Specific Litigation Exclusion Bars Coverage for Condo Owners’ Second Lawsuit against Condo Association

Applying New Jersey law, a New Jersey federal court held that a specific litigation exclusion barred coverage for a second lawsuit brought against a condominium association by the same condominium owners. The One James Plaza Condo. Assoc., Inc. v. RSUI Group, Inc., 2015 WL 7760179 (D.N.J. Dec. 2, 2015). In addition, the court held that the insurer did not act in bad faith because its coverage denial was at least “fairly debatable.”

In 2010, condominium owners filed suit against the insured condominium association and its directors and officers, which the insureds settled in 2013. Later in 2013, the same condominium owners filed suit against the insured condominium association and its directors and officers, who tendered the second lawsuit for coverage under a D&O liability policy. The insurer denied coverage based on a specific litigation exclusion. The specific litigation exclusion barred coverage for loss “arising out of or in connection with any Claim made against any Insured alleging, arising out of, based upon or attributable to, directly or indirectly, in whole or in part” the 2010 suit. The insureds filed suit seeking coverage under the policy for the 2013 suit.

The court held that the specific litigation exclusion barred coverage for the 2013 suit because of the substantial overlap in the allegations in the 2010 and 2013 suits and because the 2010 suit serves as the “foundation and logical basis” for the 2013 suit. The suits were brought by the same parties and asserted similar core allegations that the insureds failed to disclose financial information to association members, the insureds maintained a for-profit rental business without separation from the activities of the non-profit condo association, and the insureds commingled assets.

In addition, the court held that the insurer did not act in bad faith when denying coverage for the 2013 suit. The insurer had a reasonable basis to deny coverage for the 2013 suit and provided an “extensive explanation” to the insured concerning coverage, which, at minimum, was fairly debatable.