Pay the Costs and Fees Imposed on Cen-Fed
In the underlying action, WMB was awarded costs of suit against Cen-Fed. This included attorney’s fees awarded pursuant to the attorney’s fee clause in the lease. (See Code of Civ. Proc., § 1033.5; Civ. Code, § 1717, subd. (a).) In the instant action, the trial court ruled that, because Golden Eagle had in fact defended Cen-Fed in the underlying action, Golden Eagle had an obligation to pay those costs of suit in spite of the court’s determination that there was
no coverage under the policies and there never was a duty to defend.
Golden Eagle challenges that ruling.
Under the policies’ supplementary payments provisions for coverage A and coverage B, Golden Eagle promised to pay, “with respect to . . . any ‘suit’ against an insured we defend,” “[a]ll costs taxed against the insured- in the ‘suit.’ ” The policies define the word “suit” as “a civil proceeding in which damages because of ‘bodily injury,’ ‘property damage,’ ‘personal injury’ or ‘advertising injury’ to which this insurance applies are alleged.”
In support of its ruling, the trial court cited
Prichard v. Liberty Mutual Ins. Co.
(2000) 84 Cal.App.4th 890 [101 Cal.Rptr.2d 298]
(Prichard).
In Prichard, the court addressed a supplemental payments provision for payment of an insured’s defense costs that had the same language as the subject policies in the case before us. The
Prichard
court stated the supplementary payments provision “is a function of [Golden Eagle’s] defense obligation, not its indemnity obligation.”
{Id.
at pp. 911-912.) In that case, .the insurer
owed
a duty to defend at least one of the claims asserted against its insured. That, of course, is not the case here; and that distinction makes all the difference.
“The duty to defend depends on whether there is potential [indemnity] liability based on
facts
pled in the complaint or known to [Golden Eagle]. There is no duty ‘where the only potential for liability turns on resolution of a legal question. . . .’ [Citation.]”
(McLaughlin v. National Union Fire Ins. Co.
(1994) 23 Cal.App.4th 1132, 1151 [29 Cal.Rptr.2d 559], original italics.) Thus, if the potential for indemnity liability in this case had turned on disputed
factual
issues, Golden Eagle would have been required to provide a defense at least until the facts were conclusively decided to show that there is no coverage and thus no duty to defend.
(Montrose Chemical Corp. v. Superior Court, supra,
6 Cal.4th at p. 299.)
In contrast to an insurer’s duty to indemnify, which requires a determination of
actual
coverage
(Montrose Chemical Corp.
v.
Admiral Ins. Co.
(1995) 10 Cal.4th 645, 659, fn. 9 [42 Cal.Rptr.2d 324, 913 P.2d 878]), its duty to defend runs to claims that are merely potentially covered.
(Montrose Chemical Corp. v. Superior Court, supra,
6 Cal.4th at p. 295.) But there must be potential coverage for at least one of the claims asserted against the insured. In an action where
none
of the claims is even potentially covered, the insurer has no duty to defend.
(Waller, supra,
11 Cal.4th at p. 29.) “[T]he duty to defend goes to any action seeking damages for any
covered
claim.”
(Buss
v.
Superior Court, supra,
16 Cal.4th at p. 48, italics added.) Thus, “the insurer has a duty to defend as to the claims that are at least potentially covered, but not as to those that are not. [Citation.] Even if the policy’s language were unclear, the hypothetical insured could not have an objectively reasonable expectation otherwise.”
(Id.
at p. 49.)
Since, as we have held, Golden Eagle never had any duty,
as a matter of law,
to indemnify Cen-Fed for the claims asserted by WMB, it likewise never had any duty to defend the action. What impact does that conclusion have on the enforcement of the supplementary payments provision of the Golden Eagle policies? Does it matter that Golden Eagle in fact provided a defense? The trial court answered these questions differently than we do.
The trial court relied on
Prichard, supra,
84 Cal.App.4th 890 and
San Diego Housing Com. v. Industrial Indemnity Co.
(2002) 95 Cal.App.4th 669 [116 Cal.Rptr.2d 103]
(San Diego Housing).
That reliance was misplaced. The trial court erroneously found those cases persuasive to support a rule which, even if correct based on their facts, would not apply to the case before us. The critical and dispositive distinction is that
Prichard,
and
San Diego Housing,
were cases, contrary to this case, where the insurer
did
owe a duty to defend the entire case.
Thus,
Prichard
and
San 'Diego Housing
are profoundly distinct from the instant action, where the trial court correctly determined that the insurer never had a duty to defend
any
cause of action or claim.
The
Prichard
court itself specifically distinguished its circumstances from those found in
Ringler Associates Inc. v. Maryland Casualty Co.
(2000) 80 Cal.App.4th 1165 [96 Cal.Rptr.2d 136], where there never was a duty to defend, but the insurer mistakenly defended its insured.
(Prichard, supra,
84 Cal.App.4th at pp. 902-903.) The case before us is more closely analogous to
Ringler
in that here there never was a potential for coverage from the outset. WMB’s pleadings in the underlying action did not raise a potential for coverage and no claims were asserted at any time except those for breach of the lease contract and the resulting
contract
damages. The case went to the jury on the same breach of contract theory that had been alleged in the initial complaint. The jury entered an award on WMB’s breach of lease cause of action in the form of diminution of leasehold value; that is, economic harm arising from a breach of the lease and not for property damage.
In concluding that a supplementary payment obligation could exist even in the absence of a duty to defend, the trial court ignored analogous case law. In
Amex Assurance Co. v. Allstate Ins. Co.
(2003) 112 Cal.App.4th 1246 [5 Cal.Rptr.3d 744], the court held that an “Additional Protection” provision in an Allstate homeowners policy, analogous to the supplementary payment provision found in the standard form liability policy, would not cover costs where there was no duty to defend. The court stated: “Amex argues that the words ‘any suit’ mean Allstate has a duty to pay for the cost of [the insured’s] defense, regardless whether it had a duty to provide defense counsel or to indemnify. But Amex takes the words out of context. No reasonable insured would expect Allstate to pay defense costs for any and every suit, regardless whether the suit potentially seeks damages within the coverage of the policy.”
(Id.
at p. 1253; see also
Home Indemnity Co. v. Avol
(C.D.Cal. 1989) 706 F.Supp. 728, 729-730, fn. 2 [which noted that supplementary payments coverage would not apply absent some underlying coverage].)
In addition, and perhaps most important, the trial court’s decision failed to recognize the anomalous consequences that flow from a rule permitting the enforcement of the supplementary payments clause in circumstances such as those before us. The trial court’s ruling, if taken to its logical conclusion, would lead to results which are inconsistent with the fundamental principles underlying the duty to defend. The trial court’s decision would discourage, rather than encourage, an insurer to defend an insured in cases of doubtful coverage. An insurer that questions coverage is entitled to reserve its rights and then go ahead and provide its insured with a defense and obtain reimbursement of its defense costs where it is subsequently determined that no defense was ever owed.
(Scottsdale, supra,
36 Cal.4th at p. 657.)
The principles establishing this process are now settled. As the Supreme Court recently put it, “we have made clear that where the third party suit never presented any potential for policy coverage, the duty to defend does not arise in the first instance, and the insurer may properly deny a defense. Moreover, the law governing the insurer’s duty to defend need not be settled at the time the insurer makes its decision. As several courts have explained,
subsequent
case law can establish, in hindsight, that no duty to defend ever existed. ‘If the terms of the policy provide no potential for coverage, ... the insurer acts properly in denying a defense
even if that duty is later evaluated under case law that did not exist at the time of the defense tender.
[Citations.]’ [Citations.] [][]... These principles are equally true where, as here, the insurer does not deny a defense at the outset, but instead elects to provide one under a reservation of its right to reimbursement. By law applied in hindsight, courts can determine that no potential for coverage, and thus no duty to defend, ever existed. If that conclusion is reached, the insurer, having reserved its right, may recover from its insured the costs it expended to provide a defense which, under its contract of insurance, it was never obliged to furnish.”
(Scottsdale, supra,
36 Cal.4th at pp. 657-658, original italics.). This is precisely what has occurred in this case.
Because of the trial court’s erroneous ruling, Golden Eagle’s decision to provide a defense to Cen-Fed while it sought declaratory relief as to the existence of coverage exposed it to an unfair and prejudicial burden. Had it denied coverage and refused to defend, Golden Eagle would have avoided incurring any defense costs on Cen-Fed’s behalf; and at the same time, it would not now have exposure for the costs and attorney’s fee award entered against Cen-Fed under the supplementary payments provision. By electing to
err on the side of caution and prudence, and defending under a reservation of rights while seeking declaratory relief on the coverage .issue, Golden Eagle incurred many thousands of dollars in defense costs; and, as if to demonstrate that no good deed goes unpunished, the result of its protective action has been exposure to a very substantial cost and attorney’s fee burden under the policy’s supplementary payments clause.
The trial court’s literal application of the supplementary payments clause to a case where no defense duty ever existed undermines the well-settled policy of encouraging insurers to step forward and provide a defense even in those cases of doubtful or disputed coverage. To endorse the trial court’s ruling would effectively penalize the insurer providing a conditional defense to its insured and would create a substantial disincentive for insurers to do so.
The trial court’s judgment regarding the supplementary payments clause is also inconsistent with an insurer’s right to seek reimbursement of defense costs where it is determined that no defense was owed and the insurer has provided a defense under a full reservation of rights.
(Scottsdale, supra,
36 Cal.4th at pp. 657-658.) If, as
Scottsdale
makes clear, Golden Eagle would be entitled to recoup from Gen-Fed all of its properly reserved defense costs, then why would that not also extend to any supplementary payments obligation it might otherwise have under a literal reading of the policy. In this case, it seems worse than anomalous to allow Golden Eagle to recover its own defense costs, but then turn around and require it to pay the costs and attorney’s fees awarded against Gen-Fed. The liability for such supplementary payment is an integral part of the Golden Eagle defense burden. (See
Insurance Co. of North America v. National American Ins. Co.
(1995) 37 Cal.App.4th 195, 206-207 [43 Cal.Rptr.2d 518].)
Since no defense liability ever existed, Golden Eagle should likewise have no obligation under the supplementary payments provision. That clause must necessarily be read as applying
only
to those cases where the insurer actually owed a duty to defend. To read it otherwise conflicts with common sense, is contrary to the public policy of encouraging rather than discouraging liability insurers to provide a defense to an insured, and obviously would not be within the
objectively
reasonable expectations of any party to the policy.
DISPOSITION
The fourth paragraph of the judgment is amended to state, with respect to Golden Eagle’s request for declaratory relief on the issue of whether Golden Eagle has a duty to pay the costs of suit, including attorney’s fees, awarded to WMB in the underlying action, that no such duty exists because there never was a duty to defend the underlying action and Golden Eagle is not liable to pay such costs and attorney’s fees. As so amended, the judgment is affirmed. Golden Eagle shall recover its costs on appeal.
Klein, P. L, and Aldrich, J., concurred.
A petition for a rehearing was denied April 11, 2007, and the petition of defendants and appellants for review by the Supreme Court was denied June 20, 2007, S152323.