PROPERTY MANAGER ENTITLED TO DEFENSE: FEDERAL COURT FINDS CONDO OWNER CLAIMS FALL OUTSIDE OF PROPERTY DAMAGE EXCLUSION

Recently, the U.S. District Court for the Southern District of Texas found an insurer had a duty to defend a property management company after determining that some underlying claims did not fit within the applicable policy’s property damage exclusion.  In The Landing Council of Co-Owners v. Federal Insurance Company, 2017 WL 1092310 (S.D. Tex. 2017), a homeowners’ association, The Landing Council of Co-Owners, managed and maintained a condominium development known as The Landing in El Lago, Texas.  Federal provided primary and excess insurance coverage to the Council.  After Hurricane Ike damaged the Landing in 2008, several condominium owners became frustrated with the Council’s handling of the property.  Eventually, several condominium owners sued the Council alleging the Council had wrongfully demolished condominium units, tried to improperly sell the property and improperly counted votes on whether the condominium contract should be terminated.  Arguing that the property damage exclusion applied to all of the owners’ claims, Federal denied coverage. In response, the Council sought a declaratory judgment that it was owed a defense under the policy.  Both parties filed motions for summary judgment to bring the issue to a head before the Court.

 Applying the eight corners rule, the Court analyzed whether any of the factual allegations from the petitions in the owners’ lawsuits triggered a duty to defend under Federal’s policy.  The applicable policy contained a property damage exclusion excluding coverage for any claims “based upon, arising from, or in consequence of any . . . damage to or destruction of any tangible property.”  Under Texas law, the phrase “arising from” requires only a causal connection or relation—not direct or proximate cause.  Accordingly, Federal argued that “but for” the damage from Hurricane Ike there would have been no demolition of condos, no attempt to market the property, or no vote on whether to terminate the condominium contracts.  In other words, the Court only needed to find a minimal causal connection between the underlying claims and the property damage to for the exclusion to apply.  The Council instead insisted that the proper analysis merely required the Court to ask whether the underlying claims could have arisen even if no hurricane damage had occurred.  The Federal District Judge adopted the Council’s interpretation of the policy exclusion and found that two of the underlying claims could have arisen even if Hurricane Ike had never weaved its destructive path through El Lago, Texas.  Specifically, the Court found that the property damage exclusion did not apply to the owners’ claim that the Council did not have authority to sell the property because its decision-making authority or lack thereof was a separate issue not solely related to the hurricane damage.  Similarly, the Court noted the allegation that the Council had improperly counted votes on whether to terminate the condominium contracts could have arisen independently from any hurricane damage.  Thus, the Federal Court granted the Council’s motion for summary judgment and found Federal had a duty to defend the underlying lawsuits by the condominium owners.