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Texas Court of Appeals Holds Condo Association’s Commercial General Liability Insurer Owes No Duty to Third-Party Condo Owner

Bad Faith, Blogs

In a recent decision, the Court of Appeals of Texas held that an insurer issuing a commercial general liability (“CGL”) policy to a condominium association owes no duty to the owner of an individual condominium unit even if the condominium owner paid premiums for and was entitled to liability coverage under the policy. Reule v. Colony Ins. Co., 407 S.W.3d 402 (Tex. App. 2013). Accordingly, the Court ruled that the condominium owner lacks standing to assert claims against the insurer for violations of certain provisions of the Texas Insurance Code and for breach of the common-law duty of good faith and fair dealing.

In Reule, defendant Colony Insurance Company (“Colony”) issued a CGL policy (the “Policy”) to the Sherwood Valley I Counsel of Co-Owners (the “Condo Association”). Id. at 404. As the owner of a condominium unit at the subject property, the plaintiff was a member of the Condo Association and paid premiums for coverage under the Policy. 404, 411. After resolving a series of claims against the Condo Association and various other individuals and entities, the plaintiff asserted claims against Colony for, inter alia, Colony’s alleged violations of the Texas Insurance Code and breach of the duty of good faith and fair dealing. Id. at 405. Without specifying the grounds for its decision, the trial court granted Colony’s motion for summary judgment and rendered a final judgment. Id.

On appeal, the Court of Appeals addressed various issues, including whether the trial court erred in determining that plaintiff “is a third-party claimant to whom Colony does not owe certain duties under the Insurance Code and common law.” Id. at 408-09. With respect to this issue, the Court found that “[i]t is well-settled that a third-party claimant cannot enforce an insurance policy directly against an insurer until it has established, by judgment or agreement, that the insured has a legal obligation to pay damages to the injured party.” Id. at 410. Thus, the Court concluded as follows:

A third-party claimant asserting claims against the insured of a liability policy does not have standing to bring claims against the liability insurer for violations of sections 541.060 and 542.051 [of the Insurance Code]. . . . Similarly, a third-party claimant lacks standing to sue an insurer for breach of the duty of good faith and fair dealing.

Id. In reaching its conclusion, the Court rejected the plaintiff’s argument that she was actually a first-party claimant under the Policy because she qualified as an “insured” under the Policy and paid premiums for the coverage provided. Id. at 410-411. More specifically, the Court noted that, even if the plaintiff was a named insured, additional insured, or beneficiary of the Policy, the Policy provided coverage to an insured when the insured injured another person or property, not coverage to the insured for the insured’s own personal injuries or property damage. Id. at 411. The Court recognized that, under these circumstances, to hold that Colony owed duties to the plaintiff under the Insurance Code or common law “would mean Colony owed conflicting duties to its tortfeasor insureds and to [the plaintiff].” Id. at 413. As this could not be the case, the Court ruled that the plaintiff lacked standing to bring claims against Colony under the Insurance Code and/or for breach of the common-law duty of good faith and fair dealing. Id. at 414. 

For a copy of the Reule decision click here