Mortera v. State Farm Fire and Casual Company, No. 1:20-cv-00224-HSO-JCG (S.D. Miss. Sept. 20, 2021)

Risks and Liabilities: The U.S. District Court for the Southern District of Mississippi found that a condominium insurance policy did not provide coverage for property within the units that was the maintenance responsibility of the individual owners.

 

Gilberto Alarcon Mortera owned a unit in the Kona Villa condominium in Diamondhead, Miss. Kona Villa Owners Association (association) governed the condominium. The association insured the condominium property through an insurance policy with State Farm Fire and Casualty Company (State Farm).

In July 2018, Mortera discovered the upstairs unit had a failed hot water heater, which leaked into Mortera’s unit and damaged flooring, appliances, furniture, window treatments, and cabinets. Mortera did not have any other insurance on his unit besides the association policy.

The association filed a claim with State Farm. State Farm’s representative inspected the damaged units. Based on the maintenance provisions in the association’s bylaws, State Farm determined that the unit owners were responsible for interior damage, not the association. State Farm sent the association a letter closing the file but said the association should contact it if it discovered any damages that fell within the association’s responsibility.

In March 2020, Mortera sued State Farm, alleging that State Farm breached its duty of a fair investigation and dealing by refusing to pay insurance benefits due. Mortera claimed his property was insured under the policy and he also was insured under the policy as a unit owner. State Farm argued that Mortera was not insured under the association’s policy and was not permitted to maintain a direct action against State Farm.

State Farm acknowledged that some items covered under the policy were property of the individual owners but insisted that the individual unit owners were not insured under the policy. State Farm contended that only the association as the named insured was entitled to the benefits of the policy.

Mortera argued that he was considered either an insured or a third-party beneficiary under the policy’s broad language, thus allowing him to bring a direct action. Under Mississippi law, a stranger to a contract may bring a breach of contract claim as a third-party beneficiary if there was a contractual relationship between the damaged party and the liable party. To maintain the breach of contract claim against State Farm, Mortera must show he had a contractual relationship with State Farm.

A policy endorsement defined the insured as any unit owner, including each other unit owner of the association, but only with respect to that person’s liability arising out of ownership, maintenance, or repair of the common area or membership in the association. The court found that the endorsement clearly limited application of the insured definition only to claims falling under the endorsement.

Mortera claimed he was an insured under the main policy because his property was covered by the policy. The endorsement amended the policy’s property definition to include certain types of property contained within the individual units, regardless of ownership, including fixtures and improvements that were not part of the building or structure and appliances. However, the court found that Mortera was not an insured under this provision because the property covered under the endorsement was insured for the association’s benefit, not Mortera’s benefit. The association had an insurable interest in the property because it benefitted from the property’s existence and would suffer a loss if it were destroyed.

Mortera contended that, even if he was not a named insured, he had rights as a third-party beneficiary. Mississippi recognizes third-party status when the terms of a contract are expressly broad enough to cover a third party, the contract parties intended to confer benefits on the third party, and the contracting party had a substantial and articulate interest in the third-party’s welfare in respect to the subject of the contract. An incidental beneficiary to a contract does not acquire any rights under the contract. A third party is an incidental beneficiary when the contract benefits flow directly to the contracting party rather than the third party.

State Farm acknowledged that certain portions of the policy were broad enough to include Mortera for liability claims arising out of his unit ownership, but Mortera’s claim did not fall into that category. The association had no interest in the damages Mortera claimed to have suffered because unit owners were responsible for the repairs and maintenance inside the walls of their units and the association was only responsible for exterior walls and common areas.

The policy terms indicated that the parties did not intend for unit owners to directly benefit from coverage. Likewise, the court found that the property covered under the endorsement was insured for the benefit of the association and not unit owners. The intent of the policy was to cover items that enhanced the value of the structure for the benefit of association’s interest in the property.

Accordingly, the court granted summary judgment (judgment without a trial based on undisputed facts) in State Farm’s favor, and Mortera’s claims were dismissed.

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