issue before us is whether the City s 1988 action by B8RgL7F

VIEWS: 4 PAGES: 23

									Filed 1/8/01
                     CERTIFIED FOR PARTIAL PUBLICATION*

               IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                              FIRST APPELLATE DISTRICT

                                      DIVISION FOUR

PETER BULLOCK et al.,
        Plaintiffs and Appellants,                   A080499

v.                                                   (San Francisco Super. Ct.
MARYLAND CASUALTY COMPANY,                           No. 985697)
        Defendant and Respondent.
PETER BULLOCK et al.,
        Plaintiffs and Appellants,
                                                     A081283
v.
AMERICAN GUARANTY & LIABILITY
INSURANCE COMPANY et al.
        Defendants and Respondents.
PETER BULLOCK et al.,
        Plaintiffs and Appellants,
                                                     A081878
v.
FIREMAN’S FUND INSURANCE
COMPANY,
        Defendant and Respondent.


        These cases represent another chapter in, or more precisely a sequel to, the
protracted dispute between the City and County of San Francisco (City) and plaintiffs
Peter Bullock and Elke Schlosser, concerning Bullock’s efforts to convert the Abigail
Hotel, formerly a residential hotel, into a hotel for tourists and city visitors. Plaintiffs


* Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified
for publication with the exception of parts I., IV., V., VI., VII., VIII., and IX.


                                               1
brought this action to require certain liability insurers to absorb costs plaintiffs incurred
in defending an action the City brought against them in 1988. The trial court entered
judgments on demurrer in favor of defendants Liberty National Fire Insurance Co. and
Maryland Casualty Co., and granted judgment on the pleadings in favor of defendants
American Guaranty & Liability Insurance Co., Fireman’s Fund Insurance Co., and
Western Heritage Insurance Co. We will affirm the judgments.

                                     BACKGROUND
       Related matters have been before us on at least three prior occasions. In Bullock v.
City and County of San Francisco (1990) 221 Cal.App.3d 1072 (Bullock I), we reviewed
certain orders made in an action brought by Bullock against the City, as well as orders
made in an action brought by the City against Bullock in October 1988 (the underlying
action here, discussed in more detail below). We referred to an earlier, unpublished
decision setting aside the dismissal of yet another action by plaintiffs, or persons
associated with them, against the City. (Id. at p. 1092, fn. 10.) However, in City and
County of San Francisco v. Bullock (Nov. 10, 1996, A068409), review den. and opn.
ordered nonpub. Feb. 19, 1990, we affirmed the ultimate dismissal of plaintiffs’ claims.
       In this action plaintiffs seek to recover costs of defense they incurred in the City’s
1988 action against them, parts of which were before us in Bullock I. In its complaint in
that action, a copy of which was incorporated by reference in the complaint here, the City
alleged as follows: The Abigail Hotel contained 20 “tourist units” and 42 “residential
units” regulated by the City’s Residential Hotel Conversion and Demolition Ordinance
(see San Francisco Ord. No. 400-83, added in 1983; Ord. No. 217.85, added in 1995) (the
Ordinance). The Ordinance imposed restrictions on the rental of residential units to
persons other than permanent residents. For at least six years preceding the filing of the
complaint, plaintiffs violated these restrictions, renting too many residential units to
persons other than permanent residents. From late 1984 to mid-1988, plaintiffs acted
under a preliminary injunction that “permitted [plaintiffs] to rent all of the hotel’s vacant
rooms to tourists.” However, on July 6, 1988, the superior court dissolved the injunction


                                               2
and denied plaintiffs any exemption from the terms of the Ordinance.
       Based on these allegations the City asserted five causes of action: (1) that by the
conduct described above, and also by failing to post certain required notices and reports
and maintain certain daily logs, plaintiffs were violating the Ordinance; (2) that by
offering (advertising) the premises for use as a “tourist hotel,” plaintiffs were violating
the City Planning Code (Planning Code); (3) that plaintiffs’ violations of the Planning
Code and the Ordinance were a public nuisance, abatement of which was authorized by
state and municipal laws; (4) that plaintiffs’ conduct constituted unfair and unlawful
business practices under Business and Professions Code section 17200 et seq.; and
(5) that plaintiffs’ conduct warranted the imposition of various “civil penalties” under the
Planning Code, the Ordinance, and Business and Professions Code section 17206.
       The City prayed for (1) preliminary and permanent injunctions prohibiting
plaintiffs from renting residential units to nonresidential renters in violation of the
Ordinance; (2) injunctions against violating the posting and log-keeping provisions of the
Ordinance; (3) injunctions against violating the Planning Code restrictions on tourist
hotels; (4) injunctions against, and abatement of, “the public nuisances presented by the
premises”; (5) appointment of a receiver under Business and Professions Code section
17203 “to take over management and control of the premises” in order to prevent
continuing unfair practices; (6) civil penalties of $500 per day under the Planning Code;
(7) civil penalties of $250 per day per violation of the Ordinance; (8) civil penalties of
$2,500 per violation under the Business and Professions Code; (9) costs and attorneys’
fees; and (10) “such further and other relief as the court deems just.”
       The City apparently dismissed its 1988 complaint on or about October 6, 1994.
Two years later—eight years after the City filed its complaint—plaintiffs brought this
action against ten insurance companies they alleged had sold them liability insurance
during the period of “at least 1980 to 1993.” Plaintiffs alleged that they had “tendered
the defense of [the City’s] action separately to each defendant, but each defendant refused
to defend the action and denied coverage,” and that each defendant repeated that refusal
when plaintiffs asked them to reconsider. Plaintiffs further alleged that defendants failed


                                               3
to fully and fairly investigate the renewed tender of defense, and that “[s]ome”
defendants failed to respond in a timely manner.
       Based on these allegations, plaintiffs asserted claims for breach of contract, “bad
faith,” and fraud. The five defendants now before us challenged the complaint by general
demurrer or motion for judgment on the pleadings. The trial court sustained each of these
challenges, reciting in all but one case that the orders were made “without leave to
amend.” The one exception was silent as to leave to amend, but the court thereafter
entered judgment on that order, as on the others. Plaintiffs filed three timely appeals.

                                      DISCUSSION

                                              I.
                                 THE DUTY TO DEFEND.
       By issuing a policy of liability insurance, an insurer undertakes two fundamental
duties: (1) to indemnify the insured against covered liability, i.e., to pay any claim that
comes within the terms of the policy; and (2) to defend the insured against any claim that
potentially imposes a covered liability. The duty to indemnify arises “ ‘only where a
judgment has been entered on a theory which is actually (not potentially) covered by the
policy.’ ” (Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1120, quoting Collin
v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 803, italics omitted.) The duty
to defend is broader; it arises whenever a claim against the insured seeks damages which
potentially lie within the indemnity coverage of the policy, even though the judgment
ultimately entered may lie beyond the coverage provisions. (Palmer, supra, at p. 1120;
Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295 (Montrose I);
Wausau Underwriters Ins. Co. v. Unigard Security Ins. Co. (1998) 68 Cal.App.4th 1030,
1047 [duty of defense “concerns whether the [insured] faced potential liability covered by
the policies, not whether that liability ever actually materialized”].)
       Since the duty to defend arises from “a bare ‘potential’ or ‘possibility’ of
coverage,” the insured’s burden is only to “show that the underlying claim may fall
within policy coverage.” (Montrose I, 6 Cal.4th at p. 300, italics in original; see General


                                              4
Accident Ins. Co. v. West American Ins. Co. (1996) 42 Cal.App.4th 95, 102 [“the insured
need only show the bare possibility of coverage”]; New Hampshire Ins. Co. v. Ridout
Roofing Co. (1998) 68 Cal.App.4th 495, 506 [“Even a bare possibility of coverage is
sufficient to trigger a duty to defend.”].) If the insured makes that showing, the burden
shifts to the insurer to “prove [the claim] cannot [be covered].” (Montrose I, 6 Cal.4th at
p. 300.) To do so, the insurer must point to evidence that “ ‘ “presents undisputed facts
which conclusively eliminate a potential for [covered] liability.” ’ ” (Wausau
Underwriters Ins. Co. v. Unigard Security Ins. Co., supra, 68 Cal.App.4th at p. 1037,
some italics in original.) “Any doubt as to whether the facts give rise to a duty to defend
is resolved in the insured’s favor. [Citation.]” (Horace Mann Ins. Co. v. Barbara B.
(1993) 4 Cal.4th 1076, 1081.)
       Each of the insurers now before us undertook in its policy to indemnify plaintiffs
for “sums that the insured shall become legally obligated to pay as damages” as the result
of an otherwise covered claim. The central issue before us is whether the City’s 1988
action against plaintiffs created the possibility or potential to “legally obligate[]”
plaintiffs to pay any sums “as damages.”
       The City’s complaint made no reference to “damages” and prayed for no relief
that traditionally would be viewed as “damages.” Nor do plaintiffs allege any facts
extrinsic to the City’s complaint bearing on this issue. In tacit acknowledgment of this
lack, plaintiffs all but concede that their complaint is facially insufficient to allege a
potentially covered claim. They contend, however, that the complaint could be amended
to allege that the City’s action posed the potential for an award of damages in a number
of respects. Plaintiffs place particular emphasis on the asserted possibility that the City
could have sought relief under the Ordinance comparable to toxic cleanup costs under
toxic reclamation laws. They contend in essence that they should have been permitted to
amend their complaint to clarify this and other theories supposedly establishing that the
City’s 1988 action exposed them to the possibility of a covered award of “damages.”




                                               5
                                             II.
                                   COMPLIANCE COSTS.

       A.     Introduction.
       Plaintiffs contend that the City’s complaint exposed them to potential liability for
“damages” because it implicitly sought to compel their compliance with provisions of the
Ordinance requiring them to incur or pay what plaintiffs refer to as “mitigation” costs. In
particular they cite section 41.10 of the Ordinance (§ 41.10), which requires that any
owner seeking to convert a hotel to nonresidential use must, as a condition of the required
“conversion permit,” provide or pay for housing to replace the units that will be removed
from the residential market. (§ 41.10.)1 Plaintiffs also cite provisions making it unlawful
to change the use of a unit, or eliminate or convert a unit, without a conversion permit,
and empowering the superintendent of building inspection to “institute a civil proceeding
for injunctive relief” in response to “any action unlawful under this Chapter.” (Ordinance
§ 41.16, subds. (a)(1) and (e).)
       Plaintiffs contend that these provisions bring the City’s complaint within the
rationale of AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807 (AIU), where the
Supreme Court held that comprehensive general liability (CGL) policies, materially


1 As in effect in 1988, section 41.10, subdivision (a), provided: “Prior to the issuance of
a permit to convert, the owner or operator shall provide one-for-one replacement of the
units to be converted by one of the following methods: [¶] (1) Construct or cause to be
constructed a substantially comparable-sized unit to be made available at comparable rent
to replace each of the units to be converted; or [¶] (2) Cause to be brought back into the
housing market a comparable unit . . .; or [¶] (3) Construct or cause to be constructed or
rehabilitated apartment units for elderly, disabled or low-income persons or
households . . . . [¶] (4) Pay to the City and County of San Francisco an amount equal to
Forty Percent (40%) of the cost of construction of an equal number of comparable units
plus site acquisition costs. All such payments shall go into a San Francisco Residential
Hotel Preservation Fund Account . . . .”
As we noted in Bullock I, supra, 221 Cal.App.3d at p. 1100, fn. 17, section 41.10 was
subsequently reenacted in somewhat different form as section 41.13. We follow our
earlier practice, which the parties too employ, of referring to the provision by its original
number.


                                              6
similar to those at issue here, could be reasonably understood to cover toxic cleanup costs
imposed in litigation under the Comprehensive Environmental Response, Compensation,
and Liability Act (42 U.S.C. § 9601 et seq.) and related state and federal laws. The
City’s claim against plaintiffs, however, differs in several critical respects from those
before the court in AIU.
       The insured in AIU sought to establish coverage with respect to a number of suits
by public agencies alleging that the insured was responsible for the contamination of
certain waste disposal sites. The agencies sought injunctions to prevent further
contamination and to require the cleanup of contamination already caused, plus
“reimbursement of [the agencies’] costs of investigating, monitoring, and initiating
cleanup of hazardous waste for which [the insured] allegedly is responsible.” (Id. at
p. 816.) The Supreme Court concluded that the monetary reimbursement sought by the
agencies (“response costs”) could fall within the reasonable expectations of an insured as
to what constitutes “damages.” (Id. at pp. 833, 837.) The court further held that cleanup
costs incurred by an insured under compulsion of an injunction could also be covered,
primarily because they appeared to be the functional equivalent of reimbursing publicly-
incurred costs, and an insured would not expect coverage to depend on the prosecuting
agency’s fortuitous choice of remedies. (Id. at pp. 838-841.)
       In seeking to apply this holding to the present case, plaintiffs focus almost
exclusively on the supposed “mitigative” nature of the remedy at issue in AIU, arguing
that the City’s action exposed them to similar “mitigative” measures. Quoting our own
opinion in Bullock I, plaintiffs assert that section 41.10 operates to “mitigat[e] the adverse
impact on the persons who will be displaced by plaintiff’s conversion” (Bullock I, supra,
221 Cal.App.3d at p. 1101), and that their exposure to the imposition of such “mitigation
costs” makes the City’s suit indistinguishable from the actions considered in AIU. We
reject this contention, first because plaintiffs have failed to allege, and apparently cannot
allege, that they were in danger of being “legally obligated” to incur the “mitigation”
expenses in question, and second because those expenses are not comparable to the
remedies held in AIU to be the equivalent of damages.


                                              7
       B.     “Legally Obligated to Pay.”
       Plaintiffs’ exclusive emphasis on the supposed “mitigative” character of the
expenses at issue overlooks a critical part of the AIU analysis. The court there declared
that the question of coverage turned on three subsidiary questions: (1) whether an
adverse order in the underlying suits would “ ‘legally obligate’ [the insured] to pay”
cleanup costs; (2) whether the costs would “constitute ‘damages’ ” under the terms of the
policies, and (3) whether the costs would be “incurred because of ‘property damage.’ ”
(Id. at p. 818.) “Only if all three conditions are fulfilled,” the court wrote, “will the
insurers’ duty to provide coverage arise under the policies.” (Ibid.) In other words, it is
not enough that a claimant seeks to exact by some means a payment that might serve the
function of “damages.” The lawsuit must expose the insured to the possibility of being
“legally obligated” to make such payments. In AIU this obligation was in little doubt; the
underlying suits expressly sought judgments or court orders compelling the insured to
pay or incur the expenses at issue. (See id. at p. 824.) The only point of controversy was
whether the phrase “legally obligated” extended to payments compelled by equitable
remedies, such as injunctive or specific relief, as distinguished from the quintessentially
legal remedy of a judgment for damages. (Ibid.) Not surprisingly, the court found the
law-equity distinction inadequate to defeat coverage. (Id. at p. 825.)
       Here the insureds face a difficulty not present in AIU, because it does not appear
that an order obligating plaintiffs to pay or incur “mitigation” costs either was sought, or
could have been made. Apart from some correspondence outside the complaint, which
we discuss below, plaintiffs have offered no reason to suspect that the City ever
contemplated seeking a judgment requiring plaintiffs to comply with section 41.10. So
far as the pleadings and the terms of the Ordinance show, the City lacked the authority to
obtain such relief, and made no attempt to seek it.
       Nothing in the City’s complaint suggests the possibility of an order compelling
compliance with section 41.10. The City did not pray for an award of “in lieu fees”; nor
did it seek an injunction compelling plaintiffs to construct, acquire, or otherwise provide
substitute housing, as contemplated by section 41.10. Instead the City prayed for


                                               8
(1) injunctions prohibiting violations of the Ordinance and abating the public nuisances
allegedly arising from those violations, (2) appointment of a receiver, and (3) civil
penalties.
       Nor does it appear that the Ordinance authorized the City to seek, or a court to
issue, the mandatory “mitigative” relief on which plaintiffs’ argument depends. The
Ordinance specifically authorized City officials to (1) recover “civil penalties” in
specified amounts for such infractions as “insufficient filing” or failing to post and
submit certain required reports (Ordinance, §§ 41.7, subds. (d) & (e); 41.8, subd. (d));
(2) recover a “civil penalty” for “unlawful conversion,” consisting of “three . . . times the
daily rate per day,” not to exceed $5,000 (Ordinance § 41.16, subd. (c)); and (3) obtain
“injunctive relief,” implicitly against “any action unlawful under this Chapter”
(Ordinance, § 41.16, subd. (e)). In addition, the Ordinance provided that any “permanent
resident injured by any action unlawful under this Chapter” could bring an action for
“injunctive relief and damages.” (Ordinance § 41.16, subd. (e), italics added.) The
Ordinance did not authorize the City to recover damages of any kind, and it did not
authorize anyone to obtain any kind of relief mandating compliance with section 41.10.
The specific enumeration of some remedies while not mentioning others strongly implies
that the excluded forms of relief are not in fact available. (See Dyna-Med, Inc. v. Fair
Employment & Housing Com. (1987) 43 Cal.3d 1379, 1390-1391 [applying maxim
expressio unius exclusio alterius est, i.e., to express one thing is to exclude another].)
       Section 41.10 itself contains no remedial terms; it provides for no “relief” in the
legal sense at all. Rather it prescribes conditions under which a permit may be issued.
The only apparent effect of failure to satisfy these conditions is that no permit will issue,
and the owner will be prohibited by the Ordinance from engaging in the regulated
conduct—most notably, renting residential rooms to nonresidential occupants. An owner
subject to the permit requirement may choose either to comply with the condition, refrain
from the regulated conduct, or (as plaintiffs did) engage in the regulated conduct without
a permit, thereby violating the Ordinance. In none of these situations does that person
become “legally obligated to pay” the costs of complying with section 41.10. He or she


                                              9
remains legally free not to pay them. Section 41.10 imposes on hotel owners no “legal[]
obligat[ion]” whatsoever. By its plain terms it imposes only a condition on a permit
required under the Ordinance to engage in specified activities.
       Rather than discuss the actual text of the Ordinance, or its logical effect, plaintiffs
cite our opinion in Bullock I for the proposition that “[b]y its complaint, the City sought
to compel Dr. Bullock’s compliance with section 41.10.” The short answer to that
assertion is that compulsion comes in many forms, only one of which—“legal[]
obligat[ion]”—triggers coverage under defendants’ policies. In Bullock I we were
concerned only with the validity of the Ordinance insofar as it interfered with plaintiffs’
right under state law to “ ‘go out of [the residential hotel] business.’ ” (Gov. Code,
§§ 7060, 7060.7, quoted in Bullock I, supra, 221 Cal.App.3d at p. 1099.) We held in
effect that section 41.10 imposed an undue burden on that right, and was preempted. (Id.
at pp. 1099-1102.) We had no occasion to decide, and did not even contemplate, the
distinctions relevant to the issue now before us. Even so, our analysis there is explicitly
consistent with those distinctions. We wrote that section 41.10 “conditions issuance of a
permit to convert . . . on the owner either furnishing comparable units . . . or making a
substantial ‘in lieu’ payment” (221 Cal.App.3d at p. 1099, italics added), and that the
City sought to “condition” plaintiff’s departure from residential hotel business “upon the
payment of ransom” (id. at p. 1101).
       Our vivid description of the act contemplated by the condition does nothing to
alter the fact that a conditional regulatory imposition simply is not, without more, a legal
obligation to pay. The City may well have intended, as plaintiffs asserted below, to
coerce compliance with section 41.10 by enjoining Dr. Bullock in his operation of the
hotel until he complied with those provisions. Alternatively, the City may have hoped to
prevent the removal of plaintiffs’ hotel from the residential housing market. In either
case, the City made no apparent effort to legally obligate plaintiffs to pay the expenses or
undertake the acts described in section 41.10. The coercive tool employed—and the only
tool the Ordinance appeared to provide—was a traditional prohibitory injunction barring
plaintiffs, on pain of contempt, from continuing to rent rooms to nonresidents without a


                                              10
permit. Such an injunction would not become the equivalent of “damages” merely
because it would compel plaintiffs to choose, on pain of contempt, between complying
with the conditions of a permit and refraining from conduct requiring a permit.
       We are satisfied that neither the City’s complaint nor the terms of the Ordinance
suggest any potential for making plaintiffs “legally obligated to pay” the costs
contemplated by section 41.10.

       C.     The 1989 Letters.
       Plaintiffs contend somewhat obliquely that whether or not the City was entitled to
obtain a judgment compelling compliance with section 41.10, the City sought such a
judgment, or threatened to do so, thereby triggering a duty to defend. This suggestion
tacitly invokes the principle that a liability insurer “may not decline to defend a suit
merely because it is devoid of merit.” (Montrose I, supra, 6 Cal.4th at p. 298.) However,
the principle does not apply here because the City in fact never asserted the meritless
claim in question.
       As evidence to the contrary, plaintiffs refer to letters and a notice they apparently
received from City officials in April 1989. These documents were offered below in
support of plaintiffs’ request for leave to amend the complaint. They are cited here as
evidence that “[t]he City . . . had determined that Dr. Bullock had already converted the
units, and therefore was no longer able to comply with the Residential Hotel Ordinance
other than by payment of the mitigation payments.” This statement apparently asks us to
infer that when the letters were written, the City contemplated seeking an injunction to
compel such compliance.
       The 1989 letters are far from a direct threat to pursue any such claim. At most
they suggest a tentative positioning by City officials and attorneys as a possible move
toward such a strategy. We seriously doubt that correspondence outside the pleadings
which merely hints at a possible litigation strategy—one never actually pursued—is
sufficient to establish a duty to defend an otherwise non-covered lawsuit. In Foster-
Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857 (Foster-Gardner),



                                              11
the court held that notices from environmental agencies requiring an insured to undertake
cleanup measures did not trigger coverage under liability policies in which the insurer
undertook to defend any “suit” against the insured. The policies before us all likewise
refer to the defendants’ undertakings to defend “suit[s]” against plaintiffs. If a formal
notice directly imposing legal burdens on the insured under applicable law is insufficient
to trigger liability insurance coverage, we fail to see how the mere unexecuted threat to
pursue a potentially covered legal remedy can have a greater effect. (See id. at pp. 878-
879 [discussing meaning of terms “suit” and “claim” in context of liability policies].)
Here of course a “suit” was filed, but not one asserting the claims to which plaintiffs
allude. The duty to defend generally depends upon the allegations of the complaint in the
underlying action. (See id. at p. 880.)
       We need not ultimately decide whether a threat to compel compliance with section
41.10 would effectively enlarge the allegations of the City’s complaint, for coverage
purposes, because—as we discuss immediately below—the costs contemplated by that
section are not equivalent to those at issue in AIU and could not be reasonably understood
as “damages” under the rationale of that case. Thus even if the City had explicitly prayed
for an order requiring plaintiffs to comply with section 41.10 by providing replacement
housing or paying “in lieu” fees, that claim would not have triggered a duty to defend.

       D.     Compliance Costs as “Damages.”
       The essential reason coverage was found in AIU is that the government agency
claimants sought to compel the insured to pay or incur costs that served the same function
as traditional damages in that they compensated for, or sought to alleviate, harm caused
by past conduct. The court carefully limited its holding to cleanup expenses and
“response costs” incurred after a “release of hazardous waste.” (51 Cal.3d at p. 833.)
The court explicitly withheld coverage for “prophylactic costs . . . incurred to pay for
measures taken in advance of any release of hazardous waste” (id. at p. 843), elsewhere
writing, “Because the third party suits here . . . rest on allegations of past and present
damage to land and water on and surrounding hazardous waste sites, they concern



                                              12
reimbursement not for prophylactic purposes, but rather for remedial and mitigative
actions.” (Id. at pp. 832-833, italics added.) The court was careful to say that its holding
did not extend to, and no duty to defend arose under, “government regulations or court
orders requiring businesses such as [the insured] to undertake purely prophylactic
measures designed to prevent future discharges of hazardous waste.” (Id. at p. 832; see
id. at p. 833, fn. 13; see also Foster-Gardner, supra, 18 Cal.4th 857, 878.)
       This distinction between remedial and prophylactic measures is fatal to plaintiffs’
attempt to bring costs incurred in complying with section 41.10 within the rationale of
AIU. The expenses described in section 41.10 are not intended to make anyone whole
for, or compensate for the damaging effects of, past conduct. They are intended to avert
the future loss of housing units that will result from the conversion of “residential” hotel
rooms to nonresidential use. In this sense they are prospective only, and are thus the
functional equivalent of traditional injunctive remedies, not compensatory damages. (See
Cutler-Orosi Unified School Dist. v. Tulare County School etc. Authority (1994) 31
Cal.App.4th 617, 629 (Cutler-Orosi Unified School Dist.), review den. [no duty to defend
action to enforce federal voting rights act; “the equitable declaratory and injunctive
remedies authorized by the Voting Rights Act as a means of enforcing its proscriptions
are not the ‘functional equivalent’ of a form of monetary indemnification or recoupment
which may be classified as ‘damages.’ Rather, such equitable remedies retain their
traditional character as prospective and essentially prophylactic methods of preventing
the future reoccurrence of past illegal actions.”]; Aerojet-General Corp. v. Transport
Indemnity Co. (1997) 17 Cal.4th 38, 56 (Aerojet-General) [describing AIU as holding
that duty to indemnify “is not narrowly confined to money that the insured must give
under law as compensation to third parties, but may also include money that the insured
must itself expend in equity in order to provide relief of the same sort.” (Italics added.)].)
       Here an order compelling plaintiffs to provide replacement housing or pay in-lieu
fees under section 41.10 would not compensate anyone for harm already inflicted, e.g.,
by prior violations of the Ordinance. Its sole function would be to avert future harm from
the future displacement of residents. Residents already displaced in violation of the


                                             13
Ordinance would receive nothing from plaintiffs’ compliance with section 41.10. Their
only means of redress would be to maintain their own causes of action for damages.
Thus, while an order compelling compliance with section 41.10 might be “mitigative” in
some broad societal sense, the mitigation would be prophylactic, not remedial, and thus
outside the zone of coverage described in AIU.
       Even if plaintiffs’ argument were on sounder precedential footing we are
extremely reluctant to extend AIU’s rationale to costs incurred as a condition of
compliance with a regulatory permit requirement. An insured should not be encouraged
to engage in regulated activity while foregoing a required permit, or failing to comply
with its conditions, in the hope that the costs of any enforcement proceeding, and perhaps
even the costs of compliance, can be shifted to a liability insurer as “mitigative”
expenses. Land use regulators commonly condition permits for development on the
developer’s acquisition and dedication of property or rights, or the payment of some kind
of “mitigation fee.” We do not believe a developer purchases liability insurance in the
expectation that his or her insurer will pay for the costs of resisting enforcement of such
conditions—let alone of complying with them. To impose such an obligation would not
only exceed the bounds of an insured’s reasonable expectations, but would offend public
policy by encouraging landowners and others to defy regulations in the expectation that
the costs of litigation, if not of compliance, can be shifted, ultimately, to other
policyholders. Such a regime goes far beyond anything contemplated by the Supreme
Court in AIU. (See Cutler-Orosi Unified School Dist. supra, 31 Cal.App.4th 617, 630,
review den. [noting “substantial public policy reasons” not to permit coverage of school
districts’ costs to comply with federal voting rights statutes]; Bank of the West v. Superior
Court (1992) 2 Cal.4th 1254, 1267 [“costs of disgorgement” under restitution order
pursuant to Unfair Business Practices Act, Bus. & Prof. Code, § 17203, are not
“damages” covered under liability insurance policy; alternative rule would mean that “a
person found to have violated the act would simply shift the loss to his insurer and, in
effect, retain the proceeds of his unlawful conduct”].)
       Plaintiffs cite Vandenberg v. Superior Court (1999) 21 Cal.4th 815, as “additional


                                              14
conclusive authority that warrants determining this appeal in [plaintiffs’] favor.” We see
nothing of particular relevance in that case, which holds that damages for breach of
contract can, depending on circumstances, fall within the coverage provisions of a
comprehensive general liability policy. Plaintiffs contend that the case confirms their
“functional” approach to the question of what constitutes “damages.” As we have seen,
however, such an approach does not help them. Even if the City had explicitly sued for
an order compelling plaintiffs to comply with section 41.10, the “mitigation”
contemplated by such an order would not be the functional equivalent of damages, would
not fall within the rationale of AIU, and would not have placed defendants under a duty to
defend the City’s lawsuit.

                                             III.
                                        PENALTIES.
       Plaintiffs also argue that the City’s prayer for civil penalties triggered a duty to
defend. They cite a provision of the Ordinance stating that “proceeds from the filing fees
and civil fines assessed shall be used exclusively to cover the costs of investigation and
enforcement of this ordinance.” (Ordinance, § 41.8(e).) From this they argue that the
penalties were “damages” under AIU because they would compensate the City for an
injury to the “public fisc.” (See AIU, supra, 51 Cal.3d at p. 829.)
       The decision in AIU does not stand for the proposition that whenever a public
agency seeks to recoup costs of enforcement, a judicial award embodying such
recoupment constitutes “damages” for purposes of typical liability policies. To adopt
such a blanket rule would result in an enormous private subsidy to finance regulatory
enforcement litigation and would encourage, at least indirectly, noncompliance with all
manner of regulation. The role of the “harm to public fisc” rationale in AIU’s overall
reasoning is not entirely clear, but we are confident that the court did not intend to bring
all government efforts to recoup enforcement costs within the coverage of comprehensive
general liability policies.
       In any event, we need not here determine the scope and effect of the “harm to



                                              15
public fisc” rationale because it surely cannot establish coverage of penalties. The court
in AIU emphasized that the awards and expenditures at issue there were not punitive. (Id.
at p. 836.) The same cannot be said of the sums at issue here, which both the Ordinance
and the City’s complaint expressly describe as “penalties.” Given that characterization
and the absence of any attempt by plaintiffs to detract from its plain meaning and effect,
public policy would not permit defendants to insure those sums. (See id. at p. 837, fn. 15,
quoting Ins. Code, § 533.5 [“ ‘No policy of insurance shall provide, or be construed to
provide, any coverage or indemnity for the payment of any fine, penalty, or restitution in
any civil or criminal action or proceeding brought by the Attorney General, any district
attorney, or any city prosecutor . . . .’ ”] and Stats. 1988, ch. 489, § 3, No. 3 Deering’s
Adv. Legis. Service, p. 1725 [“stating that section 533.5 ‘does not constitute a change in,
but is declaratory of, the existing law’ ”]; see also Ins. Code, § 533 [prohibiting insurance
for liability resulting from wilful acts].)

                                              IV.
                                   RECEIVERSHIP COSTS.
       Plaintiffs contend that a potential for covered liability arose from the City’s prayer
for the appointment of a receiver. The sole support offered for this contention is a
judicial statement that costs of a receiver may sometimes constitute “a direct liability . . .
imposed upon the parties to the action, or upon some of them.” (Andrade v. Andrade
(1932) 216 Cal.108, 110.) Plaintiffs apparently seize upon the word “liability” to suggest
that costs thus assessed could be viewed as “damages” within the rule of AIU. This
argument is too fragmentary to merit a full response. The court in Andrade used the
quoted phrase to distinguish the described possibility from the more common situation in
which costs of a receiver are charged against the property or business under the receiver’s
management. The case cannot be read to support the notion that such costs are
“damages.” On the contrary, they appear to be compensation for services rendered, and
reimbursement for sums expended, by the receiver. In addition, to accept plaintiffs’
reasoning would mean that virtually any time a complaint against an insured included a



                                              16
prayer for a receivership, the insured’s liability insurer would be required to defend
unless or until it could conclusively establish that costs of the receiver would not be
assessed against the insured. As with other rules for which plaintiffs explicitly or
implicitly contend, such a holding would vastly exceed the reasonable expectations of
insureds and would impose heretofore undreamed-of burdens on insurers and the larger
pool of policyholders.

                                          V.
                                   PUBLIC NUISANCE.
       Plaintiffs contend that the City’s cause of action for “public nuisance” raised the
potential for an award of damages. Plaintiffs’ entire argument consists of the following
statements: “The City alleged a cause of action for public nuisance against plaintiffs. A
public entity may recover money damages on a theory of public nuisance. See Selma
Pressure Treating Co. v. Osmose Wood Preserving Co. (1990) 221 Cal.App.3d 1601,
1614-1619, 271 Cal.Rptr. 596, 603-606.”
       The fact that a public entity “may” recover damages on a given theory does not
mean that the City’s action here actually presented such a possibility. A contrary
conclusion is compelled by the absence of any such relief from the prayer, coupled with
the general rule that damages are not recoverable by a government entity in an action
based on public nuisance. (Code Civ. Proc., § 731; Selma Pressure, supra, 221
Cal.App.3d at p. 1613; County of San Luis Obispo v. Abalone Alliance (1986) 178
Cal.App.3d 848, 859-860; People ex rel. Gow v. Mitchell Brothers’ Santa Ana Theater
(1981) 114 Cal.App.3d 923, 930.) The court in Selma Pressure acknowledged an
exception to this rule when the government sues for injury to property in which it has a
substantial property interest as legal owner, “usufructuary” beneficiary, or parens
patriae. (221 Cal.App.3d at pp. 1614-1618.) We perceive no way to rationally apply this
exception to the present case.




                                             17
                                          VI.
                                     OTHER CLAIMS.
       Leaving no stone unturned, plaintiffs list nine additional forms of supposedly
covered damages which, they assert without explanation, might have been recovered in
the underlying action. All but three of the enumerated items appear to involve claims that
the City lacked standing to assert because they seek damages for injuries to tenants or
other individuals or their property. The three exceptions appear entirely unrelated to any
violation of the Ordinance except insofar as the displacement of tenants might be a cause
in fact of the harm described.
       Moreover, there is no reason to believe the City ever contemplated asserting any
of these claims, or seeking the attendant remedies, in its 1988 action. The ability to
imagine covered claims that might have been brought, but were not, cannot generate a
duty to defend non-covered claims that were brought. “An insured may not trigger the
duty to defend by speculating about extraneous ‘facts’ regarding potential liability or
ways in which the third party claimant might amend its complaint at some future date.”
(Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1114; see Hurley
Construction Co. v. State Farm Fire & Casualty Co. (1992) 10 Cal.App.4th 533, 538;
[“the insured may not speculate about unpled third party claims to manufacture
coverage”]; Cutler-Orosi Unified School Dist. v. Tulare County School Districts, supra,
31 Cal.App.4th 617, 633 [“Assertions of potential coverage which are based entirely on
speculation do not give rise to a duty to defend.”].)

                                         VII.
                                     OTHER ACTION.
       Plaintiffs assert that the City’s action was brought “in coordination” with a
“parallel” action in which individuals and “proxy organizations” sought to recover
traditional compensatory damages. This assertion may be understood to imply that
because the present action was factually and tactically related to other actions, which
themselves were presumably covered by defendants’ policies, the insurers were obliged



                                             18
to defend the present action. The law is to the contrary.
       In La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th
27, an insured sought to compel its workers’ compensation insurer to defend a civil
action arising from the alleged wrongful termination of an employee. The insured argued
that the civil action had the potential to resolve many of the same issues that would arise
in a workers’ compensation proceeding based on the same facts. The Supreme Court
rejected the notion that this commonality gave rise to a duty to defend. “Nothing in Gray
[v. Zurich Insurance Co. (1966) 65 Cal.2d 263] or its progeny . . . suggests that the duty
to defend one action is triggered by the prospect that the insured may face a claim for
materially different relief in some other action brought in a distinctly different forum,
merely because the two actions are premised on similar factual allegations.” (La Jolla,
supra, 9 Cal.4th at pp. 43-44.) The test, the court emphasized, is not whether factually
related claims might be covered but “whether the underlying action for which defense
and indemnity is sought potentially seeks relief within the coverage of the policy.” (Id. at
p. 44, italics in original.)
       Thus, where multiple suits are brought against an insured, some covered and some
not, the insurer is entitled to decline the defense of those not covered. For example, in
United Pacific Ins. Co. v. Hall (1988) 199 Cal.App.3d 551, an insurer assumed the
defense of a civil action against insured homeowners arising from a school fire, while
properly refusing to pay for the defense of proceedings against the homeowners’ son in
juvenile court. (See also Foster-Gardner, supra, 18 Cal.4th at pp. 882-883 [liability
insurer has no duty to defend criminal prosecution, despite possibility that “damaging,
perhaps even irrefutable, findings will be made” against insured].)
       Plaintiffs make no attempt to exempt the present case from the foregoing
principles. They do not suggest, and we see no reason to suppose, that the separate suits
to which they allude should be treated as a single “mixed action” in which the duty to
defend might extend, by operation of law, to non-covered claims. (See Aerojet-General,
supra, 17 Cal.4th 38, 59-60.) The existence of a separate, covered lawsuit appears
irrelevant to the question whether the insurers had a duty to defend the City’s 1988


                                             19
action, even if the lawsuits were, as plaintiffs contend, factually and tactically related.

                                          VIII.
                                        BAD FAITH.
       Plaintiffs contend that they adequately alleged a cause of action based upon bad-
faith failure by defendants to properly respond to plaintiffs’ tenders of defense.
Plaintiffs’ argument assumes, however, that an adequate response and investigation
would have led to the discovery of facts establishing a duty to defend. As we have
indicated, no such facts appear. We are directed to no authority that would support the
imposition of liability for bad faith failure to investigate when the insurer in fact had no
duty to defend. Accordingly we assume this cause of action falls with the claims
asserting breach of that duty.

                                          IX.
                                    LEAVE TO AMEND
       Finally we address plaintiffs’ contention that they should have been allowed “at
least one chance to amend to allege the facts of the money damage exposure they faced in
the underlying controversy.”
       This is plaintiffs’ most troubling argument. The trial court entered a judgment
based on the facial insufficiency of a complaint that had never been amended. As a rule,
it is inadvisable to dismiss a complaint for facial insufficiency (i.e., on demurrer or
motion for judgment on the pleadings) when the plaintiff is requesting leave to amend
and has not already been given at least one opportunity to do so. If the facts are indeed
such that the plaintiff absolutely cannot state a cause of action, then giving the plaintiff at
least one opportunity to amend will help to confirm that premise. Failing to grant such
leave greatly increases the risk that the matter will ultimately be reversed for further
proceedings, with resulting needless expenditure of time and resources.
       This risk flows from the differing standards of review applied on appeal,
depending on whether leave was allowed. “When the trial court sustains a demurrer
without leave to amend, we must . . . consider whether the complaint might state a cause


                                              20
of action if a defect could reasonably be cured by amendment . . . . A trial court abuses
its discretion if it sustains a demurrer without leave to amend when the plaintiff shows a
reasonable possibility to cure any defect by amendment.” (Lazar v. Hertz Corp. (1999)
69 Cal.App.4th 1494, 1501, italics added.) This possibility can be established for the first
time on appeal. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222
Cal.App.3d 1371, 1386.) Obviously, if the plaintiff is given ample opportunity to amend
and fails to cure the deficiencies in the pleading, the possibility of presenting a curative
amendment after entry of judgment becomes considerably more remote. Furthermore, if
the plaintiff is granted leave to amend and declines to do so, an entirely different standard
applies: “ ‘[I]t is presumed that the complaint states as strong a case as is possible
[citation]; and the judgment of dismissal must be affirmed if the unamended complaint is
objectionable on any ground raised by the demurrer. [Citations]’ (Otworth v. Southern
Pac. Transportation Co. (1985) 166 Cal.App.3d 452, 457 [212 Cal.Rptr. 743].)” (Soliz v.
Williams (1999) 74 Cal.App.4th 577, 585.)
       Given these principles it is almost always better to allow the plaintiff one or more
opportunities to perfect his or her statement of the case in the trial court than to deny that
opportunity and effectively shift the process of considering curative amendments to the
appellate stage.
       Despite the foregoing, we find no abuse of discretion in denying leave here
because plaintiffs offer us no basis to suppose that they could in fact amend their
complaint to plead facts establishing a duty to defend. In this situation it is the plaintiff’s
burden to show how the complaint can be amended so as to materially change its legal
effect. (McKelvey v. Boeing North American, Inc. (1999) 74 Cal.App.4th 151, 163; see 5
Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 946, p. 403; Lazar v. Hertz Corp.,
supra, 69 Cal.App.4th at p. 1501.) Plaintiffs have never articulated specific proposed
amendments or set out additional “ultimate facts” they believe would state a cause of
action against defendants. (See 4 Witkin, Pleading, op. cit. supra, § 339, pp. 436-437.)
Their suggestions as to possible amendments consist largely of conclusions or arguments
of law incapable of adding anything to the substance of their claims. (See id., §§ 339,


                                              21
345, 354, pp. 436-437, 444-447, 454.) We have already considered such additional facts
as plaintiffs mention—notably the City’s 1989 correspondence and the existence of other
“related” litigation—and have concluded that they do not establish a possibility that
plaintiffs were exposed to covered liability in the City’s action. Thus, while we have
reservations about the alacrity with which the trial court cut off plaintiffs’ right to plead,
we are satisfied that the demurrers were properly sustained, the motions for judgment on
the pleadings were properly granted, and plaintiffs could not have amended their
complaint to state facts sufficient to constitute a cause of action.
       The judgment is affirmed.




                                                   _________________________
                                                   Sepulveda, J.


We concur:


_________________________
Reardon, Acting P.J.


_________________________
Hanlon, J.*




* Retired Justice of the Court of Appeal, First District, sitting under assignment by the
Chief Justice pursuant to article VI, section 6 of the California Constitution.

                                              22
Trial Court:                   San Francisco County Superior Court

Trial Judge:                   Honorable David A. Garcia

Counsel for Appellant:         John B. Keating

Counsel for Respondent        Robert L. Sallander, Jr.
American Guaranty & Liability Rita M. Castro
Insurance Company             Cooper White & Cooper LLP

Counsel for Respondent          Robert Bruce Bybee
Liberty National Fire Insurance Law Offices Robert Bruce Bybee
Company

Counsel for Respondent         Ralph A. Lombardi
Fireman’s Fund Insurance       Lori A. Sebransky
Company                        Hardin, Cook, Loper, Engel & Bergez, LLP

Counsel for Respondent         Thomas E. Mulvihill
Western Heritage Insurance     Lisa M. Pierce
Company                        Low, Ball & Lynch

Counsel for Respondent         James C. Nielsen
Maryland Casualty Company      Thomas H. Nienow
                               Wright, Robinson, Osthimer & Tatum

Counsel for Amicus Curiae      David B. Goodwin
Pacific Gas and Electric       Esta L. Brand
Company                        Heller Ehrman White & McAuliffe




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