Federal Judge Denies Insurer’s Motion, Says Breach Of Contract Proceeds - Lexis Legal News

Mealey's (August 13, 2018, 7:54 AM EDT) -- SAN DIEGO — Claims for breach of contract and bad faith arising out of an insurer’s denial of coverage for an underlying wrongful eviction suit will proceed, a California federal judge said July 26 after determining that the insurer failed to prove that the underlying suit is excluded by any of the applicable policy exclusions (Black Mountain Center L.P., et al., v. Fidelity and Deposit Company of Maryland, No. 17-1776, S.D. Calif., 2018 U.S. Dist. LEXIS 125496

(Opinion available. Document #07-180814-021Z.)

Black Mountain Center L.P (BMC) and its president, Timothy Haidinger, filed suit in the U.S. District Court for the Southern District of California against their insurer, Fidelity and Deposit Company of Maryland, alleging claims for breach of contract and bad faith after Fidelity denied their claim for a defense in an underlying constructive eviction suit.

BMC owns the Haidinger Center, which consists of four buildings on one site in San Diego, Calif.  BMC leases the space to tenants for professional, retail, commercial and light manufacturing purposes.  Fidelity provided business and liability coverage for the property.

Marijuana Dispensary

On May 28, 2014, BMC entered into a lease with Victoria DuPont and Jeff Droege (collectively, tenants) for the express purpose to operate a medical marijuana dispensary.  The lease addressed the regulatory issues associated with the dispensary.  The lease stated that the tenants must be licensed to operate the dispensary. 

The tenants were able to operate the dispensary after they received their conditional use permit (CUP) from the city of San Diego.  After reviewing the conditions for the CUP, Haidinger determined that some of the CUP's conditions were unacceptable.  Specifically, Haidinger objected to the indemnity and the armed security guard provisions in the CUP and BMC's inability to obtain satisfactory insurance for the complex because of the existence of a medical marijuana dispensary.

After Haidinger refused to sign the CUP, he received a demand letter from the tenants requesting $500,000 in damages or, alternatively, a revised lease that would permit them to operate a marijuana dispensary.

Presuit Demand

Haidinger tendered the tenants’ presuit demand to Fidelity.  Fidelity denied the claim on the basis that there was no injury for which the tenants sought recovery.  Fidelity also indicated that the claims were barred by the personal injury, fraud and willful act exclusions in the policy.

The tenants then filed suit against BMC and Haidinger in the San Diego County Superior Court. The tenants sought $3.2 million in damages.  Even though they never took occupancy of the space in the Haidinger Center, the tenants continued to pay rent to BMC until April 2016, when they sent notice of termination of the lease.

Haidinger and BMC tendered the state court complaint to Fidelity seeking coverage.  Fidelity denied coverage on the basis that the tenants did not potentially seek damages covered by the policy, including under the wrongful eviction provision in the policy.

BMC and Haidinger then filed the instant suit.  The parties moved for summary judgment on the breach of contract claim. 

Question Of Fact

Judge Jeffrey T. Miller denied Fidelity’s motion and granted the plaintiffs’ motion on the breach of contract claim after determining that a question of fact exists as to whether the tenants acted within a reasonable amount of time in vacating the premises after the plaintiffs' alleged interference with their ability to operate a medical marijuana dispensary.

The judge rejected Fidelity’s argument that the insureds’ claims are barred under the policy exclusions for personal injury, fraud and willful acts.

“Here, Fidelity sets forth seven allegations from the second amended complaint filed in the underlying state court action and concludes, without analysis or addressing the extensive record before the court, that all exclusions apply.  This argument falls short of showing by ‘conclusive evidence that the exclusion applies in all possible worlds.’ Specifically, Fidelity fails to come forward with evidence to show that these exclusions apply under the circumstances — mere allegations taken from the second amended state court complaint fail to conclusively establish that these exclusions apply,” the judge explained.

Counsel

The insureds are represented by Gary Wayne Osborne of Osborne and Nesbitt in San Diego.

Fidelity is represented by Emily L. Rice, Kim Karelis and Stephen J. Erigero of Ropers Majeski Kohn & Bentley in Los Angeles and Scott P. Ward of Sinnott Puebla Campagne & Curet in Los Angeles.