In AEGIS ELECTRIC & GAS INTERNATIONAL SERVICES LIMITED v. ECI MANAGEMENT LLC, 967 F.3d 1216 (11th Cir. 2020), the appellate federal court addressed an issue where the property manager’s insurance provider did not cover the property manager’s attorney fees in a class action lawsuit brought by tenants for mistreatment of security deposits. The case illustrates the looming dangers in the property management business, the trend of tenant actions against property managers, the importance of knowing how to properly handle security deposits, and having proper insurance coverage.
Tenants of the property management company filed a class action lawsuit alleging that the property management company made wrongful claims on the security deposits and improperly withhold deposits from the tenants.
In her complaint, [the tenants] purported to represent a class made up of Georgia citizens: (1) ‘who had an agreement for the rental of real property with ECI’; (2) ‘who had all or some of their security deposit not returned’; and (3) ‘for whom Defendants did not provide . . . a comprehensive list of any damage done to the premises,’ as required by Georgia law.
The tenant-plaintiffs sought, among other things, damages in the amount of three times the damages for wrongful treatment of security deposits. The damages and attorney’s fees in that case would be significant if the tenants were to prevail–probably enough to bankrupt the property management company.
The property manager notified his insurance provider about the plaintiffs’ lawsuit and made a claim on its policy to cover the damages and attorney’s fees that the property manager may incur as a result of the lawsuit. The insurer denied the claim.
Attorneys for the property manager and the insurer communicated about the issue of coverage under the policy. Ultimately, the insurer denied the claim and filed a declaratory judgment action for the court to determine the rights and obligations of the parties under the policy.
In that action, the district court found that the insurer had not duty to defend and indemnify the property manager. The property manager would be stuck with all of the damages and attorneys fees if it lost in the action brought by the tenant. The property manager appealed the decision.
The appellate court overturned the district court, and ruled the the insurer had the duty to defend (though it left alone the issue of whether the insurer had the duty to indemnify, as it was premature to rule on since no judgment had been found in favor of the tenants in that lawsuit).
This was an important decision in favor of the property manager, because it was facing significant liability, in addition to expensive attorney’s fees and costs under the class action. The appellate court’s decision rested on its analysis of the terms of the policy in light of the tenants’ lawsuit against the property manager, to determine whether coverage existed under the policy.
THE TAKE AWAY
Check your insurance or Errors and Omissions policies and look closely at what coverage you have in the event a tenant files a lawsuit against you for wrongful actions, such as mistreatment of a security deposit. Contact your insurance agent and discuss whether you are covered adequately for this kind of event.
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