Condominium Buyers’ Claims against City Arose When They Purchased Their Units, before Policies’ Effective Dates, Circuit Court Holds

The U.S. Court of Appeals for the Ninth Circuit has ruled that claims against a city by condominium buyers arose when they purchased their units, well before the effective dates of insurance policies that had been issued to the city. Therefore, there was no coverage for the buyers’ claims.  

The Case 

The City of San Buenaventura contracted with a developer to build condominium units for people of low and moderate income. Sale and resale prices were limited to ceilings governing the development.  Sales could not close until the city issued certificates of compliance with its affordable housing program. 

A number of buyers sued the city, the developer, and the developer’s partners.  The buyers alleged that they had purchased low income condominiums and had obtained certificates of compliance without being told that their condominiums were subject to low income ceilings. They also alleged that they had paid prices higher than the ceilings. 

The buyers contended that the city failed to adequately review their sale documentation, issued erroneous certificates of compliance, and didn’t tell them about the low income price ceilings. As a result, buyers overpaid for their units, and paid higher interest and property taxes.  

The city tendered the action to two liability insurers.  Both insurers rejected the city’s claims, saying that the city’s alleged negligence and wrongful conduct in connection with the sales had occurred prior to their policy periods. 

The city sued.  The district court granted summary judgment in favor of the insurers.  It found that any occurrence or wrongful act alleged by the homeowners had taken place prior to the policy periods.  The city appealed. 

The Circuit Court’s Decision 

The circuit court determined that the city’s alleged negligence occurred prior to the policy periods.  It rejected the city’s argument that the “occurrence” had continued into the policy periods because the condominium buyers “continued to suffer” under the burden of having overpaid and having their resale prices restrained by a ceiling. 

The circuit court found that the California Supreme Court’s decision in Montrose Chemical Corp. v. Admiral Insurance Co. didn’t help the city.  Montrose Chemical held that pollutants deposited in the ground prior to the policy period, but that continued to leach into soil and groundwater during the policy period, gave rise to a duty to defend.  In the circuit court’s view, the city was stretching Montrose Chemical “too far” because the policies differed.  The Montrose Chemical policies required only damages during the policy period.  The city’s policies required an occurrence during the policy period. 

The Ninth Circuit found that the buyers alleged that they were damaged by the city’s negligence when they purchased their units – over a year prior to one policy and two years before the other.   Accordingly, it affirmed the decision in favor of the insurers. 

The case is City of San Buenaventura v. Insurance Co. of State of Pennsylvania, Nos. 10-56727, 11-55284 (9th Cir. June 26, 2013).