By Duane W. Shewaga
Adleson, Hess & Kelly, APC
Campbell, California
In recent years, general liability and professional liability insurers have increasingly been refusing to defend or indemnify lawsuits brought by trustors against trustees and lenders alleging wrongful eviction or wrongful foreclosure. Insurers have been arguing that such claims are not covered under liability policies because such policies do not cover breach of contract actions. The insurers contend that because the eviction or foreclosure is related to a trustee's sale under the terms of a promissory note or deed of trust, such actions sound in contract, not tort, and are not covered.
The California Supreme Court has now addressed the issue of whether lawsuits
which may arise out of a contract between the plaintiff and defendant but could
be brought in tort are covered under a liability policy. The California Trustee's
Association joined other trade organizations in filing an amicus brief before
the California Supreme Court in the recently decided case of Vandenberg
v. Superior Court (Centennial Insurance Company). The California Supreme
Court held that an insurer may owe a duty to cover a lawsuit which is pleaded
as a breach of contract action, where it could just as easily have been plead
as a tort claim.
The Vandenberg case involved a suit by a landlord against his tenants
for contaminating his property by failing to maintain leaking underground oil
storage tanks. The tenants tendered the suit to their general liability carriers.
The underlying claim was arbitrated. The arbitrator awarded $4 million in favor
of the landlord, finding that the tenants breached their lease by contaminating
the property. The award was confirmed by the Superior Court.
The insurers refused to pay the judgment contending that their policies did
not cover breach of contract damages citing a long line of prior cases holding
that the phrase "legally obligated to pay as damages" contained in
a liability policy meant that their policies covered only tort claims.
In the subsequent bad faith action, the trial court granted the insurers' motions
for summary judgment holding, among other things, that the arbitration award
was for contractual damages and thus was not covered. The Court of Appeal reversed.
The Supreme Court granted review.
The Supreme Court held that the arbitration award may be covered even though
the award was entered on a breach of contract theory. The court analyzed prior
case law holding that the phrase "legally obligated to pay as damages" meant
that insurance policies cover only tort claims. The Supreme Court held that
this line of cases resulted from a misreading of the Ritchie v. Anchor
Casualty Co. case which involved policy language making the distinction
between liability imposed "by law or by written contract".
The Supreme Court noted that a reasonable layperson would not understand that
the phrase "legally obligated to pay as damages" would cover claims
only plead in tort and exclude claims plead on a theory of breach of contract.
The Court also noted such an interpretation would be unfair, as some claims
may be plead either in tort or contract. Coverage is not determined based upon
how the plaintiff chooses to plead his or her claim. Instead, coverage is determined "on
the nature of the risk and the injury".
The Vandenberg case has now done away with nearly fifteen earlier
Court of Appeal and federal court cases in which insurance companies have been
citing for the proposition that any lawsuit tenuously related to a contract
between the parties is never covered under a liability policy. It is important
to keep this case in mind the next time you tender a case to your insurance
carrier.