Neighbors Who Hate Each Other Are Not Enough to Create a Professional Liability Claim
When neighbors sue each other – especially when one neighbor was the realtor who sold the property to the neighbor under false pretenses – creates multiple lawsuits that are almost impossible to resolve. Insurance companies that insure the parties to these vicious and personal lawsuits find they must pay a great deal of money defending the parties and try to drag in other insurers to reduce the financial pain and drain. Not a bad idea unless there is really no means by which the other insurer has no obligation to defend or indemnify the insured.
In Madison Mutual Insurance Company v. Diamond State Insurance…, United States Court of Appeals, Seventh Circuit — F.3d —-, 2017 WL 1065557 (March 21, 2017) Madison Mutual Insurance Company (“Madison Mutual”) sued Diamond State Insurance Company (“Diamond State”) seeking an order from the Seventh Circuit requiring it to defend Geraldine Davidson in a state-court action filed by her former neighbors, Dr. William and Wendy Dribben. Diamond State previously provided professional liability errors and omissions coverage to Davidson in her capacity as a real estate broker and supplied a defense to Davidson in a previous suit alleging certain wrongdoing by Davidson as a broker.
Davidson had also conceived of and was one of the developers of Heartland Oaks, and she and her husband owned one of the four parcels in the development. At the center of the development is a 30–acre artificial lake and the dam creating that lake is located on the parcel that the Dribbens purchased.
In a 2006 lawsuit filed by the Dribbens against Davidson and the other original owners in the development, the Dribbens alleged that Davidson had failed to disclose that the original owners/developers had never obtained a permit from the Illinois Department of Natural Resources (“IDNR”) authorizing the dam. The 2006 suit alleged that Davidson’s non-disclosure amounted to fraudulent concealment and consumer fraud. Davidson tendered the suit to Diamond State. The Diamond State policy applied to claims made and reported during the policy period and provided coverage for “wrongful acts arising out of the performance of professional services for others.”
In 2011, the Dribbens filed a second suit, this one against both Davidson and her husband, alleging a pattern of harassment, intimidation, and interference with the Dribbens’ property rights by the Davidsons. The wrongful acts attributed to the Davidsons range from commercially farming their own property and the Dribbens’ property (without their consent), in violation of restrictive covenants; polluting the Large Lake with crop runoff; filing lawsuits with the aim of interfering with the Dribbens’ easement rights; spreading rumors that Dr. Dribben was a serial killer; posting offensive signs; and stalking and intimidating the Dribben family and their attorneys. The action asserted claims for enforcement of covenants, trespass, malicious prosecution, interference with the Dribbens’ right to sell their property, intentional and negligent infliction of emotional distress, unjust enrichment, a declaration that there had been no adverse possession of the Dribbens’ property, for an order of protectio, trespass (including criminal trespass), three counts seeking to remove clouds upon and quiet title to the Dribbens’ property, two counts of nuisance, one count of negligence, and one count seeking to enjoin other neighbors in the development vis-à -vis the disputed easements, for a total of 18 counts.
Davidson tendered the 2011 lawsuit to Madison Mutual, which had provided homeowner’s insurance coverage to Davidson and her husband (including personal liability coverage up to $500,000 per occurrence) from July 2004 to July 2011. Madison Mutual had also issued umbrella liability coverage to the Davidsons (with a limit of $1 million per occurrence) from December 2005 to December 2011. Madison Mutual agreed to provide the Davidsons with a defense pursuant to their homeowner’s coverage.
Diamond State did not view either complaint as seeking relief for acts arising out of any professional services Mrs. Davidson had provided to others as a real estate broker. Madison Mutual bears a duty to reimburse Madison Mutual for the costs it has incurred in supplying a defense to her in that litigation
An insurer’s duty to defend its insured in litigation depends on both the terms of the insurance policy at issue and the nature of the underlying action. The duty to defend is logically broader than the duty to indemnify. If any portion of the complaint in the underlying litigation potentially falls within the coverage provided by the policy, the insurer must defend the entire suit.
The Diamond State policy is a real estate errors and omissions policy covering claims arising out of the professional services Davidson provided as a real estate broker. Because the policy is a “claims made and reported” policy and Diamond State’s coverage ended in 2007 the claim nominally must be one that was made against Davidson within the policy period and which was reported to Diamond State no later than 60 days after the end of that period.
The 2011 suit, of course, was filed years after Diamond State’s coverage terminated, and so at first glance timely reporting of that suit would appear to be out of the question.
There are, to be sure, factual allegations in the 2011 suit regarding the dam and Davidson’s status as a real estate broker.
Focusing on two allegations regarding a duty of care, Madison Mutual alleges that it is reasonable to infer that said duty includes Mrs. Davidson’s duty of care as a realtor and that the alleged breach of that duty includes her failure, in connection with the sale of the Favres’ property to the Dribbens, to disclose that no permit had been obtained for the dam.
To make the obvious point first, nowhere in either the first or second amended complaints filed in the 2011 litigation is the allegation made that Davidson breached her professional obligations as a real estate broker by failing to disclose to the Dribbens that the dam lacked a permit. There is no allegation, express or implied, that Davidson wronged the Dribbens in her capacity as a realtor by not disclosing that the dam was un-permitted.
The complaint overall is one about Mr. and Mrs. Davidson’s pattern of alleged acts—as neighboring landowners—that have interfered with the Dribbens’ ability to use, enjoy, and sell their own property. The allegations on which Madison Mutual has focused are but a few of the many hundreds of allegations set forth in an effort to establish why and how the Davidsons made living in the Heartland Oaks development a misery for the Dribbens.
The reference to Mrs. Davidson’s status as a realtor appears aimed at suggesting that she, better than anyone, should have understood how her actions as the Dribbens’ neighbor would interfere with the quiet enjoyment of their rights as property owners. Beyond this, there is no allegation that Mrs. Davidson was providing professional services to the Dribbens and breached any duty that she may have owed them in that regard.
The Seventh Circuit was left with a small subset of factual allegations that overlap with the factual underpinnings of the 2006 suit regarding the dam permit, but no allegation of injury resulting from Mrs. Davidson’s failure to disclose the lack of the permit to the Dribbens and no theory of recovery predicated on that failure.
Likewise here, the factual allegations concerning the dam, the lack of a permit, and Davidson’s role in selling the property to the Dribbens, while they may provide explanatory background for the Davidsons’ alleged acts of harassment (including the slander suit), do not point to any theory of recovery against Davidson for breach of her professional obligations as a realtor.
Regardless of the problems with the dam and the claim that the Dribbens claim they would not have purchased the property that does not transform what is otherwise a suit about the Davidsons’ actions as the Dribbens’ neighbors into a suit about Mrs. Davidson’s prior actions as the broker who sold them the property.
The 2011 suit does not assert, nor could they potentially assert, a claim that is plausibly within the professional liability coverage that Diamond State provided to Davidson.
Diamond State has no duty to defend her in the 2011 litigation.
An E&O insurance policy that is both claims made and reported has no need to defend or indemnify an insured if the claim was not both made against the insured and reported to the insurer during the policy period. Because the plaintiff insurer claimed the new suit related back to the suit filed during the policy period the Seventh Circuit avoided the easy answer and reviewed everything finding no need to defend because nothing alleged in the new suit had to do with the insured’s professional activity. The defendant was mean, treated her neighbors with contempt and made the defendant’s life miserable, but did not suffer from a professional error or omission.
This article and all of the blog posts on this site summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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