Most property insurance claims only involve two parties, the insured and the insurer. Sometimes, however, property claims can get more complicated and involve third parties, implicating liability insurance policies. This is exactly what happened in Eastpointe Condo. I Ass’n, Inc. v. Travelers Cas. & Sur. Co. of America, 379 Fed. Appx. 906 (11th Cir. 2010).

Two hurricanes hit Eastpointe Condominium I in 2004, causing serious damage to the property, resulting in water intrusion and mold in at least one of the units. A unit owner sued the condominium association, alleging that it had failed to adequately maintain and repair the roof to prevent damage to his unit. To defend it against the lawsuit, the association turned to its commercial general liability (CGL) insurer and its directors and officers (D&O) insurer. The association’s CGL insurer defended the association under a reservation of rights, but the D&O insurer refused to defend the association on the basis of a “property damage” exclusion that excluded coverage “for or arising out of any damage, destruction, loss of use or deterioration of any tangible property including … mold, toxic mold, spores, mildew, fungus, or wet or dry rot.” The directors and officers hired their own private counsel to defend their interests alongside the counsel provided by the association’s CGL insurer. At trial, the association obtained defense verdicts on all counts, winning the lawsuit that the unit owner had brought against it.

The association then turned around and sued its D&O insurer to recover its expenses in defending the unit owner’s lawsuit. The trial court in the D&O case granted summary judgment in favor of the insurer on the basis of the “property damage” exclusion, holding that the unit owner’s lawsuit arose out of damage to property. The association then appealed the summary judgment to the Eleventh Circuit Court of Appeals.

The association sought a reversal of the summary judgment with three main arguments. First, the association tried to reason that the lawsuit brought against it was not for property damage but breach of the association’s duty, but the court held that the breach of duty claim “arose” from property damage. Second, the association sought to prove the property damage exclusion ambiguous because another judge in another case had interpreted similar language to not exclude the type of claim brought by the unit owner, but the court found no ambiguity in the D&O policy’s language. The association’s third argument was that enforcement of the property damage exclusion would render the policy illusory, because the association’s main function was the management and maintenance of the property. The court did not agree with this logic, finding that there was other coverage available under the policy, even if there was no coverage for claims arising out of property damage.

The Eleventh Circuit affirmed the trial court’s holding that there was no coverage under the D&O policy for the lawsuit brought by the unit owner, and, therefore, no duty for the D&O insurer to defend the association against that lawsuit. Even though the original claim involved property damage, that initial claim spawned insurance issues far beyond a property insurance claim. This case is a good illustration as to why associations should check their policies, even their liability policies, to see what coverage they have in the event of property damage.