Bond Exclusion Bars Coverage for Claims Against Property Management Company

The United States Court of Appeals for the Ninth Circuit, applying California law, has issued a unanimous decision holding that a bond exclusion in a professional liability policy barred coverage for claims asserted against an insured property manager arising out of its alleged failure to secure extensions of two surety bonds relating to construction work performed on property owned by a community association. VierraMoore, Inc. v. Continental Casualty Co., 2015 WL 3652479 (9th Cir. June 15, 2015). Wiley Rein represented the insurer in the trial court and on appeal.

The insured, a property management firm, was named as a defendant in a California superior court action brought by a community association alleging that the property manager negligently failed to secure extensions of two surety bonds that were issued in connection with construction work performed on property owned by the association. The insured property manager tendered the claim to its insurer under a professional liability policy. The insurer denied coverage on the basis that, among other things, the policy contained a bond exclusion that barred coverage for any claim “based upon, directly or indirectly arising out of, or in any way involving the failure to effect or maintain any insurance or bond, or to any failure to cover certain perils or to purchase an adequate amount or type of insurance.” Notwithstanding the insurer’s position that its policy did not afford coverage for the association’s claim, the insurer contributed to the settlement of the underlying action on the property manager’s behalf, subject to a full reservation of rights, including an express reservation of the right of recoupment. After the insured instituted a coverage action, the district court granted summary judgment to the insurer, and the property manager appealed.

On appeal, the Ninth Circuit affirmed the ruling in favor of the insurer. It held that the bond exclusion was “broad, unambiguous, and enforceable,” and it noted that all of the claims in the underlying action arose out of the insured’s failure to ensure that the surety bonds remained effective until construction was complete. The court’s decision also left unchanged the district court’s ruling that the insurer was entitled to recoup the amount it contributed to the underlying settlement.