Landlord-tenant lawsuits: a primer

Landlord-tenant lawsuits are nothing new. But the heated rental markets in cities like San Francisco, Oakland and Los Angeles have created a proliferation of such suits, including complex multi-unit apartment and single resident occupancy (SRO) hotel disputes.

These disputes are rarely straightforward, and can become extremely difficult to resolve when adding multiple insurers and coverage issues into the mix. It is too daunting a task for a mediator to wrap his or her arms around all of the moving parts in a single day. But if all the parties, including plaintiffs' counsel, defense counsel and coverage counsel identify and appreciate the coverage issues involved, the prospect of resolution is significantly enhanced. Consider the most complex landlord-tenant dispute - a "typical" SRO case, which may involve up to 40 tenants suing both the owner and master lessee of a hotel for uninhabitable conditions and revolving temporary evictions spanning several years. How can counsel position the case to be resolved? Fortunately, there are consistent guideposts that can assist all counsel involved.

Landlord-tenant disputes are driven by the damages available to plaintiffs. In addition to state habitability laws, municipalities have passed protective rent ordinances that allow for a trebling of damages and recovery of attorney fees for bad faith evictions. Examples include Oakland's Tenant Protection Ordinance 8.22.370, San Francisco Rent Ordinance 37.9(f) and Los Angeles' Rent Stabilization Ordinance 151.10(A). Because attorney fees will inevitably increase the closer a case gets to trial, early evaluation of liability is particularly important to defendants. The insurers' policies - even if written on standard Insurance Services Office (ISO) forms - vary in coverage for such damages. The issues below therefore need to be determined early.

Multiple Policies

While their motivations are different, plaintiffs, defendants and insurers all have an interest in identifying and tendering to each insurer that potentially covers the plaintiffs' claims. For large, complex disputes, general liability and professional liability policies should be investigated. And for SRO cases, both the owners and master lessees may have independent policies, creating two tiers of coverage.

The identification of all insurance policies up front is key, as the practical dispute at the end of the day will be which insurers owe what percentage of any settlement, and whether the insured has to contribute for any gaps in coverage.

Key Policy Provisions

The insurers' policy provisions obviously affect whether coverage is owed, and for which damages. The following general liability policy provisions are central to each insurer's evaluation of coverage:

Supplementary payments. This standard ISO provision is important in light of the ability of plaintiffs to recover attorney fees under municipal codes. Older California authority holds that award of attorney fees were covered under the supplementary payments provision. Prichard v. Liberty Mutual. In 2007, however, the ISO amended its supplementary payments provision to provide, "these payments do not include attorney fees or attorney expenses taxed against the insured." Therefore, any policy written on a pre-2007 ISO form covers an award of attorney fees under a municipal code, while any policy written on a form in 2007 or later excludes such damages. This distinction affects contribution rights between the insurers, as those policies written on post-2007 forms have a strong argument that they should contribute a smaller share to settlement.

Punitive damages. Punitive damages are typically excluded in standard general liability policies, as well as Insurance Code Section 533. However, there is an unresolved argument whether treble damages under municipal codes constitute "punitive" damages. More recent policies may contain endorsements that specifically define punitive damages to include statutory treble damages, as provided in municipal codes. See ISO form 90-85 (01/05). This issue affects both covered/uncovered damage issues between the insured and insurer, as well as contribution rights between the insurers.

Intentional acts. This issue arises because municipal codes require bad faith (or similar) wrongful evictions for an award of treble damages. The term bad faith is not defined in the codes, and there are no published California opinions stating whether that phrase implies an intentional acts standard (not covered), a negligence standard (likely covered) or something in between.

Known injury or loss. This issue is important because the ISO added "anti-Montrose" language to its standard insuring clause in 2001, attempting to eliminate coverage for ongoing injury claims. There is no published California authority addressing exactly what "injury" or "loss" the insured must know about for the provision to apply in a habitability case. For example, is it sufficient that the landlord know about a similar prior habitability lawsuit at the same hotel, or does the insured need to have known about every single complaint by every single tenant in the current lawsuit? The answer would logically be the former, but the issue has not reached an appellate court to date.

Allocation Issues

The central practical issue for resolution of complex landlord-tenant cases is equitable contribution between insurers. These three issues tend to be the "tail wagging the dog" for resolution of such cases.

Insurer allocation. While insurers tend to agree on a time-on-risk allocation based on tenancy periods, the complexity arises when some policies exclude attorney fees awards and treble damages, but others do not. Those insurers whose policies contain the exclusions will argue that their allocation should be lower, reflecting the damages actually covered.

Uninsured periods. There is no California authority specifically addressing whether insurers have to "pick up" uninsured periods in habitability cases, or whether insureds are responsible for those periods. Commentators and out-of-state cases have pointed out that this rule should not be followed where the insured by its own fault did not have coverage.

Uninsured damages. To reiterate, general liability policies written on later ISO forms do not cover attorney fees or treble damages. Assuming the policies contain those exclusions, a trial verdict in a landlord-tenant suit would likely be overwhelmingly uncovered damages. As such, insureds may seriously consider contribution to a settlement.

The coverage issues in complex landlord-tenant cases can be daunting. The key to resolving these issues is to have all parties cognizant of them in advance of a mediation or settlement conference. Coverage counsel can, and do, create sophisticated allocation models that take the coverage issues into consideration. These can assist greatly in resolution. Even that rarely creates consensus on "fair shares," but in any event it is essential that the mediator or settlement judge not be learning the issues for the first time when the parties set foot in the door.