Recently, the United States District Court for the Southern District of California held a professional liability insurer has a legal obligation to defend a property management company.^[1] The question of insurance coverage arose from a San Diego Superior Court case in which several of MG Properties’ customers had alleged the company maintained unlawful security deposit policies and late fees. This impacted some customers’ credit score, which led to the suit. Plaintiffs in the Superior Court case sought damages for defamation in the form of unlawful debt reporting to third-party credit agencies as a result of the allegedly unlawful policies.

MG Properties sought coverage and a defense under a professional liability policy from their insurance carrier. Their insurance carrier denied the claim on two grounds: the illegal profits and the conversion exclusions. These exclusions bar coverage and a defense where the insured gained any profit to which they are not entitled and where they misappropriated or commingled the funds of their customers. While the allegations in the underlying case remain in dispute, MG Properties filed suit in federal court seeking relief in the form of a defense by its insurance carrier.

Federal Court Weighs In

The federal court sided with MG Properties and concluded the insurance carrier owes a duty to defend, and that the duty extends far beyond the duty to indemnify.^[2] For example, in California, unless a contrary intention appears in the insurance policy, an indemnitor like an insurance carrier is legally obligated to provide a defense.^[3] The insurer argued that the plaintiffs in the underlying lawsuit could not seek damages on a class-wide basis and that the monies in dispute were illegally obtained.

The court rejected both arguments and reasoned the allegations of defamation fell within the scope of the policy’s personal injury coverage. Specifically, the plaintiff customers of MG Properties had adequately sought damages due to the adverse credit reporting, and the alleged “illegal profits” were not actually in the possession of MG Properties as they were subject to collection activities.

Takeaways

Those seeking insurance coverage for their home, automobile, or business, should work closely with their insurance broker to determine and purchase adequate insurance. And while an insurer may seek to rely on exclusions based in misappropriation or even outright illegal activity on the part of their insured, such exclusions may not be adequate to shield the insurer from providing coverage. Insurers should work closely with their counsel to ensure the specific policy language and facts of the case are analyzed for applicability in light of this decision. While the court seems to have possibly expanded the scope of the policy’s personal injury coverage, it reasoned under the specific facts of this case the policy did apply.

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Sources

^[1] Gleiberman Props., Inc. v. Evanston Ins. Co., 2023 WL 5246315 (S.D. Cal. Aug. 15, 2023)

^[2] Indemnity vs. Duty to Defend: Know the Differences and Potential Critical Variations in State Law (americanbar.org)

^[3] Cal. Civ. Code § 2778(4)