In an unpublished opinion, the Eleventh Circuit recently affirmed the trial court’s decision that a D&O policy does not provide coverage for third-party property damage claims.  Eastpointe Condominium I Association, Inc. v. Travelers Cas. & Sur. Co. of America, No. 09-15866 (11th Cir. May 20, 2010).  A copy of the decision can be found here.

The Insured owned and operated a condominium complex in Singer Island, Florida.  It had purchased general liability coverage from the GL Insurer and a directors and officers policy from the D&O Insurer.  The D&O policy contained a property damage exclusion, barring coverage for loss in connection with any claim made “for or arising out of any damage, destruction, loss of use or deterioration of any tangible property including…mold, toxic mold, spores, mildew, fungus, or wet or dry rot.”

According to the decision, in October 2004, two hurricanes struck South Florida, and the Insured’s complex sustained serious damage from heavy water intrusion, which in turn bred pervasive mold that damaged the building’s residential units.  One of the unit owners sued the Insured, claiming that its failure to maintain and repair the roof and air conditioning system before, between, and after the two storms constituted negligence, breach of contract, and breach of fiduciary duty.

The GL Insurer accepted the Insured’s tender under reservation of rights.  The D&O Insurer, citing the property damage exclusion, refused and disclaimed any duty to defend.  The Insured secured independent counsel and, together with the lawyer appointed by the GL Insurer, obtained a complete defense verdict at the trial of the unit owner’s action.

The Insured then sued the D&O Insurer for declaratory judgment and breach of contract, seeking to recover the attorneys’ fees it paid in the underlying suit.  The D&O Insurer moved for summary judgment, arguing that the sole basis for the underlying lawsuit was water damage to the condominium property that resulted in leaking, mold, and loss of use to the owner’s unit.  After a hearing, the US District Court for the Southern District of Florida granted the D&O Insurer’s motion, holding that the “underlying claim arose out of damage or destruction to tangible property” and therefore, fell within the property damage exclusion.  The D&O Insurer had no duty to defend.

The Eleventh Circuit affirmed, in a per curiam order.  Applying Florida law, the court wrote that the “language of the policy is the most important factor” in construing insurance contracts and that it was essential to give effect to the plain meaning of that language.  It quickly dismissed the Insured’s argument that there was a difference between losses originating from property damage and losses originating from breaches of fiduciary duty, that ultimately result in property damage.  Noting that the Florida Supreme Court has construed the “arising out of” language appearing in the D&O policy’s property damage exclusion quite broadly, it found that the exclusion covered the damage alleged in the underlying complaint.  The court stated that the underlying suit depended upon the existence of the property damage and, therefore, fell outside the D&O policy’s coverage.