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Condo | HOA Lawyers

“Related Wrongful Acts” Can Exhaust an Association’s Liability Insurance Policy Limit

IMPRESSION: The ruling in Great Am. Ins. Co. v. State Parkway Condo. Ass’n, No. 17-cv-3083 (N.D. Ill. Sept. 11, 2018), should serve as a cautionary tale to Condo and HOA boards.

DETAILS: In Chicago, a unit owner of a condominium located at 1445 North State Street filed an Illinois state discrimination claim in 2007 against the State Parkway Condominium Association (“SPCA”) for failure to accommodate his hearing disability during SPCA Board meetings.  The SPCA defended the claim under its 2006-2007 Non-Profit Management and Organization Liability Insurance Policy (“policy) issued by Travelers Casualty and Surety Company of America (“Travelers”).

A settlement between parties was reached in September 2007; but six months later, the SPCA sued the same unit owner in an entirely unrelated matter. In response, the unit owner filed a counterclaim alleging harassment and defamation, purportedly beginning in September 2007 and continuing through 2008.  Again, Travelers defended the counterclaim via the SPCA 2006-2007 term insurance policy—which had a $1 million dollar limit—because the unit owner’s assertions in the counterclaim and the prior 2007 discrimination claim constituted, “Related Wrongful Acts.” Later, Travelers clarified the counterclaim coverage fell under the 2009-2010 policy which had a $2 million dollar limit.

In November 2010, the same unit owner filed yet another state discrimination claim against the SPCA, specifically referencing the initial 2007 disability discrimination claim, along with a new allegation of refusal to recognize his dog as a qualified service animal. Travelers defended this new discrimination claim under the 2009-2010 policy.

After a relatively tranquil two-year period, in 2013, the same unit owner filed a federal lawsuit related to his prior state discrimination claims prompting Travelers to defend the SPCA until the $1 million dollar policy limit was exhausted.  (This meant there were no more insurance funds to protect the association.)

The SPCA then sued Travelers, asserting that more than one insurance policy was involved in defending the unit owner’s claims, and therefore policy coverage for defending the lawsuits en masse should total at least $2 million dollars.  Further, the SPCA opined the two state discrimination lawsuits, counterclaim, and federal discrimination suit constituted four individual claims; and by failing to defend all four claims, Travelers was in violation of the Illinois Insurance Code.

In retort, Travelers argued the unit owners four lawsuits were all “Related Wrongful Acts” which arose from the unit owner’s initial 2007 state discrimination claim; and as a result, are all treated as a single insurance claim falling under the 2006-2007 policy that had a coverage limit of $1 million dollars. In support, Travelers pointed to policy language which defined “Related Wrongful Acts” as acts “that arise out of, are based on, relate to or are in consequence of, the same facts, circumstances or situations.

Although the SPCA vehemently argued the policy definition of “Related Wrongful Acts” was ambiguous, the court found the definition to be “very broad,” and with certainty ruled the unit owner’s claims were encompassed. In fact, the court stated,

[t]here is no question for this Court that these matters are related within the meaning of the policy. Each arises from or is based on relates to the SPCA’s allegedly discriminatory and retaliatory conduct against [the unit owner] for his hearing disability.  Any distinctions between these matters [is] superficial. (emphasis added).

Consequently, the court ruled all of the discrimination claims/lawsuits established a single comprehensive insurance claim subject to the SPCA’s single insurance policy limit.

LESSON: There are actually two lessons here:

  1. Establish an insurance committee on the association board so that insurance coverages are understood. You cannot expect—and no property manager can realistically understand—all insurance issues to the extent necessary; and
  2. Problem unit owners generally don’t become less of a problem because your insurance company settled some suit with them, especially if that settlement paid the unit owner money. It only empowers the unit owner to make similar claims in the future, especially if the association then decides to fine or otherwise challenge the unit owner in some fashion. Instead, if the association has a legitimate claim against such a unit owner, take some basic steps:
    1. Document everything;
    2. Make true good faith efforts to resolve the controversy;
    3. If you can’t resolve, before doing anything further, obtain an opinion from knowledgeable counsel as to the options available to the association and what the attorney recommends (See §181.0850 Wis. Stat.); and
    4. Keep all of the unit owners advised—to the extent possible, without disclosing any attorney client privileged information.

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