Opinion
No. C-03-3399 SC
November 5, 2003
ORDER REMANDING CASE TO BANKRUPTCY COURT FOR FURTHER PROCEEDINGS
I. INTRODUCTION
On or about January 15, 1999, Debtor Captain Blyther's Inc. ("Captain Blyther's") filed a complaint in Bankruptcy Court against the City of Martinez ("Martinez"). Martinez requested that New Hampshire Insurance Company ("New Hampshire") provide it a defense to the proceeding. New Hampshire refused this request, stating that Captain Blyther's claims against Martinez were not covered under Martinez's insurance policy. Martinez then filed its third party complaint against New Hampshire. On April 25, 2002, New Hampshire filed a motion for summary judgment against Martinez which was granted by the Bankruptcy Court. Martinez now appeals the Bankruptcy Court's grant of summary judgment to New Hampshire. Having reviewed the papers and relevant case law and for the reasons discussed below, this Court reverses the Bankruptcy Court's grant of summary judgment and remands this case back to the Bankruptcy Court for further proceedings consistent with the principles articulated in this order.
II. BACKGROUND
Captain Blyther's began as a restaurant in Benecia, California. Appellee's Br. at 1. Alfred John Schlette has been the sole officer, director and shareholder of Captain Blyther's at all relevant times. In the spring of 1997, a representative from the City of Martinez spoke with Mr. Schlette about opening a new restaurant at the Martinez Marina.Id. They eventually reached an agreement and, on June 1, 1997, Captain Blyther's entered into a written contract (the "Lease") with Martinez to lease a building located at the Martinez Marina (hereinafter referred to as "Restaurant" or the "premises"). The Lease was for a period of two years, and it required Captain Blyther's to obtain insurance for the premises and to name Martinez as an additional insured. For purposes of this motion, New Hampshire has stipulated that Captain Blyther's obtained a New Hampshire insurance policy ("Policy") that was in effect during all relevant times and that Martinez was an additional named insured under the Policy.
The following Policy language is relevant to this motion.
COMMERCIAL LIABILITY COVERAGE FORM
A. Coverage
1. Business Liability
F. LIABILITY AND MEDICAL EXPENSES DEFINITIONS
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury," "property damage," "personal injury" or "advertising injury" to which this insurance applied. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" and settle any claim or "suit" that may result. . . .
10. "Personal Injury" means injury, other than "bodily injury," arising out of one or more of the following offenses:
a. The 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 its owner, landlord, or lessor.
Appellee's Br. at 3-5 (emphasis added).
Thus, the definition of "personal injury" sets forth three general types of personal injuries: (1) wrongful eviction; (2) wrongful entry; and (3) invasion of the right of private occupancy. Martinez alleges that it is entitled to a defense based on the first (wrongful eviction) and third (invasion of the right of private occupancy) types of personal injuries.
The following facts are assumed as true for purposes of this appeal only. The Restaurant was forced to close for lunch on December 14, 1997 because of flooding apparently caused by tidal intrusion. Appellee's Br. at 5. The Restaurant also closed for lunch from flooding problems on the following days in 1998: January 10, 11, 12, 26, 27, 28, 29 and February 2, 3 and every day from the 5th until it was permanently closed sometime between February 6th and 8th. Id. On the flood days, high tides flooded the parking lot adjacent to the Restaurant where most Restaurant patrons parked. The flood waters also surrounded and went under the Restaurant, making it difficult for patrons to enter and exit without having to walk through ankle to knee-high water. The Restaurant itself was elevated, and water did not actually enter the Restaurant. Id.
The Lease states in relevant part:
13(B) . . . The parking lots which serve the Restaurant are not part of the leased premises. . . . LESSOR . . . shall also maintain the public waterways within the harbor, . . . To the extent practicable and feasible, LESSOR will make available at LESSEE'S request a reasonable number of sandbags for flood or high tide protection. In this connection, therefore, LESSEE acknowledges that there exists a risk that flooding and tidal action will cause water to inundate the premises and damage same and LESSEE'S equipment, . . . .
Appellee's Br. at 1-2.
Mr. Schlette testified that he finally made the decision to suspend operations of the restaurant based on the increased frequency of the tidal intrusion, the amount of money the restaurant was allegedly losing, the tide tables which allegedly indicated that there would be many high tides during the upcoming weeks and Martinez1 alleged failure to address the tidal intrusion problem. Id.
On June 5, 1998, Captain Blyther's filed a Chapter 11 Bankruptcy Petition. On or about January 15, 1999, Captain Blyther's filed a complaint in the Bankruptcy Court against Martinez, asserting five different causes of action. The first cause of action is for "Breach of Lease — Breach of Covenant to Maintain Parking Lot" and alleges that Martinez failed to maintain the parking lot in accordance with the Lease. The second claim asserts that Martinez's failure to maintain the adjacent parking lot in accordance with the Lease constituted a material breach of the covenant of quiet enjoyment. The third cause of action alleges a "Breach of Implied Covenant of Good Faith and Fair Dealing." The fourth cause of action alleges that the failure of the adjacent parking lot to adequately serve the Restaurant constituted a material breach of warranty. The fifth cause of action is for "Unjust Enrichment" and asserts that Martinez knew or had reason to know that the adjacent parking lot was subject to flooding, and it either knowingly, intentionally or negligently failed to disclose such a fact. Captain Blyther's seeks over $3,000,000 in damages, including lost prospective profits for twenty years. Appellee's Br. at 7-8. In July of 1998, Captain Blyther's and Martinez agreed to terminate the Lease early so that Martinez could mitigate damages by finding a new tenant.
Martinez requested that New Hampshire provide it a defense to the proceeding initiated by Captain Blyther's. New Hampshire refused to provide coverage. Martinez then filed its third party complaint against New Hampshire. The first cause of action is for breach of contract and alleges that Martinez is an additional insured under the Policy and, as such, is entitled to a defense in the action brought against it by Captain Blyther's. The second cause of action is for declaratory relief, and the third cause of action is for breach of the covenant of good faith and fair dealing based on New Hampshire's failure to provide a defense. On April 25, 2002, New Hampshire filed its motion for summary judgment, seeking judgment as a matter of law against Martinez on its complaint. New Hampshire moved for summary adjudication on the ground that Captain Blyther's claims against Martinez did not fall within the Policy's definition of "personal injury," and thus it had no duty to defend or indemnify Martinez. Martinez argued that there was a potential for coverage because the flooding (1) constituted a "wrongful eviction" under the Policy and (2) was an invasion of its "right to private occupancy." On June 22, 2002, the Bankruptcy Court granted New Hampshire's motion, finding that New Hampshire had no duty under the Policy to defend Martinez in its case with Captain Blyther's. Martinez now appeals the Bankruptcy Court's grant of summary judgment to New Hampshire. For the reasons explained below, this Court reverses the Bankruptcy Court's award of summary judgment and remands this case to the Bankruptcy Court for further proceedings consistent with the principles articulated in this order.
The posture of this case is unorthodox and susceptible to confusion. The Policy was taken out by Captain Blythers, and Martinez was listed as an additional insured. Apparently there is no prohibition against one insured being covered under the Policy for claims made against them by someone insured under the same policy. Furthermore, in this appeal Martinez is arguing that Captain Blyther's claims against Martinez create a potential for coverage under the Policy because Captain Blyther's complaint can be read as claiming damages based on, inter alia, a "wrongful eviction" or "invasion of the right of private occupancy." Martinez is not alleging that these claims have any merit; in fact it expressly reserves the right to argue to the contrary throughout its brief, and undoubtedly it will vigorously contest these claims subsequently. For the purposes of this appeal, Martinez is simply trying to show that Captain Blyther's claims against it potentially fall within the Policy coverage, which would require New Hampshire to provide Martinez with a defense.
III. LEGAL STANDARD A. Duty to Defend
A liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. Horace Mann Ins. Co. v. Barbara B, 4 Cal.4th 1076, 1081 (1993). The duty to defend is broader than the duty to indemnify, meaning that an insurer may owe a duty to defend its insured in an action in which no damages are ultimately awarded. Id. "Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured's favor."Id. In order to trigger an insurer's duty to defend, an insured need only show the bare possibility of coverage. Montrose Chemical Corp. v. Superior Court, 6 Cal.4th 287, 295-296 (1993). "In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot."Id. at 300.
The scope of the duty to defend does not depend on the labels given to the causes of action in the underlying complaint. Rather, it rests on whether the alleged facts or known extrinsic facts reveal a possibility that the claim may be covered by the policy. See Hurley Constr. Co. v. State Farm Fire Cas. Co., 10 Cal.App.4th 533, 538 (1992). An "insurer's duty to defend is measured by the nature and kinds of risks covered by the policy."Rosen v. Nations Title Ins. Co., 56 Cal.App.4th 1489, 1497 (1997). In addition, while we must resolve any doubt as to whether the facts establish a duty to defend in the insured's favor, "[w]e may not impose coverage by adopting a strained or absurd interpretation in order to create an ambiguity where none exists." Id. B. Summary Judgment
A party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and they are entitled to judgment as a matter of law. Aguillar v. Atlantic Richfield Co., 25 Cal.4th 826, 850 (2001). In a duty to defend case, an insurer moving for summary judgment "must establish the absence of any . . . potential" for coverage, i.e., that the underlying complaint "can by no conceivable theory raise a single issue which could bring it within the policy coverage." Montrose, 6 Cal.4th at 300. In determining the existence of a duty to defend on a summary judgment motion, this Court conducts a de novo review, viewing the evidence in the light most favorable to the nonmoving party.Winterrowd v. American General Annuity Ins., 321 F.3d 933, 937 (9th Cir. 2003); Walton v. Westfar, 290 F.3d 1199, 1204 (9th Cir. 2001). The interpretation of the terms of an insurance policy is a question of law. Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, (1995).
IV. DISCUSSION
Martinez opposes New Hampshire's motion for summary judgment on two grounds. First, it contends that the underlying claims can be seen as alleging constructive eviction, which it argues would fall under the Policy term of "wrongful eviction." Second, Martinez maintains that the flooding in this case potentially invaded Captain Blyther's "right of private occupancy" as that term has been construed by the courts. Because we agree with Martinez's second argument, we will not address whether or not Captain Blyther's can bring a claim for constructive eviction under the facts of this case.
A. "Invasion of the Right of Private Occupancy"
The clause we are asked to interpret here is a common one, adopted by the insurance industry as part of the standard broad form comprehensive general liability endorsement. Martin Marietta Corp. v. Ins. Co. of N. Am., 47 Cal.Rptr.2d 670, 675 (1995). Consequently, courts have had much occasion to interpret its meaning. For the facts of an underlying action to provide a basis for a potential invasion of a right of occupancy claim and to create a duty to defend on the part of the insurer, there must be some invasion of an enforceable possessory interest in real property and not just an interference with the use or enjoyment of real property. Evergrow Industrial Co., Inc. v. Travelers Ins. Co., 2002 WL 1288038 at * 1, (9th Cir.). InSterling Builders, Inc. v. United Nat. Ins. Co., 79 Cal.App.4th 105 (2000), the Court rejected an argument that a personal injury clause in an insurance policy covering a "wrongful entry or eviction or other invasion of the right of private occupancy" obligated the insurer to defend an action for a "noninvasive interference with the use and enjoyment of property." The plaintiffs in the underlying action had sued the insured for fraudulently obtaining an interest (an easement) in their real property. The court concluded that "claims that do not involve the physical occupation of or trespass upon real property are not within the meaning of the phrase, even though the claim may entail interference with rights relating to such property." Sterling, 79 Cal.App.4th at 108.
Many of the cases we have reviewed interpret a slightly different version of this clause, one which places the word "other" before the phrase "invasion of the right of private occupancy." To the extent this distinction has any significance regarding the scope of coverage under this provision, it has no effect on the disposition of this case.
Courts in other states have reached a similar result. InDecorative Center of Houston v. Employers Cas. Co., 833 S.W.2d 257, 261 (Tex.Ct.App. 1992), the Court stated that "the right of `private occupancy' can only refer to those rights associated with an individual's act of inhabiting the premises, and not to rights associated with the individual's right to use and enjoy the inhabited premises." InKruger Commodities, Inc. v. United States Fidelity and Guaranty, 923 F. Supp. 1474 (M.D. Ala. 1996), the Court quoted the following statement from the Supreme Court of Nebraska: "[I]n other words, the right of private occupancy is the legal right to occupy premises, not the right to enjoy occupying those premises."Id., quoting Columbia Nat'l. Ins, v. Pacesetter Homes Inc., 532 N.W.3d 1, 9 (1995).
1. Underlying Complaint in the Case Sub Judice
Based on these principles, this Court finds that there is a potential for coverage of the underlying complaint in this action under the "invasion of the right of private occupancy" provision in the Policy. The gravamen of the underlying action is a claim for damages suffered as a result of having to close the restaurant and evacuate the building. Flooding allegedly caused the Restaurant to be inaccessible to the public, which forced Captain Blyther's to close the Restaurant and execute a stipulation with the City of Martinez terminating the Lease pre-maturely. We find that these allegations potentially satisfy the requirements for an "invasion of the right of private occupancy" claim.
First, in the context of a commercial lease, the rights to continue operating your business and have your establishment remain accessible to the public are arguably part of "those rights associated with an individual's act of inhabiting the premises." In this case, the right of private occupancy would seem to include the right to stay in the building and operate the Restaurant. Captain Blyther's had a possessory interest in the premises for a number of years. Being forced to terminate the Lease and leave the building because customers can no longer gain access would thus be an invasion of that right. The primary source of confusion on this point stems from the fact that in the context of a commercial lease, being prevented from "inhabiting" or "occupying" the leased premises necessarily entails being prevented from "using" the premises. That is, if you are blocked from accessing your restaurant, you can neither "inhabit" nor "use" it. This becomes problematic when courts state that "the right of `private occupancy' can only refer to those rights associated with an individual's act of inhabiting the premises and not to rights associated with the individual's right to use and enjoy the inhabited premises." Decorative Center, 833 S.W.2d at 261. However, we need not resolve this confusion because, as stated above, we find that the facts of this case create the possibility that Captain Blyther's right to "occupy" the Restaurant was invaded. As discussed above, "Personal injury liability" coverage is triggered by the offense, not the injury or damages that a plaintiff suffers. Consistent with this principle, the offense claimed against the insured in the underlying action here is the denial of access to the real property it had leased. It is true that most of the damages claimed by Captain Blyther's have to do with the "use" of this property, but the offense constituted an invasion of its right to occupy, indeed even to enter, the real property it had leased. Thus, this complaint is potentially covered by the "personal injury liability" provisions of the New Hampshire Policy.
Second, we find that the flooding in this case has the potential to meet the requirement for a "physical" invasion of real property. The Court in Sterling Builders also addressed the meaning of the "invasion clause." The court began by looking at several definitions contained in the Oxford English Dictionary in its effort to determine the meaning of the term "invasion." Ultimately, the court concluded that "invasion" denotes a "harmful incursion." Sterling Builders, 79 Cal.App.4th at 112. An incursion "entails the idea of going into something;" it does not include, e.g., obtaining something by fraud or "tricking people into believing they had a right they never had in the first place."Id. We find that the alleged flooding has the potential to be considered a "harmful incursion." The flood waters allegedly surrounded and went under the Restaurant, thereby physically invading the real property around and underneath the Restaurant and physically interfering with Captain Blyther's ability to occupy it. We therefore find that these allegations satisfy the "invasion clause".
New Hampshire argues that because the water never entered the Restaurant itself, there can be no physical invasion under the Policy. In effect, New Hampshire is arguing that in order to meet the requirement of an invasion, there must be an actual incursion or entry into the leased premises. However, we do not read the Policy or the cases that have interpreted this language as imposing such a requirement. We read the Policy as requiring an invasion of the "right of private occupancy," not an invasion of the "leased premises." While this distinction will likely be trivial in most cases, there is a possibility that it will prove relevant to Captain Blyther's claims. Captain Blyther's might nonethless be able to show that it was prevented from inhabiting the Restaurant because of the flooding that surrounded and went under the premises. New Hampshire cannot eliminate the possibility of a triable issue of fact merely because the flooding never reached the floor of the Restaurant. Accordingly, New Hampshire is not entitled to judgment as a matter of law.
V. CONCLUSION
The evidence, when viewed in the light most favorable to Martinez, sufficiently creates a triable controversy as to whether there was a wrongful eviction or entry or invasion of the right of private occupancy. Therefore, the grant of summary judgment to New Hampshire is hereby REVERSED, and this case is REMANDED to the U.S. Bankruptcy Court for the Northern District of California (Oakland Division) for further proceedings consistent with the principles articulated in this order.
IT IS SO ORDERED.