- The Bradens' lanai roof was a common element that the AOAO had to maintain;

- The AOAO had failed to properly maintain the Bradens' lanai roof, which was the source of leaks that had caused damage to their unit, and

- The AOAO's failure to address the Bradens' interior damage was “deliberately discriminatory … because interior damages were paid to other owners.”

The arbitrator awarded the Bradens $6,203.49 in special damages, which reflected the amount they had paid to repair their roof and interior damage. The arbitrator also required the AOAO to contract with a licensed roofing contractor to perform all necessary and reasonable work on the Bradens' lanai roof. The arbitrator denied the Bradens' tort claims, but concluded they were the prevailing parties and awarded them $85,644.30 in attorneys' fees and $8,515.91 in costs.

Dongbu Insurance Co., Ltd., which had issued a CGL policy to the AOAO, informed it that it would reimburse the AOAO $6,203.49 in special damages and $8,515.91 in costs, but would not pay the attorneys' fees award of $85,644.30. Dongbu explained that the award of attorneys' fees was not covered under the policy because they did “not constitute 'bodily injury,' 'property damage,' or 'personal and advertising injury'” as those terms were defined in the policy.

The AOAO sued Dongbu, seeking judgment in the amount of $85,644.30 for the attorneys' fees awarded by the arbitrator, plus prejudgment interest.

The parties moved for summary judgment.

The Dongbu Policy

The Dongbu policy stated that the insurer:

will pay those sums that the [AOAO] becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.

The district court granted summary judgment in favor of the AOAO and against Dongbu.

In its decision, the district court pointed out that Dongbu had agreed to “pay those sums that the [AOAO] becomes legally obligated to pay as damages because of … 'property damage' to which this insurance applies.” It then found that the AOAO had become legally obligated to pay the attorneys' fee award when the state court confirmed the arbitration award and that the Bradens' property damage constituted “property damage to which this insurance applies” insofar as Dongbu reimbursed the AOAO – pursuant to the policy – for the special damages awarded by the arbitrator.

The district court observed that the terms “damages” and “because of” were not defined in the policy, but then ruled that the attorneys' fees were “damages because of” the Bradens' property damage because they “flowed from the Bradens' property damage” and constituted “restitutive payment to the Bradens.” The district court stated that, “but for their property damage, they would not have pursued arbitration and been awarded fees.”

Accordingly, the district court concluded that the arbitrator's award of attorneys' fees was covered by the policy and had to be reimbursed to the AOAO, together with prejudgment interest.

The case is Association of Apartment Owners of the Moorings, Inc. v. Dongbu Ins. Co., Ltd., No. 15-00497 BMK (D. HI Aug. 18, 2016).

FC&S Legal Comment

Other courts have reached the same result.

In American Family Mutual Ins. Co. v. Spectre West Builders Corp., No. 09-968 PHX-JAT (D. Ariz. Feb. 4, 2011), the U.S. District Court for the District of Arizona concluded that attorneys' fees were covered by the insurance policy. In that case, the defendant construction company built a 73-unit condominium complex in Arizona. The plaintiff insurance company insured the defendant under a CGL policy. After construction was complete, the homeowners' association of the residential complex sought arbitration against the defendant to resolve construction defect issues. The arbitrator found the defendant construction company to be liable for construction defects and awarded damages, attorneys' fees, and costs to the homeowners' association. The arbitration award was confirmed in state court.

The insurance company instituted a declaratory judgment action against its insured (the construction company), arguing that the policy did not cover attorneys' fees awarded by the arbitrator. The policy provided: “We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies.” The district court noted that the policy defined “'bodily injury' and 'property damage,' but not 'damages'” and that “[t]he issue before the Court is not whether attorneys' fees and costs can be characterized as 'property damage,' but whether they can be characterized as damages that [the defendant construction company] became legally obligated to pay because of property damages.” (Emphasis in original.)

Based on the policy language, the Arizona district court ruled:

The Court finds that the insuring language is broad enough to encompass coverage for the Arbitrator's award of attorneys' fees and costs to the Association. The Court already has held that property damage occurred under the policies, and [the defendant construction company] became legally obligated to pay attorneys' fees and costs as a result of that property damage. The Court therefore finds that the attorney's fees and costs awarded at the arbitration are damages that fall under the insuring clause of the policies.

Ultimately, the district court concluded “as a matter of law that the policies provide coverage for the Arbitrator's award of $300,000 in attorneys' fees,” and ordered the insurer to reimburse the fees to the construction company.

In another case, the U.S. District Court for the Northern District of California concluded that attorneys' fees awarded in an underlying action were covered by the insurance policy at issue. In APL Co. v. Valley Force Ins. Co., 754 F.2d 1084 (N.D. Cal. 2010), the plaintiff won a judgment, including attorneys' fees, in an underlying action against an insured of the defendant insurance company. The plaintiff brought a subsequent lawsuit against the insurance company, seeking coverage of the underlying judgment including fees. The policy provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury,' 'property damage,' 'personal injury' or 'advertising injury'….”

The district court noted that the term “damages” was not defined in the policy and therefore turned to “its ordinary and popular definition”: “any remunerative payment made to an aggrieved party, including restitutive and punitive measures.” (Internal quotations omitted.) Finding that the “fee award in the underlying litigation is a 'remunerative payment made to an aggrieved party,” the district court concluded that the “attorneys' fees awarded in the underlying litigation fall plainly within the coverage of the policy.”