Where’s The Beef? In California, Claims Brought By Residents Who Do Not Allege Compensatory Damages May Not Be Covered By An HOA’s Insurance Policy


By: Nick Rogers
Insurance companies may not have a duty to defend homeowner associations or their volunteer board members when homeowners do not demand compensation. I have represented a number of clients sued for violating provisions of California’s Davis-Stirling Act that regulate homeowner association elections. In such cases, plaintiffs often request injunctive and declaratory relief invalidating a prior election or an order directing an association to hold a new election and do not demand compensatory damages. A recent California appellate opinion may have broad ramifications on coverage issues implicated by statutory claims arising from certain statutory provisions. (San Miguel Community Association v. State Farm General Insurance Company (2013) 220 Cal.App.4th 798.)
In San Miguel Community Association, two residents complained their association was not enforcing parking restrictions, replacing fire signs, or providing adequate notice of election results. The residents demanded mediation, which proved unsuccessful and then filed suit. At each stage of the litigation the association tendered the claim to State Farm. State Farm denied the claim because in the absence of any demand for compensatory damages there was no allegation of “bodily injury, property damage, personal injury, or advertising injury” as required under their general liability policy or any request for “monetary damages” as required under their directors and officers policy.
The residents’ amended complaint, however, sought compensatory damages. This time State Farm agreed to defend the lawsuit, but specified its obligation to provide defense commenced when the association tendered the amended complaint. State Farm refused to compensate the association for costs incurred in defending the case prior to that time. Upon resolution of the underlying civil action, the association sued State Farm alleging breach of contract and bad faith. State Farm moved for summary judgment contending the policy did not obligate it to provide a defense to any claim unless “covered damages” were sought by the residents, which did not occur until the amended complaint was filed. The trial court entered judgment in State Farm’s favor and an appellate court affirmed.
In light of statutory provisions of the Davis-Stirling Act including, but not limited to Civil Code section 1363.09 (a), [Civil Code section 5145 (a) as of January 1, 2014], which affords a plaintiff the right to solely seek injunctive relief for violation of provisions regulating homeowner association elections, the San Miguel Community Association opinion may effect coverage determinations in 2014. It may also result in the creative theories for compensatory damages in order to trigger insurance coverage for Davis-Stirling claims. Volunteer board members, as well as members of any homeowners’ association subject to provisions of the Davis-Stirling Act, should be aware that in light of this opinion certain claims in California may not be covered under their insurance policies.