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Condo | HOA Lawyers

The Risk of Being Under Insured

Truck Insurance Exchange v. Ullman, –N.E.3d – (2023), 2023 IL APP (1st) 220804

What you need to know:

  1. Purchasing inadequate amounts of insurance as a director can result in a lawsuit against you for which there might not be insurance coverage.
  2. If your association objects to you as a director seeking sufficient insurance coverage, resign as a director.

Issue: Did a project to install street lighting (where none previously existed) require a special assessment or could it be part of the annual budget? 

Facts: A 35-unit condominium building in Des Plaines, IL was destroyed by fire in September of 2018. Prior to the fire, The Landings Condominium Association (Association) had “switched insurers from Allstate Insurance Company to Truck (a member of Farmers Group of Companies) (Truck) and reduced the amount of coverage by nearly $1.6 million. “The policy limit for the building’s replacement cost under the Truck policy was $5,858,300, with a total coverage of $6,482,542… The policy also included an umbrella provision of additional D & O liability coverage once the underlying policy D & O’s coverage was exhausted.” The estimate to rebuild was for more than $8.3 million. Two years after the fire, in October 2020, various unit owners filed a complaint against the Association, three of its directors, and the property management company. The complaint alleged that defendants:

  1. Failed to obtain adequate and appropriate kinds of insurance in violation of the relevant condominium act and violation of the relevant section of the Declaration of Condominium Ownership (Declaration);
  2. Violated their fiduciary duties;
  3. Engaged in fraudulent misrepresentation;
  4. Mismanaged the reconstruction process;
  5. Violated the Condominium Act and the Declaration by accepting a bid from the contractor that exceeded the policy limit without the unit owners’ approval; and
  6. Failed to keep detailed and accurate records for the project.

The insurer, Truck, filed a complaint seeking a declaration that it had no duty to defend the insureds under the three relevant policies: the D&O policy, the liability policy, and the umbrella policy. The insurer also claimed it had no duty to indemnify any of the insureds essentially because the directors failed to procure a sufficient amount of insurance coverage.

Trial Court: The trial court granted Truck’s motion for judgment on the pleadings. The court found that although the underlying complaint alleges the occurrence as the 2018 fire, there was no “occurrence” under policies because there is no allegation that the insureds “had any role in causing or exacerbating the fire.” The alleged failure of the defendants was not obtaining adequate coverage, and these alleged breaches of contract and fiduciary duty “are not the sort of bodily injury or property damage contemplated by the [insurance policies].” The defendant directors and Association appealed.

Appeals Court: The underlying complaint is that the insured defendants breached fiduciary duties by failing to maintain adequate insurance to cover replacement and this is “not the sort of bodily injury or property damage covered by the policies. “Consequently, the facts in the underlying complaint do not fall within, or potentially within, the liability coverage provision to trigger Truck’s duty to defend.” However, because the complaint also alleges that the defendants “failed to obtain competitive bids for the reconstruction project, properly manage the project, and keep detailed and accurate records in violation of the Condominium Act and the Declaration,” the decision of the trial court must be reversed and remanded because these allegations could result in liability for which coverage potentially exists.

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