If an HOA is sued pertaining to a dispute over property damage, and the opposing party prevails and obtains an award of attorney fees, does the HOA’s liability insurance policy cover the attorney fee award?

According to a recent district court decision in Hawaii, the answer is yes.

In Apartment Owners of the Moorings v. Dongbu Insurance Company,1 Jo-Anne and Brent Braden brought an arbitration claim against their HOA (Association of Apartment Owners of the Moorings, Inc. (the “AOAO”)) for property damage arising from the AOAO’s failure to repair and maintain the roof after their condominium unit suffered water damage. The Braden’s contended that the AOAO had failed to repair and maintain their lanai roof, which they claimed caused the water damage to the interior of their unit.

At the conclusion of the arbitration, the arbitrator determined that (1) the lanai roof was a common element that the AOAO had to maintain; (2) the AOAO had failed to properly maintain the lanai roof, which was the source of leaks that had caused damage to their unit, and (3) the AOAO’s failure to address the interior damage was “deliberately discriminatory … because interior damages were paid to other owners.”

The arbitrator’s order required that the AOAO:

  1. Pay the Bradens $6,203.49 in special damages, which reflected the amount they had paid to repair their roof and interior damage;
  2. To contract with a licensed roofing contractor to perform all necessary and reasonable work on the Bradens’ lanai roof; and to
  3. Pay the Braden’s attorney’s fees and costs incurred in pursuing the litigation because they were the “prevailing party.” This required AOAO to pay the Braden’s $85,644.30 in attorneys’ fees and $8,515.91 in costs.

The AOAO had a general liability insurance policy issued to it by Dongbu Insurance Company. Although the insurer informed the AOAO that it would reimburse the AOAO for the $6,203.49 in special damages and the $8,515.91 in costs incurred by the Bradens, it also took the position that it would not pay the attorneys’ fees award of $85,644.30. Dongbu’s position was that the attorneys’ fee award was not covered under the policy because it did “not constitute ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury’” as those terms were defined in the policy.

Dongbu’s denial triggered The AOAO to sue it seeking judgment in the amount of $85,644.30 for the attorneys’ fees awarded by the arbitrator, plus prejudgment interest.

The Dongbu policy specified that Dongbu:

will pay those sums that the [AOAO] becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.

Both parties moved for summary judgment. The district court ruled in favor of the AOAO. The district court’s decision highlighted the fact that Dongbu had agreed to “pay those sums that the [AOAO] becomes legally obligated to pay as damages because of … ‘property damage’ to which this insurance applies.” The court determined that the AOAO had become legally obligated to pay the attorneys’ fee award when the state court confirmed the arbitration award and that the Bradens’ property damage constituted “property damage to which this insurance applies” insofar as Dongbu reimbursed the AOAO—pursuant to the policy—for the special damages awarded by the arbitrator.

Although the court observed the terms “damages” and “because of” were not defined in the policy, it nonetheless ruled the attorneys’ fees were “damages because of” the Bradens’ property damage because they “flowed from the Bradens’ property damage” and constituted “restitutive payment to the Bradens.” The district court stated, “but for their property damage, they would not have pursued arbitration and been awarded fees.”

The district court concluded that the arbitrator’s award of attorneys’ fees was covered by the policy and had to be reimbursed to the AOAO, together with prejudgment interest.

The decision of the district court in Hawaii is not unique. In fact, other courts have similarly found that attorneys’ fees that are incurred and awarded as a result of property damage (for which insurance applies) are also covered under the insurance policy at issue.

The U.S. District Court for the Northern District of California, in APL Company v. Valley Force Insurance Company,2 also found attorneys’ fees incurred as a result of property damage were covered under a CGL policy. There, the plaintiff won a judgment, including attorneys’ fees, in an underlying action against an insured of the defendant insurance company. The plaintiff brought a later lawsuit against the insurance company, seeking coverage of the underlying judgment including the attorneys’ fees. There, the policy provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury,’ ‘property damage,’ ‘personal injury’ or ‘advertising injury’….”

The district court in California found that because the term “damages” was not defined in the policy, that it would turn to “its ordinary and popular definition”: “any remunerative payment made to an aggrieved party, including restitutive and punitive measures.” (Internal quotations omitted.) Finding that the “fee award in the underlying litigation is a ‘remunerative payment made to an aggrieved party,” the district court concluded that the “attorneys’ fees awarded in the underlying litigation fall plainly within the coverage of the policy.”

Similarly, in American Family Mutual Insurance Company v. Spectre West Builders Corp.,3 the U.S. District Court for the District of Arizona found that attorneys’ fees were covered by a construction company’s CGL policy. In that case, the defendant construction company built a 73-unit condominium complex in Arizona. The insurance company insured the defendant under a CGL policy. After construction was complete, the homeowners’ association of the condominium complex compelled arbitration against the defendant to as a result of the construction defects. The arbitrator determined that the defendant construction company was liable for construction defects and awarded damages, attorneys’ fees, and costs to the homeowners’ association. The arbitration award was also confirmed in state court.

Thereafter, the insurance company instituted a declaratory judgment action against its insured (the construction company), arguing that the policy did not cover attorneys’ fees awarded by the arbitrator. The policy provided: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The district court noted that the policy defined “‘bodily injury’ and ‘property damage,’ but not ‘damages’” and that,

The issue before the Court is not whether attorneys’ fees and costs can be characterized as ‘property damage,’ but whether they can be characterized as damages that [the defendant construction company] became legally obligated to pay because of property damages.

Based on the policy language, the Arizona district court ruled:

The Court finds that the insuring language is broad enough to encompass coverage for the Arbitrator’s award of attorneys’ fees and costs to the Association. The Court already has held that property damage occurred under the policies, and [the defendant construction company] became legally obligated to pay attorneys’ fees and costs as a result of that property damage. The Court therefore finds that the attorney’s fees and costs awarded at the arbitration are damages that fall under the insuring clause of the policies.

Ultimately, the district court concluded “as a matter of law that the policies provide coverage for the Arbitrator’s award of $300,000 in attorneys’ fees,” and ordered the insurer to reimburse the fees to the construction company.

These cases are important because they demonstrate that when an insured under a general liability policy is found liable for property damage and is also ordered to pay the attorneys’ fees and costs in connection with the property damage litigation, if the language in the insurance policy requires the insurer to pay for “sums that the insured becomes legally obligated to pay…” then the liability insurer must not only indemnify its insured for the property damage itself, but it must also indemnify the insured for the attorneys’ fees that it is ordered to pay.

1 Apartment Owners of the Moorings, Inc. v. Dongbu Ins. Co., Ltd., No. 15-00497 BMK (D. HI Aug. 18, 2016).
2 APL Co. v. Valley Force Ins. Co., 754 F.2d 1084 (N.D. Cal. 2010).
3 American Family Mutual Ins. Co. v. Spectre West Builders Corp., No. 09-968 PHX-JAT (D. Ariz. Feb. 4, 2011).