Landlords Sued by Own Insurance Carrier

Daily Newspaper shutterstock_1272343108 Two California landlords will have to pay out of pocket for a tenant lawsuit after the insurance company representing them agreed to pay the tenants, then looked to the landlords for reimbursement.

The couple owned and managed over 100 rental properties over 30 years, according to court records.

Earlier, the husband pleaded no contest in two cases where he was accused of building code violations, including permitting a fire hazard at a real estate project, pest harborage, inadequate heating facilities, and general dilapidation.

The couple then jointly purchased a 48-unit apartment complex which they both managed. Disgruntled tenants in that building filed a lawsuit against the two landlords for breach of contract, breach of implied warranties of habitability, and infliction of emotional distress. According to the tenants, they each made repeated requests of the landlords to correct deficiencies, but they say the landlords failed to take proper action.

The tenants sought damages in excess of $10 million, plus punitive damages, attorney and expert fees, and interest. One consultant of the insurer estimated that the compensatory damages could be as much as $30 million. Another opined that the range of potential damages was between $3.5 and $22 million.

The landlord’s insurance company agreed to defend them and their corporate entity against the lawsuit.  The company settled with the tenants for around $3 million.

The insurer then brought a lawsuit against the landlords seeking to recover its defense costs and settlement contribution, on the basis that the landlords’ actions were intentional, and therefore not covered under the policy.

At the trial with the insurance company, an attorney for the insurer who had been involved in the landlords’ defense testified on the company’s behalf that while investigating the case he found substantial factual support for the tenants’ claims. He testified that he did not believe that the landlords would have prevailed if the case had gone to trial. He detailed how the couple, in response to tenant complaints, had hired a property management company to care for the property, but that failed to quell tenant concerns.

A former employee also came forward and testified that the husband was neither uninvolved in management nor an absentee landlord, but rather the man chose to force his tenants to live in substandard conditions. The employee says he left his job out of frustration that he was not allowed to make repairs to the building.

According to court documents, little time was spent representing the wife’s interests, despite the insurance company’s admission that there was little evidence of her culpability. The couple appealed the denial of the wife’s insurance coverage.  However, the appeals court found that as a co-owner she was jointly and severally liable, and has ordered that the judgment stand.

A justice’s footnote in the legal opinion indicates the couple benefited from the insurance carrier’s settlement of the tenants’ lawsuit, noting that the couple sold the property — apparently to satisfy the judgment — for more than the settlement figure.

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