Liability insurance coverage disputes often evolve out of the insurer’s duty to defend the policyholder from suits within the coverage promised by the insurance contract. When the duty to defend is triggered, the insurer is burdened with the contractual duty to assume control of the defense to the suit against the policyholder. But an insurer’s duty to defend is limited when a condition precedent is not satisfied by the insured, as detailed in the newly filed case, Century Surety Co. v. L For Lofts, LLC.[i]
On June 8, 2021, a fire started at Nelly’s Wholesale, Inc., a commercial tobacco shop in Los Angeles County.[ii] Nelly’s was located inside an expansive property which L for Lofts, LLC owned.[iii] The property included other commercial businesses on the first floor and residential space on the second and third floors.[iv] The blaze quickly expanded from Nelly’s and cloaked the premises shortly after that; 150 firefighters battled the inferno but could not save the premises.[v]
Three months before the fire, Century Surety Company issued commercial general liability insurance and property insurance to L for Lofts, LLC, covering the period from March 5, 2021 through March 5, 2022.[vi] The policy contained one notable endorsement titled “Amendatory Endorsement – Conditional Coverage – Non-Residential Tenants.”[vii] The endorsement provided non-residential tenants had to maintain general liability insurance and policies that named the landlord as an additional insured.[viii]
Consistent with their insurer’s policy, L for Lofts, LLC, included a provision in its lease agreement requiring each business to carry liability insurance and name the landlord as an additional insured.[ix] On December 8, 2020, the owner of Nelly’s Smokeshop signed the agreement but did not abide by this contractual term.[x]
As quickly as the June 8, 2021, fire erupted, so did the lawsuits. On May 31, 2022, a group of 11 tenants renting or leasing space above Nelly’s filed a complaint in Los Angeles County Superior Court (civil action no. 22STCV17848) claiming L for Lofts, LLC was responsible for the fire that damaged or destroyed their property.[xi] Additionally, on November 22, 2022, a resident living above Nelly’s filed a lawsuit against L for Lofts in Los Angeles County Superior Court (civil action no. 22STCV36884), alleging that she was within the premises on an incident date and sustained injuries because of the fire.[xii]
In response to these lawsuits, L for Lofts turned to Century for protection. Century declined and, in response, filed the instant lawsuit. Century’s principal argument is that, because Nelly’s did not purchase liability insurance as required by L for Loft’s lease agreement and, consequently, did not have L for Lofts added to a policy of insurance as an additional insured, L for Lofts cannot provide Century with a certificate of insurance from its tenant which would create protection for L for Lofts from claims arising from the fire that commenced from the space.[xiii] Additionally, L for Lofts failed to satisfy the conditions for coverage to apply as outlined in its contract with Century.[xiv]
Accordingly, the lawsuit filed by Century in the Central District of California on July 28, 2023, asserts three causes of action against L for Lofts.[xv] The first two causes of action for declaratory relief request that the court release Century of its duty to defend and indemnify based on L for Loft’s failure to comply with the terms of Conditional Coverage.[xvi] The last cause of action seeks a relief for recoupment from the “full amount of the expenses Century has incurred or will incur in the defense L for Lofts” based on their non-compliance with the terms of conditional coverage.[xvii]
Although the litigation is still in its infancy, the case highlights the extent to which an insurer can be called to defend. If a tenant fails to obtain liability insurance as required by the terms of their commercial lease, it can lead to various consequences and potential issues for both the tenant and the landlord. Here are some potential outcomes:
- Breach of Lease Agreement: Failure to obtain the required liability insurance would likely constitute a breach of the lease agreement. Lease agreements typically contain clauses specifying insurance requirements that tenants must adhere to. This breach could give the landlord the right to take legal action against the tenant, including penalties, fines, or eviction.
- Financial Responsibility: Without liability insurance, the tenant may be directly responsible for any costs arising from accidents, injuries, or property damage on the leased premises. This can include medical expenses, legal fees, settlements, and judgments. Such costs can be substantial and significantly impact the tenant’s financial stability.
- Legal Liability: If an accident or injury occurs on the property and the tenant lacks the necessary liability insurance, they may face legal actions from injured parties seeking compensation. The tenant might be held personally liable, potentially risking their business and personal assets.
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[i] (C.D. Cal. Jul. 28, 2023.) Dckt. 1, at 1.
[iii] Id at 2.
[vi] Id. at 3.
[vii] Id. at 4.
[xi] Emily Dobbs, et al. v. L for Lofts LLC, et al. (civil action no. 22STCV17848)
[xii] Virginia Viera v. L is for Lofts, LLC, et al. (civil action no. 22STCV36884)
[xiii] Id. at 5
[xv] Id. at 5-6.
[xvii] Id. at 7.