Recent Cases Push Boundaries of Coverage for Property Disputes
By David A. Gauntlett*
Introduction
Property disputes can arise in many forms—boundary disagreements, title defects, encroachments, and easement conflicts—and several types of insurance policies may provide coverage depending on the nature of the claim. The most common is title insurance, which protects property owners against defects in title, liens, or encumbrances that were unknown at the time of purchase; however, title policies are often limited to issues existing before the policy’s issuance and may not cover post-acquisition disputes. Commercial General Liability (“CGL”) policies can sometimes provide coverage when a property dispute results in claims such as nuisance, trespass, or interference with property rights that fall under “personal and advertising injury” provisions.
Landowner Seeks Coverage for Easement Dispute
In the case of Carmel Valley Centre Drive LLC v. American Fire & Casualty Co. et al., Case No. 3:26-cv-01175 (U.S. District Court for the Southern District of California, Judge Thomas J. Whelan), the plaintiff, Carmel Valley Centre Drive LLC (CVCD), filed suit against its insurer, American Fire & Casualty Co., alleging breach of contract and bad faith for denying coverage related to an easement interference lawsuit. CVCD owned a three-acre parcel of fenced vacant land in San Diego and was sued in August 2022 by Del Mar Hotel Partners LLP. Del Mar alleged that CVCD unlawfully interfered with a shared easement by installing a metal fence and concrete barriers, asserting claims including nuisance, negligence, and breach of covenants, conditions, and restrictions.
The dispute proceeded to trial in February 2025, where a jury awarded Del Mar more than $373,000 in damages, along with nearly $1 million in attorney fees and costs. CVCD had tendered the defense of this lawsuit to American Fire under both a primary and umbrella policy, arguing that the claims potentially fell within coverage for “personal and advertising injury” or “personal injury.” However, the insurer denied the claim. Although the policies were originally issued to a different entity and failed to name CVCD due to a broker’s error, American Fire later agreed to reform the policies retroactively to include CVCD as a named insured effective October 19, 2021. CVCD contends that despite this correction, the insurer failed to properly investigate or honor its defense and indemnity obligations, thereby acting in bad faith.
Insurers Must Investigate Extrinsic Evidence
In its complaint, CVCD alleged that the basis for American Fire’s duty to defend is partially grounded in available extrinsic evidence that the insurer failed to investigate. Under California law, insurers have a broad duty to investigate any reported claims and discover all “facts available” that might impact a coverage determination. While one of the underlying rationales for this rule is the broad scope of the duty to investigate, first articulated by the California Supreme Court in Egan,[1] the doctrine has been readily applied in the third-party context.[2] Indeed, a number of cases have found that facts available to a non-defending insurer may implicate a defense, even though the insurer is apprised of the salient facts after the resolution of the underlying action.
A number of courts have found that affidavits and interrogatory answers by the underlying claimant can invoke an insurer’s duty to defend even where the complaint’s allegations are inadequate to do so.[3] These states treat notice as a covenant rather than a condition precedent to the recovery of attorneys’ fees.[4]
Some courts have permitted discovery which an insurer could have obtained if it had investigated the duty of defense owed.[5] This discovery, however, cannot include the context in which claims were asserted against the insured because all possible contexts must be considered by the insurer before denying a defense, so the particular context the claimant focused on is irrelevant. Indeed, the insurer must “defend the insured against any claim ‘potentially covered by the policy.’”[6]
[A]n insurer may only defeat an existing potential for coverage by undisputed facts that conclusively negate such coverage. This is particularly true where the insurer seeks to defeat coverage by reliance on an exclusion. An insurer may rely on an exclusion to deny coverage only if it provides conclusive evidence demonstrating that the exclusion applies. . . . Thus, an insurer that wishes to rely on an exclusion has the burden of proving, through conclusive evidence, that the exclusion applies in all possible worlds.[7]
Settlement with § 11580 Rights May Have Been Possible
California Insurance Code Section 11580 permits plaintiffs to pursue payment as judgment-creditors under an opposing party’s insurance policies “in an action based upon bodily injury, death, or property damage.” While insurers often argue that the “property damage” provision should be interpreted narrowly, recent case law and compelling public policy arguments do not support such a reading.
In Cal. State Grange v. Carolina Cas. Ins. Co.,[8] the Ninth Circuit recently reversed the district court on the basis that it “failed to consider whether the attorney's fees awarded pursuant to the slander of title claim may have been covered under the policy where a wrongful act is defined as including any ‘error, misstatement, [or] misleading statement.’” The court did not reject the validity of the action as one brought by a judgment-creditor against an insurer pursuant to Section 11580.
Other decisions have also expressed skepticism at rigidly enforcing the language.
Contrary to the argument of London Insurers, this interpretation of section 11580 does not render any part of the statute meaningless. The reference to property damage caused by “draught animals” is archaic, but the remaining language of section 11580, subdivision (a) expresses an intent to require a direct action provision in most liability policies issued to California residents.[9]
The court specifically noted that Section 11580 was “derived from a statute enacted in 1919.”[10] Accordingly, the court enforced the statute according to the clear legislative intent that it apply broadly to liability policies.
Conclusion
The CVCD case serves as an example of the scope of coverage available under a standard CGL policy, encompassing many claims that the name might not immediately suggest. While the CVCD case is likely far from a conclusion, both longstanding and recent case law support the position that American Fire should have defended its insured. Its failure to investigate available extrinsic evidence is no defense under California law.
*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.
[1] Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809 (1979) (a first-party disability policy case).
[2] Nelson v. West Am. Ins. Co., No. B143838, 2004 Cal. App. Unpub. LEXIS 5606, *15–16, *27–28 (Cal. Ct. App. June 14, 2004) (“[T]he insurer is ‘charge[d] with notice of all those facts which [it] might have ascertained had [it] diligently pursued the requisite inquiry.’ (California Shoppers, Inc. v. Royal Globe Ins. Co., supra, 175 Cal.App.3d at p. 37, 221 Cal.Rptr. 171; see KPFF, Inc. v. California Union Ins. Co., supra, 56 Cal.App.4th at p. 974, 66 Cal.Rptr.2d 36; State Farm Mut. Auto. Ins. Co. v. Martinez-Lozano (E.D.Cal.1996) 916 F.Supp. 996, 1005.) Accordingly, ‘[t]he risk that an insurer takes when it denies coverage without investigation is that the insured may later be able to prove that a reasonable investigation would have uncovered evidence to establish coverage or a potential for coverage.’ (American Internat. Bank v. Fidelity & Deposit Co. (1996) 49 Cal.App.4th 1558, 1571, 57 Cal.Rptr.2d 567.) . . . [A]n insurer is required to provide a defense against unpled claims that fall within policy coverage, provided that facts – whether extrinsic or alleged – available to the insurer sufficiently indicate that the third party could assert such claims.”)
[3] See, e.g., Teletronics Int’l, Inc. v. CNA Ins. Co., 302 F. Supp. 2d 442, 448, 449 (D. Md. 2004), aff’d, 120 F. App’x 440 (4th Cir. (Md.) 2005).
[4] Insurance Co. of State of Pa. v. Associated Int’l Ins. Co., 922 F.2d 516, 523–24 (9th Cir. (Cal.) 1990) (“Research . . . indicates that, absent a clear and unambiguous expression by the parties . . . that they intended the notice provision to be a condition precedent, the provision will not be construed as a condition precedent.”)
[5] Amerisure Mut. Ins. Co. v. Superior Constr. Corp., No. 3:07-cr-00276-W, 2008 U.S. Dist. LEXIS 62458, *12 (W.D.N.C. Aug. 15, 2008) (“Plaintiff . . . contends that it was not made aware of the nature of the damage to the condos until it received an interrogatory response dated May 12, 2008, more than a year after Defendant had resolved the Underlying Litigation. Plaintiff admits, however, that it had a duty to conduct a ‘reasonable’ investigation notwithstanding the information its insured (Defendant here) may provide.”)
[6] Pueblo Sante Fe Townhomes Owners’ Ass’n v. Transcontinental Ins. Co., 178 P.3d 485, 491 (Ariz. Ct. App. 2008), quoting United Servs. Auto. Ass’n v. Morris, 741 P.2d 246, 250 (Ariz. 1987).
[7] Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1038–39 (2002) (bold emphasis added).
[8] Cal. State Grange v. Carolina Cas. Ins. Co., No. 22-16169, 2023 U.S. App. LEXIS 30078, at *2 (9th Cir. (Cal.) Nov. 13, 2023).
[9] People ex rel. City of Willits v. Certain Underwriters at Lloyd's of London, 97 Cal. App. 4th 1125, 1130 (2002).
[10] Id. at n.3.