Unpublished Disposition, 927 F.2d 609 (9th Cir. 1989)

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US Court of Appeals for the Ninth Circuit - 927 F.2d 609 (9th Cir. 1989)

No. 89-56198.

United States Court of Appeals, Ninth Circuit.

Appeal from the United States District Court for the Southern District of California, No. 86-1009S (IEG); Edward J. Schwartz, District Judge Presiding.

S.D. Cal.

AFFIRMED.

Before D. W. NELSON and REINHARDT, Circuit Judges, and TANNER,*  District Judge.

Northern Insurance Company appeals the district court's grant of summary judgment in favor of appellee Equity General Trust Company, and denying appellant Northern Insurance Company's Motion for Summary Judgment. We affirm.

On or about May 6, 1981, the Smith v. Bay class action complaint was filed against Bay Development Limited Corporation and The Bowen Company, among others.

The Smith action arose out of the conversion of an apartment complex into a condominium project. Bay Development, Ltd. (Bay) was responsible for the conversion of apartments into condominiums. The Smith plaintiffs were homeowners at the Mission Village Condominium Development. The Smith plaintiffs alleged that they had sustained property damage, loss of use, and loss of value of their units as a result of Bay's defective workmanship, and that the units purchased did not meet the purchasers' expectations, for varied reasons. Bowen acted as property manager of the condominium development project until January 1980.

The Smith action was tendered to both Northern and Equity General Insurance Company, each of which had issued an insurance policy to its insured, Bowen Company. The tender for defense was accepted by Equity, and declined by Northern.

On April 26, 1986, Equity filed a complaint for reimbursement for sums expended in defending Bowen in the Smith action. The district court entertained cross-motions for summary judgment on March 20, 1989.

The district court denied Northern's motion, and granted Equity General's motion for summary judgment on the issue of liability. The court held that Northern had a duty to defend in its capacity as property manager and as a partner in Bay. Trial as to damages was held on June 13, 1989. On August 3, 1989, the court entered judgment against Northern in the amount of $236,892.04, together with prejudgment interest in the amount of $87,750.89. Northern appeals.

ANALYSIS

The issue before us is whether the district court properly granted Equity's motion for summary judgment on its claim that Northern had a duty to defend Bowen in the Smith action. We review a grant of summary judgment de novo. Franceschi v. American Motorists Ins. Co., 852 F.2d 1217, 1219 (9th Cir. 1988). Because this is a diversity action, California substantive law applies. See id. at 1219.

The Duty to Defend

Northern contends that the district court erred in finding that Northern had a duty to defend Bowen based on its potential liability for personal property damage to individual condominium owners.

Northern contends that it was not obligated to defend Bowen because; (1) Bowen was insured under the Northern policy only in its capacity as property manager and not as a partner in Bay, and (2) even if Bowen was insured in its capacity as a partner in Bay, the Smith complaint did not allege any facts which raised the potential for liability under the policy.

We reject Northern's position, and affirm the district court.

In determining the existence of a duty to defend, the relevant inquiry is whether there was a potential for liability at the time the request for tender of defense was made. Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 54 Cal. Rptr. 104 (1966). The potential for liability is analyzed in light of the facts available to the insurer at the time the tender of defense occurs. CNA Casualty of California v. Seabord Surety Company, 176 Cal. App. 3d 598, 605, 222 Cal. Rptr. 276, 278.

It is undisputed that Bowen was insured under the Northern policy with respect to its activities as property manager. Furthermore, we reject Northern's contention that it had no duty to defend because Bay was not sued in its capacity as "property manager." Although the Smith complaint does not expressly state that Bay is sued in its capacity as "property manager", it does allege damage to plaintiffs' property arising out of the maintenance and conversion of the subject property prior to its purchase by plaintiffs.

These allegations could have led to liability on the part of Bowen in its capacity as property manager. The averments of plaintiffs' complaint alleging damage to property, including loss of use and value, and the facts available to the insurer at the time of tender presented the potential for liability under the policy. Where such a potential is presented, an insurer may not deny coverage even if the suit is groundless, false, or ultimately not covered, CNA Casualty v. Seabord Surety Company, 176 Cal. App. 3d 598, 606, 222 Cal. Rptr. 276, 279 (1986).

Northern's reliance on an alienated premises exclusion is misplaced here. Where defective design or construction caused damage to property other than the alienated premises or resulted in personal injury, courts have found a duty to defend. Central Mutual Insurance Company v. Del Mar Beach Club Owners Association, 123 Cal. App. 3d 916, 176 Cal. Rptr. 895 (1981).

Thus, where the damage alleged goes beyond damage to the alienated property, a duty to defend arises. The court finds that the allegations in the complaint were sufficient to give rise to a potential for liability of Bowen in its capacity as property manager.

Northern's duty to defend Bowen also arises from its status as a partner in Bay.

The Northern policy covered named insureds designated as partnerships or joint ventures. Bay was listed in the declarations as a limited partnership, and Bowen as a partner in Bay; therefore, Bowen was an insured on the Northern policy as partner in Bay Development.

Northern argues that a subsequently adopted endorsement constituted a limitation restricting the coverage otherwise granted in the policy for Bowen as a partner in Bay.

The first of two endorsements to the Northern policy added Bay as a named insured. The second endorsement added Bowen as an additional insured while acting as property managers for the Mission Village project.

An exclusion is only effective to bar a duty to defend if it is conspicuous, plain and clear. State Farm Mutual Auto Insurance Co. v. Jacober, 10 Cal. 3d 193, 201-202, 110 Cal. Rptr. 1, 5-6 (1973). The court finds that use of the term "additional insured" in the endorsement creates an ambiguity which is to be resolved against the insurer, American States Insurance Co. v. Borbor by Borbor, 826 F.2d 888 (9th Cir. 1987); Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 269, 54 Cal. Rptr. 104, 110-111 (1966).

The Northern policy expressly provided coverage for Bowen as a partner in Bay Development. We therefore conclude that the endorsement was intended to add coverage, insuring Bowen as a partner in Bay, and does not operate as a limitation on coverage. When there is doubt as to whether the duty to defend exists, the doubt should be resolved in favor of the insured and against the insurer. Eichler Homes Inc. v. Underwriters At Lloyds, London, 238 Cal. App. 2d 532, 538, 47 Cal. Rptr. 843, 847 (1965).

Northern raises for the first time on appeal its claim that, even if it had a duty to defend Bowen, it should not be charged with the entire cost of that defense. Issues not properly raised at trial will not be considered on appeal. CNA Casualty v. Seabord Surety Co., 176 Cal. App. 3d 598, 618, 222 Cal. Rptr. 276, 288 (1986). Because this issue is not properly before this court, it will not be addressed.

When there is a dispute between insurers as to whose policy provides coverage for a particular loss, the court has given effect to the "primary" and "excess" insurance clauses in the respective policies. Interinsurance Exchange v. Spectrum Inv. Corp., 209 Cal. App. 3d 1243, 1256, 258 Cal. Rptr. 43, 50. The Northern policy states that the insurance afforded by it is primary insurance. Because the limits of the primary policy were never reached, Equity, as the excess insurer, is entitled to recover from Northern all of its defense costs expended in defending Bowen in the Smith action. National Am. Ins. Co. v. Insurance Co. of N.Am., 74 Cal. App. 3d 565, 576, 140 Cal. Rptr. 828, 834 (1977).

CONCLUSIONS

Bowen was an insured under the Northern policy both as a partner in Bay and as a property manager for the condominium development. The general damage allegations in the complaint were sufficient to evidence a potential for liability under the policy. The damage allegations encompass damage to non-alienated premises, and therefore, the "premises alienated" exclusion is inapplicable. Therefore, Northern had a duty to defend Bowen. The costs incurred by Equity in defending Bowen do not exceed the limits of the Northern policy. Northern, as the primary insurer, is therefore obligated to assume the full cost of defense of Bowen in the Smith action.

Accordingly, the district court's grant of summary judgment is AFFIRMED.

 **

MEMORANDUM

 *

The Honorable Jack E. Tanner, United States District Judge for the Western District of Washington, sitting by designation

 **

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Circ.R. 36-3

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