Real Estate Law

No Insurance For Land Developer and Condo Board Member For Attempt To Rezone Condo Real Estate For Casino

    Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP

In its recent decision in State Farm Fire& Cas. Co. v. Anderson, 2013 U.S. Dist. LEXIS 57837 (S.D. Miss. Apr. 23, 2013) [enhanced version available to subscribers], the United States District Court for the Southern District of Mississippi had occasion to consider coverage for an alleged fraudulent real estate scheme under a comprehensive condo policy containing business liability coverage and directors and officers coverages.

State Farm insured the Harbor House Property Owners Association, Inc., a condo development located in Diamondhead, Mississippi. The Harbor House development experienced significant property damage as a result of Hurricane Katrina. It was alleged that one of the Association board of directors, Carl Joffe, used his board position to intentionally delay rebuilding efforts after the hurricane so as to cause a number of property owners to sell their properties to Mr. Joffe, or one of his associates. These properties were later resold to Diamondhead Real Estate ("DRE"), a land developer. As a result of these sales, DRE was able to appoint enough members to the Association board so as to take majority control of the board. DRE, through these individual board members and Joffe, thereafter engaged in efforts to have the development rezoned for use as a casino. Although these efforts ultimately were unsuccessful, the homeowners brought suit against Mr. Joffe and various members of DRE that had been appointed to the Association board. The suit sought money damages from these individuals based on theories of they (1) committed oppressive and/or fraudulent activity and breached their common law duty of loyalty and fiduciary duty to the Association; (2) engaged in self-dealing; (3) served the interests of DRE, rather than the Association and its members; (4) acted in bad faith; (5) engaged in intentional misconduct and a knowing violation of the Association's charter document; and (6) committed illegal, oppressive, and/or fraudulent acts.

State Farm's policy contained a business liability coverage similar in nature to a general liability policy. The policy provided coverage for bodily injury or property damage resulting from an occurrence. It also provided coverage for personal or advertising injury resulting from an occurrence. The court readily agreed that the underlying lawsuit contained no allegations of any such categories of harm resulting from an occurrence.

The policy's directors and officers coverage insured the Association board for sums it became "legally obligated to pay as damages, because of 'wrongful acts' committed by an insured solely in the conduct of their management responsibilities for the Condominium/Association." The policy, however, contained an exclusion applicable to "any dishonest, fraudulent, criminal or malicious act" as well as an exclusion applicable to "damages arising out of any transaction of the insured from which the insured will gain any personal profit or advantage which is not shared equitably by the Condominium/Association members."

Joffe and the other board member defendants argued that coverage was triggered simply based on allegations of breach of fiduciary duty and breach of duty of care, and that the underlying complaint could be characterized as a negligence claim for which State Farm had a duty to defend and indemnify. The court disagreed with the insureds' characterizations, concluding that the underlying complaint alleged illegal, oppressive and/or fraudulent misconduct falling within the policy's exclusions. As the court explained:

The breaches alleged in the underlying case are not the sort of errors, omissions, or negligent acts covered by Option DO. They fall squarely within the coverage exclusions for "dishonest, fraudulent, criminal or malicious" acts, and "damages arising out of any transaction of the insured from which the insured will gain any personal profit or advantage which is not shared equitably by the Condominium/Association members." Therefore, the optional Directors and Officers Liability section does not provide coverage for the conduct alleged in the underlying case.

Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.

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