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February 19, 2015  

 
 Q&A of the Week

Insurance for a Rented Condo

A Texas subscriber recently asked the following question:

What is the correct coverage form to insure a condominium unit that is rented or held for rental, but is not the insured's/owner's residence premises?


ANSWER: The ISO HO 17 33 provides coverage for condominiums rented to others. Personal property of the insured is excluded as he is not present at the residence, and theft is excluded for money, securities, bullion, gold, goldware, personal records, tickets, jewelry, watches, furs, and gemstones. Business is also excluded except for the rental of the unit itself. The rest of the HO 00 06 applies as normal.

 
 Litigation Watch
Issues on the Duty to Defend

This case arises from a dispute between an insurer and its insured over the insurer's duty to defend the insured in a lawsuit. This case is Surety Mechanical Services, Inc. v. Phoenix Ins. Co., Civil No. 1:12-cv-3242 (NLH/AMD), 2014 WL 2921015 (D. N.J. June 27, 2014).

Surety entered into a contract with Cape May County Vocational Technical School District to provide mechanical services for the school's heating, ventilation, and air conditioning system. A few years after the work was finished, the school filed a lawsuit against Surety alleging that the work was performed negligently and that Surety failed to perform its contractual obligations in a workmanship manner. The school claimed it suffered compensatory and consequential damages.

Surety submitted the claim to its insurer, Phoenix Insurance Company. The insurer denied coverage. Surety filed for summary judgment on the issues of whether Phoenix had a duty to defend and whether Phoenix was obligated to reimburse Surety for the costs it already incurred on the school litigation. Phoenix filed its opposition and a cross motion for summary judgment on the same issues.

The United States District Court, New Jersey, noted that an insurer's duty to defend is based on its duty to pay, which in turn is dictated by the terms of the insurance policy; an insurer has a duty to defend its insured against any claims that are potentially coverable under the policy. However, the court also said that an exception to this general rule holds that an insurer is not obligated to defend its insured if it intends to dispute coverage based on a question of fact that is not material to the underlying litigation. Therefore, when the insurer intends to dispute coverage based on an issue that is not material to the underlying case, the insured must bear the initial burden of defending itself, but the insurer must reimburse the insured if it is later determined that the claim was actually covered by the policy.

In this instance, the court ruled that Phoenix was not obligated to defend Surety because it disputed coverage and that dispute depends on a question of fact that is not material to the underlying litigation. Phoenix in particular disputed whether the school suffered damages beyond the cost of repairing Surety's work, and this issue would be resolved only by the underlying litigation. The school had to prove its damages, and it should have been clear from that proof whether those damages went beyond the cost of repairing the insured's work. Accordingly, the court entered judgment in favor of the insurer on its claim that it did not have to defend the insured.

The court then addressed the issue of reimbursement to Surety for its defense costs. The court said that although Phoenix did not have to defend Surety in the underlying litigation, it may be obligated to reimburse Surety if the actual facts of the case show that Phoenix had a duty to indemnify Surety. To prevail on that point, Surety had to show that, based on the uncontroverted evidence, a reasonable jury could only conclude that the school actually suffered damages covered by the policy. The court noted that the only evidence of coverable damages was contained in a letter sent by the school's attorney as a supplement to the school's answers to interrogatories. Now, if proven at trial, the statements in the letter would certainly trigger the insurer's duty to pay. However, this court could not say that a reasonable jury could only find in favor of Surety and so, this court could not grant Surety's motion for summary judgment on the issue of reimbursement because it had not provided evidence from which a reasonable jury could only find that the school actually suffered coverable damages.

On the other side of the coin, the court said that the insurer was also not entitled to summary judgment on its motion pertaining to reimbursement to the insured for defense costs. The court found that the letter from the school's attorney was enough to withstand the insurer's motion. Based on that letter, the court found that the insured showed that there was a genuine issue for trial, that is, whether the damages suffered by the school were in fact coverable damages.

In summary, the court ruled that the insurer's motion that it had no duty to defend was granted but that its motion pertaining to reimbursement of defense costs was not granted. The court denied the motions put forth by the insured.

Editor's Note: The U.S. District Court in its ruling basically punted on the basic question of the duty of reimbursement. It held that, although the insurer did not have the duty to defend, the final determination of which party will pay defense costs rests with the jury hearing the underlying litigation.
 
   
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