Insurance – D&O Endorsement – Real Property – Condominium Development – Property Owners’ Association – Developers’ Designates

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Pulliam v. Travelers Indemnity Co. (Lawyers Weekly No. 011-068-13, 11 pp.) (Aphrodite K. Konduros, J.) Appealed from York County Circuit Court (S. Jackson Kimball III, Special Judge) S.C. App.

Holding: Although it excludes coverage for “property damage”, a directors and officers (D&O) endorsement issued to a property owners’ association (POA) may still provide coverage with respect to plaintiffs’ claims that the POA failed to establish a reserve fund and breached a fiduciary duty to warn of the inherent conflict in developer-controlled POAs. However, the D&O endorsement does not provide coverage for plaintiffs’ claim that the POA failed to adequately inspect, repair, and maintain the development’s common elements.

We affirm in part and reverse in part the circuit court’s grant of summary judgment for plaintiffs in this declaratory judgment action.

Damages for the correction of defective construction are not covered by the D&O endorsement. First, plaintiffs do not contend the POA completed construction or made repairs to the development in 1994 and 1995 as the POA did not exist at that time. Consequently, no reasonable interpretation of the complaint can support a finding that the POA was being sued for initial construction or repair defects. Second, any further deterioration of the faulty construction or repairs from 1997 to 2006 that could arguably be attributed to the POA’s inaction would at most constitute diminution in the value of plaintiffs’ property — a harm specifically included in the definition of “property damage.”

However, plaintiffs also allege that the POA failed to establish a reserve fund, an allegation of economic damage. Plaintiffs further allege that the POA breached a fiduciary duty to warn of the inherent conflict in developer-controlled POAs. This claim does not allege physical injury to tangible property, so it is not excluded by the “property damage” exclusion.

While the D&O endorsement excludes coverage for damages resulting from “any dishonest, fraudulent, criminal or malicious act, error or omission committed by or with the knowledge of any insured,” plaintiffs’ claim that the POA placed the developer’s interests before the owners’ does not allege any dishonest, fraudulent, criminal, or malicious action.

The D&O endorsement also excludes coverage for damages resulting from “the failure of any insured to enforce the rights of the Named Insured against the builder, sponsor or developer of the property designated in the Declaration.” The complaint does not allege the POA failed to enforce any rights or compel the developer to perform a particular action. The complaint alleges a failure establish the reserve fund and to warn of conflicts of interest. Consequently, this exclusion does not apply.

Additionally, the D&O endorsement excludes coverage for damages resulting from “any claim or ‘suit’ made by any insured against another insured.” Although seven plaintiffs have served on the POA, they did not do so during the time of the alleged wrongful acts. The exclusion, as written, does not apply.

Finally, the circuit court did not rule on the issue of coverage for punitive damages. The policy clearly excludes punitive damages. We exercise our discretion to rule on this issue and conclude the D&O endorsement does not cover punitive damages.

Affirmed in part and reversed in part.