Kazi v. State Farm Fire & Casualty Co.

• Decision Date: 18 January 2001
• Docket Number: No. S078962.,S078962.
• Citation: 103 Cal.Rptr.2d 1,24 Cal.4th 871,15 P.3d 223
• Court: California Supreme Court
• Parties: Zubair M. KAZI et al., Plaintiffs and Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY et al., Defendants and Respondents; Kerns & Gradillas et al., Movants and Respondents; Gary S. Smolker, Objector and Appellant.

103 Cal.Rptr.2d 1

24 Cal.4th 871

15 P.3d 223

Zubair M. KAZI et al., Plaintiffs and Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY et al., Defendants and Respondents;

Kerns & Gradillas et al., Movants and Respondents;

Gary S. Smolker, Objector and Appellant.

No. S078962.

Supreme Court of California.

January 18, 2001.

Rehearing Denied April 11, 2001.

Law Offices of Smolker & Graham, Alice M. Graham, Marina Del Rey, and Gary S. Smolker, in pro. per., and for Plaintiffs and Appellants and for Objector and Appellant.

Anderson, Kill & Olick, John A. Mac-Donald, Philadelphia, PA, Edward M. Joyce, New York, NY, Jordan S. Stanzler, San Francisco; and Amy S. Bach, for United Policyholders as Amicus Curiae on behalf of Plaintiffs and Appellants.

Robie & Matthai, Michael J. O'Neill, Pamela E. Dunn, Claudia M. Sokol, Gabrielle M. Jackson and Natalie A. Kouyoumdjian, Los Angeles, for Defendant and Respondent State Farm Fire and Casualty Company.

Horvitz & Levy, Barry R. Levy, Mitchell C. Tilner, Encino, Robert H. Wright; Cotkin & Collins, Joan M. Dolinsky and Terry C. Leuin, Los Angeles, for Defendants and Respondents Truck Insurance Exchange and Farmers Insurance Exchange.

Peter F. Riley, for Movants and Respondents.

CHIN, J.

We granted review to determine whether comprehensive liability insurers who insure only for tangible property losses owe a duty to defend in a dispute involving the right to use an implied easement. Case law and treatises have always acknowledged that actions over easement ownership, interference, or the right to use an easement concern "pure rights in property" or intangible rights only. (See Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1109, 44 Cal.Rptr.2d 272 (Gunderson); see also 6 Miller & Starr, Cal. Real Estate (3d ed. 2000) Easements, §§ 15:1,15:5, pp. 4,16.)

In line with Gunderson, we conclude, in contrast to the Court of Appeal, that an insurer providing a liability policy that covers damage to tangible property on the insured's premises has no duty to defend an easement dispute. For reasons explained below, we therefore reverse the Court of Appeal judgment and remand the matter for proceedings consistent with this conclusion.

I. Facts And Procedural History

Plaintiffs Zubair M. Kazi and Khatija Kazi (the Kazis) purchased land (Parcel A) from the State of California's Santa Monica Mountains Conservancy (Conservancy). C. David Tollakson and Lynn L. Tollakson (the Tollaksons) also purchased Conservancy land (Parcel B). In an informational booklet, the Conservancy informed prospective buyers that Parcels A and B shared a common driveway 20 feet in width that straddled the boundary line between the two parcels. The deeds made no reference to any express easement for a common driveway. When the Tollaksons bought Parcel B, however, they relied on the representations made in the informational booklet to assume an implied easement existed on Parcel A for a "common driveway, for ingress, egress, and a right of way over and across Parcel A, parallel to the Boundary Line and for a width of not less than ten feet, all of which is appurtenant to Parcel B...."

In order to facilitate building on their property, the Kazis graded an access road on Parcel A, at or near the boundary line of Parcel B. Although the access road did not involve Parcel B, the Tollaksons complained to the Kazis that the grading interfered with their claimed implied easement and right-of-way over the Kazis' parcel, effectively ousting them from use and possession of their own Parcel B. When the Kazis denied the existence of an implied easement over Parcel A, the Tollaksons sued them in May 1990.

The Tollaksons' complaint against the Kazis asserted causes of action for (1) declaratory and injunctive relief, (2) quiet title, (3) trespass to the common driveway easement, and (4) ejectment from the common driveway easement. Each cause of action essentially alleged that the Kazis' access road obstructed the Tollaksons' alleged implied easement over Parcel A. The complaint specifically noted that the entire dispute concerned the "right of way over and across Parcel A, parallel to the Boundary Line and for a width of not less than ten feet, all of which is appurtenant to Parcel B...."

The Tollaksons also alleged in their complaint that they purchased their parcel from the Conservancy with the understanding that each parcel would be served by a common driveway straddling the property boundary line. They admitted, however, that the Conservancy never conveyed to them or to the Kazis any deed for an express easement in the common driveway. The Tollaksons complained that the Kazis "denied the existence of an easement" over their parcel for purposes of the common driveway, and that they "have been grading and constructing on Parcel A in contravention of the existence of such common driveway easement and have obstructed the same, denying [the Tollaksons] the benefits of such easement." The complaint alleged no physical damage to either parcel, but essentially asserted that the Tollaksons would not have purchased Parcel B without the easement over Parcel A for the common driveway because without it, Parcel B was not buildable.

The trespass claim sought $4,000 per month in damages and alleged that interference with the alleged implied easement diminished Parcel B's value by $400,000. The ejectment claim sought payment of $4,000 per month in damages for obstructing the easement. The Kazis denied the existence of an implied easement over Parcel A and refused to acknowledge any access interference.

In August 1990, the Kazis tendered defense of the Tollaksons' complaint to their liability insurance carriers, defendants Farmers Insurance Exchange (Farmers), the primary insurance carrier, State Farm Fire and Casualty Company (State Farm), and Truck Insurance Exchange (Truck). These policies covered property damage and personal injury, which included a duty to defend and indemnify the Kazis in an underlying lawsuit involving third party property damage or personal injury. Farmers insured the Kazis under a Farmers E-Z-Reader Car Policy that included a "Comprehensive Personal Liability Insurance Endorsement" providing liability coverage for "damages which an insured becomes legally obligated to pay because of ... property damage resulting from an occurrence to which this coverage applies." The policy defined property damage as "physical injury to or destruction of tangible property, including loss of its use." The insurers did not intend these policies to cover disputes involving claims over intangible property rights.

The Truck personal umbrella policy provided coverage for "damages that you must pay ... because of personal injury ... covered by this policy; [and] reasonable expenses that you incur in the investigation, defense and settlement of a claim or suit because of personal injury or property damage covered by this policy...." The policy defined personal injury to mean, in pertinent part, "injury arising out of ... [¶] ... wrongful entry or eviction, or other invasion of ... a person's right of private occupancy.... [¶] Property damage means damage to or loss of use of tangible property." The State Farm homeowners liability insurance policy defined property damage to mean "physical damage to or destruction of tangible property, including loss of use of this property." The policy's "loss of use" provision covered payment to maintain the insureds' own standard of living if the insured loss rendered the insureds'"residence premises" uninhabitable.

Before the insurers responded to the demand for a defense, the Kazis settled the Tollakson action on the eve of trial in November 1990. As part of the settlement, the parties agreed that the mutual common driveway alleged in the complaint did not exist. Instead the Kazis agreed to record a deeded easement in a portion of Parcel A to enable the Tollaksons to construct and maintain a separate driveway on Parcel B. The settlement agreement also gave the Kazis an option, at the Tollaksons' expense, to "process a lot line adjustment" so that the easement the Kazis granted to the Tollaksons would become part of Parcel B. Following the settlement, State Farm reimbursed the Kazis for the fees and costs it found reasonably attributable to the six-month defense and settlement.

Not satisfied with the reimbursement, the Kazis filed the present bad faith action against their insurers, suing them for breach of contract, breach of the duty of good faith and fair dealing, and negligent handling of their claim. The insurers' answer to the complaint asserted that they had no duty to defend or indemnify the Kazis in the underlying Tollakson lawsuit because it involved an easement dispute and their policies did not cover intangible property actions. Truck and Farmers also cross-complained against the Kazis in declaratory relief, seeking a declaration that they had no duty to defend the Kazis, that their policies provided no coverage for the Tollaksons' claims, and that they had no duty to indemnify the Kazis for their costs.

The trial court granted State Farm's motion to sever the issues and try first the duty to defend question. It ruled in the insurers' favor, finding that because the easement dispute involved intangible property rights only, and no physical damage or occurrence on the Tollaksons' property, the complaint on its face did not trigger the duty to defend. The court added that the Tollaksons' complaint did not allege any claim for tangible property damage to Parcel B, and they therefore were not seeking the type of damages that were potentially covered under the liability insurance policies. It therefore granted the insurers' motion for nonsuit, concluding that they "had no duty to defend the Kazis in the Tollakson action because there was no potential for coverage under any of the policies for personal injury or property damage." Based on its coverage conclusion, the...