Based on Defamation Allegations, Insurer Must Defend Property Management Company against Lawsuit for Unlawful Security Deposit and Late Fee Practices

The United States District Court for the Southern District of California, applying California law, held that a professional liability insurer had a duty to defend a property management company against a class action lawsuit arising out of allegedly unlawful security deposit and late fee practices. Gleiberman Props., Inc. v. Evanston Ins. Co., 2023 WL 5246315 (S.D. Cal. Aug. 15, 2023). The court held that allegations that the company defamed former tenants by reporting unlawful debts to third parties implicated the policy’s “Personal Injury” coverage, and the “Illegal Profits” and “Conversion” Exclusions did not apply.

Former tenants filed a class action lawsuit against a property management company alleging that it caused improper bills and collection notices to be sent to the tenants, resulting in damages both through the collection of those amounts and by the reporting of the alleged debts to third parties, defaming the former tenants.  Plaintiffs asserted causes of action for unlawful retention of security deposits, unfair competition, and unlawful liquidated damages in violation of California statutes.

The property management company sought coverage under its professional liability insurance policy.  Its insurer denied coverage, including based on exclusions applicable to the “gaining by any Insured of any profit, remuneration or advantage to which such Insured was not legally entitled” (the “Illegal Profits Exclusion”) and “conversion, misappropriation, commingling of or defalcation of funds or property (the “Conversion Exclusion”). The insured initiated coverage litigation, and, on cross-motions, the court denied the insurer’s motion to dismiss and granted summary judgment in favor of the insured on the duty to defend.

The Court held that the allegations of defamation fell within the scope of the Policy’s “Personal Injury” coverage. The Court rejected the insurer’s argument that plaintiffs did not—and could not on a class-wide basis—seek damages for the defamation allegations, finding that the plaintiffs did allege such damages, including negative impacts on their credit and ability to lease other apartments and that nothing precluded them from recovering those damages on a class-wide basis. The court also rejected the insurer’s argument that the policy’s “Illegal Profits” and “Conversion” Exclusions barred coverage, concluding that those exclusions apply to claims relating to funds already in the insured’s possession, and the defamation allegations related to funds that the company claimed plaintiffs owed but had not paid.