Unexpected Sources of Insurance

The public nuisance theory is already expanding into the subprime mortgage context. Earlier this year, the City of Cleveland sued 21 financial institutions, including Ameriquest, Bank of America, Citigroup, and J.P. Morgan Chase, among others, alleging that the defendants’ “sub-prime lending abuses” created a foreclosure crisis that has imposed “tangible costs” on the city, including increased fire and police expenditures associated with vacant properties, demolition costs, and lost tax revenue. The city claims the foreclosures constitute a “public nuisance” and seeks compensation from the banks for the city’s losses.

While suspect on its merits, the City of Cleveland lawsuit presents an interesting case study for insurance purposes. Many commentators examining the availability of insurance coverage for subprime mortgage-related lawsuits have focused on Directors and Officers (D&O) and Errors and Omissions (E&O) policies as the only potential sources of coverage, in some cases suggesting that other standard policies, such as Comprehensive General Liability (CGL) policies, won't apply. City of Cleveland shows that those commentators' pronouncements are premature, failing to account for the possibility of novel theories of liability.

Contrary to the popular belief that CGL coverage won’t apply to subprime-related suits, in the City of Cleveland suit, it appears that the complaint’s allegations could fall within the scope of the CGL’s property damage coverage. CGL policies commonly define “property damage” to include “physical injury to tangible property” and “loss of use of tangible property that is not physically injured.” The Cleveland complaint alleges that the mass foreclosures have caused the city to expend funds maintaining, demolishing, and providing fire services to the foreclosed properties, which presupposes some level of physical damage to the properties. With respect to foreclosed properties that were not physically damaged, the complaint alleges that the defendants’ actions caused a proliferation of abandoned buildings, which arguably constitute “loss of use of tangible property that is not physically injured.”

City of Cleveland shows that when it comes to claims involving novel theories like public nuisance -- which, while of questionable merit, can give rise to significant defense costs -- policyholders should carefully review each complaint, examine all possibly applicable insurance policies, and consult with coverage counsel, to ensure that they don’t overlook any sources of coverage.