A majority of the U.S. Court of Appeals for the Eleventh Circuit has held that the underlying court erred when it found that a professional liability insurer has no duty to defend against an underlying lawsuit alleging that an insured apartment manager wrongfully withheld security deposits from current and former tenants. The case is AEGIS Electric and Gas International Services Ltd. v. ECI Management LLC, No. 19-11114 (11th Cir. July 30, 2020).
ECI Management, LLC (ECI) is a company that manages multiple apartment properties in Georgia. In 2016, ECI purchased a "Real Estate Services Professional Liability Insurance Policy" (the Policy) from AEGIS. The Policy limited AEGIS' liability to $1 million per claim and was effective from July 1, 2016 to July 1, 2017. In May, 2017, during the policy period, plaintiff Nichon Roberson (Roberson) filed a putative class action suit against ECI and others in DeKalb County State Court. Roberson claimed that ECI systematically violated the security deposit statute of Georgia by wrongfully withholding her security deposit and the security deposits of other current and former tenants of other apartment complexes ECI managed. Specifically, ECI failed to provide tenants with a list of damages that justified withholding all or part of the security deposits.
O.C.G.A § 44-7-35 provides remedies for violation of the statute. Remedies include 3x the sum improperly withheld, plus reasonable attorney's fees. The statute notes that if the landlord shows that the withholding was unintentional, and resulted as a result of an error, and there were procedures in place to make sure such an error did not occur, the landlord is only liable for the sum erroneously withheld.
The class represented Georgia citizens who had a rental property with ECI, who had some or all of their security deposit not returned, and for whom ECI failed to provide a list of damages. The class action sought 3 times the unlawfully withheld security deposit for every class member, reasonable attorney fees, and injunctive or declaratory relief to prevent the security deposit law from being violated in the future.
On March 9, 2017, ECI provided timely notice to AEGIS and requested coverage. In May, AEGIS sent a formal letter acknowledging receipt of the claim and asserting that the matter was not covered under the Policy, so there was no duty to defend or pay damages. Specifically, the letter noted that class certification, equitable relief to prevent future statutory violations and damages claiming 3 times the unlawfully withheld security deposit were all excluded under the policy. The letter did not invoke an exclusion in the policy for "any disgorgement, return, withdrawal, restitution or reduction of any sums which are or were in the possession or control of any Insured." The letter did reserve its right to raise additional coverage issues if the need arose in the future.
The district court found that none of Roberson's requested relief, and any relief to which Roberson would be entitled to under the statute, would qualify as a "loss" under the policy, and concluded that AEGIS had no obligation to defend and no duty to indemnify ECI in the litigation.
The Eleventh Circuit agreed with the district court that the unreimbursed deposit did not constitute a loss, specifically since the policy's definition of "loss" stated that coverage that does not extend to any disgorgement, return restriction or reduction of any sums which are or were in the possession or control of an insured. Still, the Eleventh Circuit concluded that any attorney's fees that might separately be awarded under the applicable statute would in fact constitute a potential "loss" under the Policy, so AEGIS had wrongfully failed to defend.
Editors Note: The three-judge appeals court panel was divided on the decision to overturn the lower court. The dissenting opinion found that the other two judges misinterpreted Georgia law.
The majority opinion noted that it would leave the question of whether AEGIS must indemnify ECI for any liability it might incur, "for a later date," and remanded the case for further proceedings.