DALLAS FEDERAL COURT CONCLUDES PLAINTIFF’S ALLEGATIONS FELL OUTSIDE OF POLICY EXCLUSION FOR CONDO PROJECTS & HOLDS INSURER HAS DUTY TO DEFEND

Last week, the United States District Court for the Northern District of Texas concluded that the plaintiff’s allegations fell outside the policy provision excluding coverage for condominium projects that exceed 25 units, and held that the insurer had a duty to defend. In Certain Underwriters at Lloyd’s v. Keystone Development, LLC, No. 3:21-CV-336-L, 2022 WL 865891 (N.D. Tex. [Dallas Division] March 23, 2022), Keystone Development built a construction project known as Cityscape Plaza. Cityscape Plaza Owners Association managed and maintained Cityscape Plaza. Cityscape commenced an action in District Court in Dallas County against Keystone, seeking monetary damages because of alleged construction defects and physical damage to Cityscape Plaza.  Cityscape alleged in its petition: “Cityscape Plaza is a common interest community which was constructed as two separate projects. The first project, located at 1717 Annex Avenue in Dallas, Texas, is comprised of four buildings with 24 three-story condominiums. The second project, located at 1801 Annex Avenue in Dallas, Texas, is comprised of two buildings with 15 three-story condominiums.”

Certain Underwriters at Lloyd's filed a declaratory judgment action in federal court, and sought summary judgment contending that it did not have a duty to defend Keystone, its insured, in the Underlying Lawsuit. Lloyd’s relied on the policy provision excluding coverage for work incorporated into a condominium or townhouse project for projects that exceed 25 units. Lloyd’s argued that Cityscape Plaza had 39 units, which clearly exceeded 25 units and therefore fell within the exclusion. 

The Federal Court in Dallas disagreed with Lloyds and concluded Cityscape's petition alleged facts that possibly implicated coverage under the policy and did not allege facts which clearly fell within the exclusion. The Court noted: “Indeed, the petition outline[d] two separate projects neither of which include[d] more than 25 units.” Further, “[b]ecause it [was] unclear if “project” as used in the Policy mean[t] the overall completed condominium or, instead, mean[t] each project taken individually, the court . . . interpreted “project” to mean each individual project; therefore, Cityscape's allegations that one project consisted of 25 units and the other consisted of 15 units [fell] outside of the exclusion provision within the Policy.”

The Court also rejected Lloyd’s argument that the court should consider extrinsic evidence about the number of units involved in the project, concluding that this “impermissibly engages the truth or falsity of the facts alleged in the petition.”