Property Management and Financial Interest Exclusions Bar Coverage for Real Estate Professionals
Applying Connecticut law, a Connecticut state trial court has held that no coverage exists under a real estate errors and omissions policy for a lawsuit brought by property investors against two real estate professionals arising from the purported mismanagement of property investment companies. Sarfaty v. United States Liab. Ins. Co., 2018 WL 3060110 (Conn. Super. Ct. May 25, 2018).
The insureds, two real estate professionals, were managers of two limited liability companies formed to purchase two properties. The insureds represented the companies in several transactions with other entities to lease the properties and obtain purchase options. Unbeknownst to the investors, at the time, the insureds held interests in those entities.
Subsequently, the investors brought suit against the insureds for mismanaging the properties and failing to disclose that they acted as dual agents in the transactions. The insureds tendered coverage under a real estate errors and omissions policy. The insurer defended the suit but denied indemnity coverage on the basis that the lawsuit was excluded from coverage.
In the litigation that followed, the trial court held that a “joint ventures” exclusion barred coverage for the lawsuit. The exclusion barred from coverage “any Claim arising out of, directly or indirectly resulting from, based upon or in any way involving any actual or alleged: … formulation, promotion, syndication, offer, sale or management of any limited or general partnership or real estate investment trust or any interest therein.” The court held that, although the entities were set up as limited liability companies, the entities “acted, and were treated like” partnerships formed to manage real estate investments. According to the court, the insureds “actively managed” the real estate investments.
In addition, the trial court held that a “personally owned property exclusion” barred coverage for claims arising from one of the entities. The exclusion barred from coverage “any Claim arising out of, directly or indirectly resulting from, based upon, or in any way involving any actual or alleged purchase [of] real property by, or the sale, leasing or property management or property developed, constructed or owned by [an insured or any entity in which an insured has a financial interest].” The court found that the exclusion applied to claims arising from the management of one of the entities, because one of the insureds owned the property the entity sought to purchase and therefore had a “direct financial interest” in its purchase.
Finally, the trial court held that a “business enterprise exclusion” did not apply. The exclusion barred coverage for the rendering of professional services to a non-insured real estate company. The court held that the insureds had only provided real estate services on behalf of the named insured.