Court Opinion

ID: 1042671
Source: CourtListenerOpinion
Date Created: 2013-10-01 19:52:45.307971+00
Date Added: 2024-06-11T12:18:50.529593
License: Public Domain

Filed 10/1/13 San Miguel Community Assn. v. State Farm General Ins. CA4/

                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FOURTH APPELLATE DISTRICT

                                                 DIVISION THREE

SAN MIGUEL COMMUNITY
ASSOCIATION et al.,
                                                                       G047738
     Plaintiffs and Appellants,
                                                                       (Super. Ct. No. 30-2011-00478236)
         v.
                                                                       OPINION
STATE FARM GENERAL INSURANCE
COMPANY,

     Defendant and Respondent.

                   Appeal from a judgment of the Superior Court of Orange County, Ronald
L. Bauer, Judge. Affirmed.
                   Samuels, Green & Steel, Orlando F. Cabanday and Frederick H. Choi for
Plaintiffs and Appellants.
                   LHB Pacific Law Partners, Michael J. McGuire and Matthew F. Batezel for
Defendant and Respondent.

                                             *               *               *
              Question: When an insurance company issues a liability policy, agreeing to
indemnify its insured against a third party claim for damages covered under the policy,
and to defend the insured against any such claim, does the insurer have a duty to defend
the insured against a third party lawsuit seeking injunctive relief but no compensatory
damages? Answer: No. The third party‟s failure to seek compensatory damages against
the insured means the dispute is not a claim for damages under the policy. The insurer‟s
defense obligation requires it to provide the insured with a defense against a claim
seeking damages potentially payable under the policy, not to defend the insured‟s honor
or otherwise assist it in resolving a nonmonetary dispute.
              Here, appellants San Miguel Community Association and William Beggs
sued State Farm General Insurance Company, alleging it breached obligations to them
under a liability insurance policy by refusing to reimburse them for the cost of defending
the early stages of a lawsuit in which the plaintiffs had initially sought only injunctive
relief to enforce parking restrictions within the community, plus an award of punitive
damages. When the third party plaintiffs later amended their pleading to include a claim
for recovery of compensatory damages, State Farm agreed to assume appellants‟ defense,
but refused to reimburse it for any defense costs incurred prior to the amendment. The
trial court entered summary judgment in favor of State Farm.
              Appellants challenge the judgment, arguing State Farm had an obligation to
provide them with a defense even in absence of any express claim for damages in the
earlier versions of the third party complaint, because those earlier versions implied the
third parties had suffered compensable damages as a result of appellants‟ wrongdoing and
thus demonstrated appellants had potential liability for damages covered under the policy.
We affirm.
              In the abstract, it is irrelevant that the third party might have suffered harm
that could give rise to a claim for damages covered under the insured‟s policy. What
matters is whether the third party has sought to recover damages from the insured. It is

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only when the third party does that, that it has it made a claim which triggers even
potential coverage under a liability policy. That did not occur here until the third party
plaintiffs amended their pleading to include a claim for compensatory damages. Finally,
because coverage is triggered by a third party claim for damages, the allegation that State
Farm also misrepresented that the attorney for the third parties had denied they sustained
damages adds nothing to the cause of action. Whether or not those third parties believed
they had sustained damages, the record demonstrates they made no effort to recover any
from appellants until their second amended complaint.

                                             FACTS

                San Miguel, a nonprofit residential community association, is the named
insured under the State Farm policy at issue in this case and Beggs is the president of San
Miguel‟s board of directors. State Farm‟s policy provided San Miguel with
“comprehensive business liability” coverage. Under that coverage, State Farm agreed to
“pay those sums that the insured becomes legally obligated to pay as damages because of
bodily injury, property damage, personal injury or advertising injury” caused by an
“occurrence.”
                   The policy defined an “occurrence” as either “an accident . . . which
result[s] in bodily injury or property damage,” or “the commission of an offense, or a
series of similar or related offenses, which results in personal injury or advertising
injury.” And the policy defined “property damage” as: (1) “physical injury to or
destruction of tangible property, including all resulting loss of use of that property . . .
[; and (2)] [¶] loss of use of tangible property that is not physically injured or destroyed,
provided such loss of use is caused by physical injury to or destruction of other tangible
property. . . .”

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              The policy also offered optional coverage for “Directors and Officers
Liability,” which was defined as “those sums the insured becomes legally obligated to
pay as damages because of „wrongful acts‟ committed by an insured solely in the conduct
of their management responsibilities for the Condominium/Association.” “Wrongful
acts” was defined as “any negligent acts, errors, omissions or breach of duty directly
related to the operations of the Condominium/Association.” However, the Directors and
Officers Liability coverage did not apply to “any dishonest, fraudulent, criminal or
malicious act, including fines or penalties resulting from these acts”; did not apply to
“bodily injury, property damage, personal injury or advertising injury liability”; or
“damages other than monetary damages.”
              Additionally, State Farm agreed to “defend any claim or suit seeking
damages payable under this policy even though the allegations of the suit may be
groundless.” (Italics added.) A “suit” is defined as “a civil proceeding in a court of law
in which damages . . . to which this insurance applies are alleged,” and includes “an
arbitration proceeding in which such damages are claimed” and “any other alternative
dispute resolution proceeding in which such damages are claimed and to which you
submit with our consent.” (Italics added.)
              The underlying suit arose out of a dispute regarding enforcement of parking
restrictions within the San Miguel community. The third party plaintiffs are two San
Miguel residents who briefly served as members of its board of directors. During their
tenure on the board, these plaintiffs sought enforcement of parking restrictions within the
community, and promulgated new policies governing parking. They were later recalled
from the board in an election which also resulted in Beggs becoming a board member.
The newly comprised board of directors rescinded the parking policies.
              In late 2008, the third party plaintiffs began complaining at board meetings
that San Miguel was not enforcing the parking restrictions contained in the community‟s
governing Declarations, Conditions, Covenants and Reservation of Easements (CC&R‟s)

                                             4
and that the failure to do so was causing the plaintiffs distress and affecting their property
values. The plaintiffs also alleged they had incurred out-of-pocket costs (in the form of
copying costs and fees) as part of their effort to persuade the board to enforce the
CC&R‟s.
              San Miguel rejected the plaintiff‟s complaints, and in December 2008, the
plaintiffs made a demand for nonbinding mediation of the dispute concerning
enforcement of the CC&R‟s. The notice identified several issues to be addressed in the
mediation, but did not identify any damages allegedly suffered by plaintiffs, or demand
compensation. After receipt of the plaintiff‟s alternate dispute resolution (ADR) demand,
San Miguel tendered its defense to State Farm.
              The plaintiffs‟ attorney testified in deposition that if he had been asked in
December 2008 about damages, he would have said that the “gravamen” of plaintiffs‟
complaint “would have been to fix the wrongs that were occurring.” While he had done
an analysis of money damages stemming from San Miguel‟s violation of the CC&R‟s,
and concluded there were “loss-of-use damages” and “postage damages,” he concluded
they “were not of a significant amount.” He stated that “my clients weren’t actually
looking for a payout on those monetary damages . . . as much as they were looking for
the injunctive relief to correct the problems that were occurring.” (Italics added.)
              Upon receipt of the ADR demand, a State Farm representative noted in the
claim file that it was “[u]nclear if [the] demand for non-binding mediation seeks either
[bodily injury, property damage, personal injury or advertising injury] under Cov. L; or
money [damages] under [optional directors and officers]. The allegations are vague as to
resulting [damages] or prayer for relief.” The representative also noted that a letter from
the plaintiffs‟ attorney outlining their claims includes “no mention of money [damages.]”
A State Farm supervisor suggested to the claims representative that he find out “what
other information [San Miguel] has about this matter that could shed some light on the

                                              5
nature of the damages claim. You may also need to talk with the plaintiff attorney about
this.”
              According to the State Farm claim file, the representative spoke to the
plaintiffs‟ attorney on January 27, 2009. The file reflects that in addition to providing
other information about the claim, the attorney indicated the plaintiffs “have not suffered
any [personal injury] at this time or out of pocket expense.” The plaintiffs‟ attorney
testified he did not recall that “first conversation” with the State Farm representative in
January 2009, although he did not specifically deny it occurred. He did note it was his
usual practice not to take calls from insurance company representatives who were not
attorneys.
              On January 29, State Farm sent San Miguel a letter stating it was
continuing to investigate the claim and was reserving its rights to deny coverage.
On March 9, State Farm‟s claim representative recommended denial of the claim, based
on the fact the plaintiffs had asserted no claim for damages covered by the policy, and on
March 23, State Farm formally denied the claim on that basis. The letter explained there
was no coverage under the business liability policy because “the claimants‟ allegations
involve alleged failure of the Association to enforce parking regulations, replace fire
signage, or the Association‟s failure to provide notice of election results. Such claims do
not qualify as bodily injury, property damage, personal injury or advertising injury . . . .”
As for coverage under the optional directors‟ and officers‟ coverage, the letter noted “the
claims do not seek recovery of money damages.”
              The nonbinding mediation did not resolve the matter, and in April 2009 the
plaintiffs filed their initial complaint against Beggs only, alleging causes of action for
breach of the CC&R‟s and nuisance, and seeking injunctive relief. Although the cause of
action for nuisance included an allegation that Beggs‟ conduct was “intentional and/or
grossly willful,” and “despicable” and on that basis justified an award of punitive

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damages, it neither alleged the plaintiffs‟ sustained, nor sought recovery of, any
compensatory damages.
              Beggs once again submitted the claim to State Farm, but before State Farm
had taken formal action on the claim, the plaintiffs filed their first amended complaint.
In that amended complaint, the plaintiffs added San Miguel as a defendant, and added a
third cause of action for breach of fiduciary duty.
              Again, the First Amended Complaint contained no allegation the plaintiffs‟
sustained compensatory damages as a result of defendants‟ alleged wrongs, nor sought
recovery of any such damages. Instead, it alleged the effect of the defendants‟ violations
of the CC&Rs was to cause them “irreparable injury due [to] the actions alleged herein
and depriv[e] them of the benefit of the CC&Rs” which “cannot be fully compensated in
damages.” (Italics added.) Hence, the sole remedy the plaintiffs sought for the alleged
breach of the CC&R‟s was an injunction. In their nuisance cause of action, the plaintiffs
again claimed they “cannot be fully compensated for the damages caused” and were
“without an adequate remedy at law,” and they again sought the remedy of an injunction.
In their cause of action for breach of fiduciary duty, the plaintiffs alleged they “have been
harmed” by defendants‟ breaches, but again “cannot be fully compensated for the
damages caused” and again characterized the harm as “irreparable” and sought an
injunction. And once again, the plaintiffs included an allegation that defendants‟ conduct
was intentional and despicable, and on that justified an award of punitive damages.
              San Miguel again tendered the defense of the first amended complaint to
State Farm, and on May 26, 2009, State Farm denied the claim. Once again, State Farm
based its denial on the fact “the action does not seek damages that would be covered
under the policy.”
              San Miguel demurred to the plaintiffs‟ first amended complaint and moved
to strike the punitive damages allegation on the basis the plaintiffs had failed to allege
any entitlement to compensatory damages. In opposition to the demurrer, the plaintiffs

                                              7
argued they could amend the complaint to allege entitlement to an award of such
damages, including “„diminution in value to Plaintiff[s]‟ homes and annoyance‟” caused
by San Miguel‟s failure to enforce the parking regulations, and costs incurred by
plaintiffs in attempting to resolve the matter short of litigation. The court sustained the
demurrer with leave to amend, and the plaintiffs filed their second amended complaint in
August 2009.
               The second amended complaint alleged for the first time that as a result of
San Miguel‟s alleged wrongs, the plaintiffs had sustained damages “in an amount to be
proved at trial or . . . nominal damages to the extent necessary.” In their prayer for relief,
the plaintiffs sought, in addition to declaratory and injunctive relief, an award of
“compensatory damages, according to proof at the time of trial or alternatively . . .
an award of nominal damages.”
               San Miguel once again tendered the claim to State Farm, pointing out that
“unlike the previous complaints, [the second amended complaint] seeks damages.” State
Farm once again denied coverage. In its letter, State Farm stated “plaintiffs have made
no claims for money damages,” and pointed out “[n]ominal damages are not money
damages arising out of a wrongful act.” State Farm also reiterated in its letter that the
plaintiffs‟ attorney had advised State Farm the plaintiffs had incurred no out-of-pocket
costs. The letter did not state when the plaintiffs‟ attorney had made that statement.
               However, San Miguel‟s attorney apparently interpreted State Farm‟s denial
letter as reflecting a statement made by the plaintiffs‟ attorney following the filing of the
second amended complaint. He thus contacted the plaintiffs‟ attorney and inquired
whether the attorney had denied to State Farm that plaintiffs had incurred damages in
connection with the second amended complaint. According to a confirming letter written
by San Miguel‟s attorney, the plaintiffs‟ attorney replied that he had not spoken to
anyone from State Farm within the past three to four months and reiterated that his clients
had incurred the damages as set forth in the second amended complaint. San Miguel‟s

                                              8
attorney then wrote a letter to State Farm, informing it that the plaintiffs‟ attorney was in
fact claiming they had incurred compensable damages, and accusing State Farm of
making a “material misstatement[] of fact to support its letter declining . . . tender.”
              A State Farm representative then contacted the plaintiffs‟ attorney. The
attorney did recall that conversation, which he described as “a second phone call I believe
I did have with [a State Farm representative], after I had been advised . . . that apparently
there was a claim we had made some sort of an admission there were no damages.
Which was not our position. [¶] Our position was the monetary damages were de
minimus, but there are damages.” The attorney acknowledged that “[i]t may be an issue
that those damages will go away if we settle the main part of the action, but not that they
don‟t exist.” He stated, however, that he had no recollection of what he actually told the
representative during that second call, “and I probably hung up on the gentleman.”
              Following that conversation, State Farm reversed its decision and agreed to
provide San Miguel with a defense of the plaintiffs‟ lawsuit under a reservation of rights.
However, it concluded that its obligation to provide a defense commenced on August 27,
2009, when San Miguel tendered the second amended complaint – the first complaint
seeking recovery of compensatory damages and thus the first to reflect the potential for
coverage under the policy. Consequently, State Farm refused to compensate San Miguel
for the costs incurred in defending the underlying case prior to that time.
              This lawsuit followed. San Miguel alleged a cause of action for breach of
the insurance contract, and a cause of action for breach of the covenant of good faith and
fair dealing. Both causes of action were based on the identical assertions that State Farm
had breached its obligations by (1) failing to pay for defense of the plaintiffs‟ underlying
claim prior to the filing of their second amended complaint, and (2) misrepresenting the
statements of the plaintiffs‟ attorney concerning their purported lack of damages in an
effort to avoid paying benefits under the policy. San Miguel specifically alleged the
plaintiffs‟ complaint in the underlying lawsuit had included a claim for money damages

                                              9
within the coverage of the optional Directors and Officers Liability provision of State
Farm‟s policy from the outset, and thus that State Farm was obligated to pay the cost of
defending that suit from the outset. State Farm successfully moved for summary
judgment, and the court entered a final judgment in its favor.

                                       DISCUSSION

              We employ a de novo standard of review on appeal from a summary
judgment. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal. 4th 826, 860.) We are not
bound by the trial court‟s stated reasons for granting summary judgment, and will affirm
the judgment if correct on any theory advanced. “The trial judge‟s stated reason for
granting summary judgment is not binding on us because we review its ruling, not its
rationale.” (Reliance Nat. Indemnity Co. v. General Star Indemnity Co. (1999)
72 Cal. App. 4th 1063, 1074.)
              In our analysis, “[w]e apply the same three-step analysis required of the
trial court. First, we identify the issues framed by the operative complaint and answer
since it is these allegations to which the motion must respond. Second, we determine
whether the moving party‟s showing establishes facts which negate the opponent‟s claim
and justifies a judgment in the moving party‟s favor. When the moving party makes a
prima facie showing, the third and final step is to determine whether the opposition
demonstrates the existence of a triable issue of material fact. [Citation.] [¶] In
performing these steps, we view the evidence in the light most favorable to the party
opposing the motion, liberally construe the opposing party‟s evidence, strictly construe
the moving party‟s evidence, and resolve all doubts in favor of the opposing party.”
(Minish v. Hanuman Fellowship (2013) 214 Cal. App. 4th 437, 444.)
              State Farm‟s motion for summary judgment was based on the assertion that
the policy it issued to San Miguel did not obligate it to provide a defense to any claim

                                             10
unless “covered damages” were sought, and that contrary to San Miguel‟s allegation, no
such damages had been sought by the plaintiffs in the underlying case until they filed
their second amended complaint. The trial court agreed with that analysis, despite San
Miguel‟s vigorous assertion that a claim for covered damages was implicit in the earlier
versions of the complaint.
1. Implied Claim for Recovery of Damages in the Underlying Case
              On appeal, San Miguel does not dispute that a claim for covered damages
by the third party plaintiffs was necessary to trigger State Farm‟s duty to defend under
the policy. That is appropriate, as the policy clearly specifies the obligation to defend
applies to “any claim or suit seeking damages payable under this policy even though the
allegations of the suit may be groundless.” (Italics added.) As pointed out in United
Pacific Ins. Co. v. Hall (1988) 199 Cal. App. 3d 551, 556, “[w]here the language of an
insurance policy plainly obligates an insurer to defend an action for damages against the
insured, the insurer has no obligation to defend an insured in . . . proceedings where
damages are not sought.”
              Instead, San Miguel essentially repeats the argument it made below, and
indeed characterizes the main question to be resolved on appeal as: “Do the [underlying
plaintiffs‟] allegations asserting claims for nuisance, breach of fiduciary duty, irreparable
damage, and praying for punitive damages, which in turn would require proof of actual
damages, give rise to the implication of actual damages and [thus] obligat[e] State Farm
to defen[d] the claims?” (Italics added.)
              San Miguel‟s argument that a claim for actual damages was implied in the
allegations of the underlying case relies significantly on Travelers Property Casualty Co.
of America v. Charlotte Russe Holding, Inc. (2012) 207 Cal. App. 4th 969 (Travelers).
According to San Miguel, Travelers stands for the proposition that an insurer “shall
[infer] the elements necessary to find a possibility of coverage and may not decline a
defense simply because the pleading does not expressly state the conditions for

                                             11
coverage.” (Italics added.) In our view, however, Travelers expresses a different rule,
and is thus inapposite.
               Travelers involved a third party claim made by a clothing manufacturer,
which alleged that the insured, a retailer, had harmed the manufacturer‟s brand reputation
by severely discounting the manufacturer‟s clothing in its stores. The retailer sought
insurance coverage for the dispute on the theory that the allegations amounted to a claim
the retailer had disparaged the manufacturer‟s goods. While the trial court rejected the
argument, the Court of Appeal did not. The court explained “it is not essential that the
underlying claims must be expressly phrased in terms of „disparagement‟ or trade libel”
in order to trigger coverage. (Travelers, supra, 207 Cal.App.4th at 978.) Rather, it was
sufficient if the third party allegations “may be understood to accuse” the retailer of such
conduct. (Ibid.)
               In other words, Travelers reminds us we cannot strictly construe the
allegations of a third party complaint, and allow the insurer to deny coverage merely
because those existing allegations are not phrased in strict accordance with the language
of the policy. Thus, Travelers merely reinforces the well-established notion espoused in
Gray v. Zurich Insurance Co. (1966) 65 Cal. 2d 263, 276-277, that an insurer “cannot
construct a formal fortress of the third party‟s pleadings and retreat behind its walls. The
pleadings are malleable, changeable and amendable. . . . [C]ourts do not examine only
the pleaded word but the potential liability created by the suit. . . . [¶] . . . [¶] . . . An
insurer, therefore, bears a duty to defend its insured whenever it ascertains facts which
give rise to the potential of liability under the policy.”
               But what Travelers does not do is what San Miguel claims: establish a rule
that insurers must infer the existence of additional allegations not actually included
within the underlying third party complaint, merely because it is aware those additional
claims might have been plausibly included. And that is what San Miguel is arguing for
here.

                                                12
                 In effect, San Miguel is asserting that because the third party plaintiffs in
the underlying case purportedly sustained some actual damage as a result of San Miguel‟s
alleged wrongs – albeit in an amount that plaintiffs‟ own attorney characterized as “de
minimus” – and thus could have sought recovery of those damages from San Miguel in
earlier pleadings, State Farm was obligated to infer they had actually done so. We reject
the assertion.
                 First, we note that in their earlier pleadings, the third parties‟ description of
the alleged harm inflicted on them by San Miguel was actually inconsistent with the
implication they were seeking money damages. They characterized that harm as
“irreparable,” and they purported to be “without an adequate remedy at law” to redress it.
Standing alone, such allegations imply that an award of money damages is not sought,
because monetary damages are the quintessential remedy at law. Further, as our Supreme
Court has explained: “irreparable injuries [are] ones that cannot be adequately
compensated in damages.” (Intel Corp. v. Hamidi (2003) 30 Cal. 4th 1342, 1352.) Until
the plaintiffs filed their second amended complaint, expressly claiming a right to recover
compensatory damages flowing from San Miguel‟s wrongs, there was no reason to infer
that any such claim was intended.
                 Second, we reject San Miguel‟s claim that the underlying plaintiffs‟ request
for punitive damages in the earlier pleadings necessarily implied that an award of
compensatory damages – a prerequisite for the desired punitive damages – was also being
sought in those complaints. In general, whether such damages are sought can be
discerned from the face of the complaint. Just as the plaintiffs‟ first two complaints
clearly sought punitive damages – they just as clearly did not seek compensatory ones.
And the fact that the plaintiffs‟ claim for punitive damages was flawed in the earlier
complaints does not require anyone to infer they pleaded something different than they
did. If defendants (and courts) were required to infer the existence of allegations missing

                                                 13
from a complaint merely because those allegations are necessary to the success of a
claim, there would be little purpose to demurrers.
              And of course, San Miguel did demur – and successfully – to the first
amended complaint in the underlying case, pointing to the plaintiffs‟ failure to seek actual
damages as a significant flaw in both their claim for punitive damages and their cause of
action alleging breach of fiduciary duty. Clearly, then, San Miguel did not “infer” the
missing allegations already existed in the first amended complaint. State Farm was not
obligated to do so either.
              And third, the testimony offered by the plaintiffs‟ attorney supports the
conclusion they were not initially seeking an award of covered damages in the underlying
case – expressly or impliedly. While the attorney completed a damage analysis very
early in the dispute, his conclusion was that the damages incurred by the plaintiffs “were
not of a significant amount.” At another point, he described their damages as “de
minimus.” Perhaps more important, the attorney made it clear that the plaintiffs‟ goal –
the “gravamen” of their underlying case – was to obtain injunctive relief, and he thus
acknowledged that the plaintiffs “weren’t actually looking for a payout on those
monetary damages . . . .” (Italics added.) And even when the plaintiffs‟ attorney finally
did include a claim for compensatory damages in their second amended complaint, in an
attempt to shore up their other challenged claims, he was refreshingly honest in
acknowledging that the damages they were entitled to recover might only be “nominal.”
(See Heritage Pacific Financial, LLC v. Monroy (2013) 215 Cal. App. 4th 972, 1006
[“The award of only nominal damages highlighted the plaintiff‟s failure to prove actual
injury or any basis for awarding punitive damages”]; Silk v. Feldman (2012) 208
Cal. App. 4th 547, 556 [“In the absence of proof of actual damages, nominal damages are
awarded”].)
              In light of the foregoing, we conclude San Miguel failed to demonstrate the
existence of even a triable issue of fact to support its contention that the plaintiffs in the

                                              14
underlying case were seeking an award of damages that might be covered by State
Farm‟s policy prior to the filing of their second amended complaint – and thus failed to
demonstrate State Farm had any obligation to provide San Miguel with a defense in the
underlying case prior to that time.
2. The Alleged Misrepresentation
              San Miguel‟s second contention is that State Farm‟s attempt to avoid
coverage by “making up the phone call” in which the attorney for the plaintiffs in the
underlying case purportedly stated they had sustained no damages, constitutes actionable
bad faith and thus precluded summary judgment in State Farm‟s favor. We find the
contention unpersuasive for several reasons.
              First, we find no evidence in the record that the phone call was “made up.”
The evidence in the record demonstrates State Farm‟s case file reflects that one of its
representatives spoke to the plaintiffs‟ attorney in December 2008, when the case was in
the early ADR stage, and the attorney‟s position was that his clients “have not suffered
any [personal injury] at this time or out of pocket expense.” While the attorney later
testified he did not remember the call, and that his belief at the time was that his clients
had suffered some “de minimus” amount of damages, he did not actually deny having the
conversation. Moreover, in a conversation with San Miguel‟s counsel in the wake of his
filing the second amended complaint in August 2009, the attorney stated he had not
spoken with a State Farm representative about the case in the past three to four months –
thus implying he had spoken to one at a prior date.
              It was San Miguel‟s counsel who assumed – apparently erroneously – that
the statement contained in State Farm‟s letter denying a defense for the second amended
complaint in the underlying case, to the effect that the plaintiffs‟ attorney denied they had
sustained damages, referenced a new denial. But the letter does not specify the date of
the attorney‟s statement, and does not reflect there were multiple conversations with the
plaintiffs‟ attorney. In short, a careful reading of the letter does not support the idea that

                                              15
State Farm made any misrepresentations about having a conversation with the attorney
for the plaintiffs in the underlying case.
              Second, even if the phone call took place, but the State Farm representative
mischaracterized what the attorney said, we could not find a triable issue of fact. San
Miguel points to evidence in the record suggesting the State Farm representative who
initially spoke to the plaintiffs‟ attorney did not specifically ask him about whether they
incurred damages, but instead inferred they had none from the attorney‟s description of
their “asserted claims.” Based on the attorney‟s later testimony about the plaintiffs‟
claims, and the relief they were seeking at that time, this was an accurate inference. As
the attorney explained, the plaintiffs‟ “out of pocket” damages were insubstantial, and
they were not making any effort to recover them. Instead, what the plaintiffs wanted
from San Miguel was enforcement of the CC&R‟s. From the insurance company‟s
perspective, the third party‟s disavowal of any claim for damages is tantamount to an
acknowledgement they have sustained none. The inaccuracy, if any, was insignificant.
              Third, the fact State Farm did not engage in significant additional efforts to
investigate the claim following the initial phone call to the plaintiffs‟ attorney creates no
triable issue of fact. Although there was evidence suggesting the plaintiffs had sustained
some miniscule amount of compensable damage, the record is absolutely clear they were
making no effort to recover those damages from San Miguel prior to the filing of their
second amended complaint. Moreover, that damage claim was made only after San
Miguel backed the plaintiffs into a corner by demurring to the first amended complaint,
and even then, the plaintiffs acknowledged that the damages they sought might be purely
nominal. There is simply no evidence that if State Farm had engaged in a more rigorous
investigation, it would have led to any conclusion other than that no covered claim
existed until the plaintiffs in the underlying case filed their second amended complaint.
              Finally, San Miguel‟s claim for liability based on State Farm‟s alleged bad
faith in manufacturing evidence fails for the most basic reason of all: As our Supreme

                                              16
Court held in Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal. 4th 1, a claim for liability
based on an insurer‟s alleged breach of the implied covenant of good faith and fair
dealing cannot be maintained unless the insured was entitled to coverage under the
insurer‟s policy. As the Court explained, “when benefits are due an insured, „delayed
payment based on inadequate or tardy investigations, oppressive conduct by claims
adjusters seeking to reduce the amounts legitimately payable and numerous other tactics
may breach the implied covenant because‟ they frustrate the insured‟s right to receive the
benefits of the contract in „prompt compensation for losses.‟ [Citation.] Absent that
contractual right, however, the implied covenant has nothing upon which to act as a
supplement, and „should not be endowed with an existence independent of its contractual
underpinnings.‟” (Id. at p. 36.)
              Here, because the plaintiffs in the underlying case were not seeking
damages against San Miguel prior to the filing of their second amended complaint, there
was no potential for coverage under State Farm‟s policy prior to that filing, and thus no
contractual requirement that it provide San Miguel with a defense. It consequently
follows that even if State Farm had engaged in questionable tactics to support the denial
of San Miguel‟s claim in the early stages of the underlying litigation, those tactics would
not provide a basis upon which to impose liability for breach of the covenant of good
faith and fair dealing. We find no error in the trial court‟s grant of summary judgment in
State Farm‟s favor.

                                            17
                                   DISPOSITION

            The judgment is affirmed. State Farm is to recover its costs on appeal.

                                               RYLAARSDAM, ACTING P. J.

WE CONCUR:

MOORE, J.

IKOLA, J.

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