Opinion ID: 2585557
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Heading: An Insurer's Duty to Defend Claim for Loss to Intangible Property

Text: A standard general liability insurer has a duty to defend and indemnify for a loss to tangible property only. The property loss section of these policies provides coverage for physical injury, loss, or destruction of tangible property, and the focus of the property damage coverage is the property itself. ( Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 17, 44 Cal.Rptr.2d 370, 900 P.2d 619 ( Waller ).) For our purposes, it is important to note that the policies are not intended to cover intangible property losses, including loss of an investment, loss of goodwill or loss of intangible property use. ( Id. at pp. 17-18, 44 Cal.Rptr.2d 370, 900 P.2d 619; Gunderson, supra, 37 Cal.App.4th at p. 1109, 44 Cal.Rptr.2d 272.) Our inquiry here is limited to the Kazis' claim, as stated in their action against the insurers, that the insurers owed a duty to defend them in the Tollakson action and acted in bad faith in refusing to do so. [1] We have consistently observed that insurance companies must defend insureds for actions that give rise to a potential for indemnity. ( Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168 ( Gray ).) We have recognized insureds' expectations that they have the right to call on the insurer's superior resources for the defense of third party claims. ( Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153 ( Montrose ).) Moreover, the insurers' duty to defend is broader than their duty to indemnify. ( Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792.) Courts first determine whether insurers have a duty to defend by comparing the allegations of the complaint with the terms of the policy. ( Waller, supra, 11 Cal.4th at p. 19, 44 Cal.Rptr.2d 370, 900 P.2d 619.) Regarding the policy, contract terms are interpreted in their `ordinary and popular sense.' ( Id. at p. 18, 44 Cal.Rptr.2d 370, 900 P.2d 619.) Any ambiguous terms are resolved in the insureds' favor, consistent with the insureds' reasonable expectations. ( Montrose, supra, 6 Cal.4th at p. 299, 24 Cal. Rptr.2d 467, 861 P.2d 1153.) Ambiguous terms are those capable of two or more reasonable constructions. ( Waller, supra, 11 Cal.4th at p. 18, 44 Cal.Rptr.2d 370, 900 P.2d 619.) Regarding the complaint, insurers must defend a lawsuit that  potentially seeks damages within the coverage of the policy. ( Gray, supra, 65 Cal.2d at p. 275, 54 Cal.Rptr. 104, 419 P.2d 168.) The insurers' duty to defend does not depend on whether damages are ultimately awarded. ( Montrose, supra, 6 Cal.4th at p. 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) In fact, the duty to defend may `exist even where coverage is in doubt and ultimately does not develop,' and it continues until there is no potential for coverage. ( Ibid. ) Any doubt as to whether the facts establish that the duty to defend exists must be resolved in the insured's favor. ( Id. at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) When `there is no possibility of coverage, there is no duty to defend. ( Waller, supra, 11 Cal.4th at p. 19, 44 Cal.Rptr.2d 370, 900 P.2d 619.) In 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. ( Id. at p. 18, 44 Cal.Rptr.2d 370, 900 P.2d 619.) When damages that the liability policy covers flow from damages that the policy does not cover, no duty to defend exists. In Waller, emotional distress (bodily harm that that particular liability policy covered) flowed from the economic loss that the comprehensive liability policy did not cover. ( Waller, supra, 11 Cal.4th at p. 17, 44 Cal.Rptr.2d 370, 900 P.2d 619.) There, we held that the insurer had no duty to defend. ( Id. at p. 27, 44 Cal. Rptr.2d 370, 900 P.2d 619.) Here, we consider whether the liability insurance policies potentially cover the source of the damages (loss of right-of-way) or the consequential damages (alleged devaluation and loss of rental value of Parcel B). ( Gunderson, supra, 37 Cal.App.4th at p. 1109, 44 Cal.Rptr.2d 272.) Our conclusion will rest on a determination whether the Court of Appeal erred in failing to consider the easement's legal meaning in light of the insurance contract. First, we look to the policies' definition of the term tangible property. Tangible property is not ambiguous, and coverage therefore does not turn on alternative meanings. Consistent with an insured's reasonable expectations, tangible property refers to things that can be touched, seen, and smelled. (See Warner v. Fire Ins. Exchange (1991) 230 Cal.App.3d 1029, 1034, 281 Cal.Rptr. 635.) To construe tangible property as including a legal interest in an easement or in property requires a strained and farfetched interpretation. ( Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 219, 169 Cal. Rptr. 278.) Instead, an easement is a nonpossessory `interest in the land of another that gives its owner the right to use the land of another or to prevent the property owner from using his land.' ( County Sanitation Dist. v. Watson Land Co. (1993) 17 Cal.App.4th 1268, 1278, 22 Cal.Rptr.2d 117, quoting 5 Miller & Starr, Cal. Real Estate (2d ed. 1989) Easements, §§ 15:1, 15:5, pp. 389, 400; see now 6 Miller & Starr, Cal. Real Estate supra, Easements, §§ 15:1, 15:5, pp. 4, 16.) An easement right is akin to goodwill, an anticipated benefit of a bargain, or an investment, none of which is considered tangible property. ( Giddings v. Industrial Indemnity Co., supra, 112 Cal. App.3d at p. 219, 169 Cal.Rptr. 278.) It is especially important to distinguish an easement right from fee simple property ownership. (See Highland Realty Co. v. City of San Rafael (1956) 46 Cal.2d 669, 677-678, 298 P.2d 15; City of Long Beach v. Daugherty (1977) 75 Cal. App.3d 972, 977, 142 Cal.Rptr. 593.) Fee simple title provides an owner the right to the surface and to everything permanently situated beneath or above it. (Civ.Code, § 829.) By contrast, an appurtenant easement is a burden on land that creates a right-of-way or the right to use the land only. (Civ.Code, § 801.) It represents a limited privilege to use the land of another for the benefit of the easement holder's land, but does not create an interest in the land itself. ( Camp Meeker Water System, Inc. v. Public Utilities Com. (1990) 51 Cal.3d 845, 865, 274 Cal.Rptr. 678, 799 P.2d 758, 6 Miller & Starr, Cal Real Estate, supra, Easements, § 15:5, pp. 16-18; 4 Powell on Real Property (1999) Easements and Licenses, § 34.02[2][d], p. 34-17.) An easement is therefore an incorporeal or intangible property right that does not relate to physical objects but is instead imposed on the servient land to benefit the dominant tenement land. ( City & County of San Francisco v. Calderwood (1867) 31 Cal. 585, 589-590; Wood v. Truckee Turnpike Co. (1864) 24 Cal. 474, 479; City of Hay ward v. Mohr (1958) 160 Cal.App.2d 427, 431-432, 325 P.2d 209; 6 Miller & Starr, supra, Cal. Real Estate, Fixtures, § 17:3, pp. 7-8.) Being incorporeal, the right to an easement is limited to the intangible benefit of access to the easement holder's property. ( Fresno St. R. Co. v. Southern Pac. R. Co. (1901) 135 Cal. 202, 203, 67 P. 773.) In other words, it is an intangible legal right. The owner of the dominant tenement may maintain an action for the enforcement of this intangible right and may recover damages from a party for obstructing the easement. (Civ. Code, § 809; Moylan v. Dykes (1986) 181 Cal.App.3d 561, 574, 226 Cal.Rptr. 673 ( Moylan ).) Awardable damages compensate the plaintiff for loss of use of the easement and the diminished value of the lot it benefited. ( Moylan, supra, 181 Cal. App.3d at p. 574, 226 Cal.Rptr. 673.) The ability to recover damages for obstruction of an easement, however, does not change the intangible nature of the property right for purposes of interpreting insurance liability coverage. (See Gunderson, supra, 37 Cal.App.4th at p. 1119, 44 Cal.Rptr.2d 272.) As a matter of law, therefore, an easement, representing only a nonpossessory right to use another's property, is not tangible property. As we will conclude, any damages the Tollaksons claimed were for economic loss due to loss of use of the easement. We will therefore conclude that the several liability insurance policies before us provided the Kazis with no potential coverage, and therefore no duty to defend, the Tollaksons' claim for intangible losses.