Using Liability Insurance to Manage the Financial Risks of Fair Housing Lawsuits

It’s important to select a product that works for you.

 

 

While it’s a moral and legal imperative, diligent compliance with fair housing laws isn’t enough to protect you against the risk of discrimination claims. After all, you can do everything right and still end up getting sued. That’s why you need a full-blown risk management strategy that includes protection in the event that claims prevention fails and you find yourself on the wrong end of a fair housing lawsuit or other legal action. To get that protection, you need to buy a liability insurance policy.

Insurance protecting landlords against liability for fair housing liability risks to third parties, commonly referred to as “tenant liability insurance,” comes in different shapes and sizes, and it’s important to select a product that works for you. This month’s lesson will explain what you need to know to accomplish that crucial objective. Specifically, we’ll tell you how tenant liability insurance works and outline 12 rules to ensure you get the right coverage for your own business. We’ll follow that up with a Coach’s Quiz enabling you to apply the lesson material to real-life situations.

WHAT DOES THE LAW SAY?

The federal Fair Housing Act (FHA) bans landlords and other housing providers from discriminating on the basis of race, color, national origin, sex, familial status, disability, and religion. State and local fair housing laws may extend those protections to other groups, which, depending on the jurisdiction, may include, age, ancestry, sexual orientation, gender identity and/or expression, marital status, source of income, creed, domestic violence victim, and/or military status.

Liability under fair housing laws is extremely broad, encompassing not only intentional but also inadvertent discrimination, including policies and practices that look neutral but have the effect of discriminating against one or more protected groups. The potential penalties for discrimination can be ruinous, including:

• Money damages compensating the victim for economic loss, lost housing opportunity, emotional distress, moving costs, and other out-of-pocket costs;
• Punitive damages and civil penalties designed to punish the landlord and deter others from discriminating in the future; and
• The victim’s/plaintiff’s attorney fees and legal costs.

Of course, landlords don’t have to pay these penalties if they’re not guilty. But mounting a legal defense, even when successful, can cost a fortune, especially if the case drags on for years. That’s why it’s so common for landlords to pay the alleged victim a substantial sum to settle even when they firmly believe that the claim lacks merit and that they did nothing wrong. 

12 RULES FOR ACQUIRING

TENANT DISCRIMINATION LIABILITY INSURANCE

Tenant discrimination insurance is designed to protect landlords against the financial consequences of fair housing litigation. Without insurance, landlords who get sued for discrimination would have to pay the resulting damages, settlements, attorney fees, and other legal costs out of their own bank account. With tenant discrimination insurance, for a covered claim insurers will pay for defense and settlement bills for you. At least that’s how it’s supposed to work. The problem is that if you don’t get the right coverage, you may be out of luck.  

Rule #1: Don’t Count on Your General Liability Policy for Fair Housing Discrimination Protection

First and foremost, recognize that having general commercial liability insurance doesn’t protect you against fair housing liability. Standard general commercial liability policies don’t include tenant discrimination and fair housing coverage. Such policies are typically designed to cover “bodily injury,” “property damage,” and “advertising injury,” and fair housing liability doesn’t qualify as any of these things, explains a Colorado-based liability insurance consultant.

Example: A New Jersey landlord asked its commercial liability insurance company to reimburse the $15,000 it paid to an African-American rental applicant to settle a claim of deliberate racial discrimination. The insurer denied the landlord’s claim, noting that deliberate discrimination didn’t constitute “personal injury” under the policy. The court agreed and said the insurer didn’t have to reimburse the landlord [Powell v. Alemaz, Inc., 335 N.J. Super. 33 (App. Div. 2000), 760 A.2d 1141].

DEEP DIVE

What Counts as “Personal Injury”

The Commercial General Liability Coverage Form (CG 00 01 12 07) from the Insurance Services Office (ISO), the principal provider of insurance underwriting, rating, and statistical information to the property and casualty insurance industry in the U.S., doesn’t mention the term “discrimination.” And it defines personal and advertising injury as “injury, including consequential ‘bodily injury,’" arising out of one or more of the following offenses, only one of which (the third) even remotely resembles housing discrimination:

• False arrest, detention, or imprisonment;
• Malicious prosecution;
• The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling, or premises that a person occupies, committed by or on behalf of its owner, landlord, or lessor;
• Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services;
• Oral or written publication, in any manner, of material that violates a person's right of privacy;
• The use of another’s advertising idea in your “advertisement”; or
• Infringing upon another’s copyright, trade dress, or slogan in your “advertisement.”

Rule #2: Don’t Count on Your Employment Discrimination Policy to Protect You Against Housing Discrimination

Like many businesses, you may carry liability insurance to protect you against discrimination and other legal claims by your employees. Such policies typically cover employment-related matters only and don’t protect you from discrimination claims by tenants and other third parties.

Rule #3: Purchase Tenant Discrimination Coverage Separately

The implication of Rules #1 and #2 is that if you want tenant discrimination coverage, you must purchase it separately, either as part of another liability policy or as a standalone policy. Some insurers include tenant discrimination coverage as part of the Errors & Omissions (E&O) policies they offer to real estate firms. If that’s not the case, you’ll probably need a standalone policy. Also recognize that even when it is covered by E&O, tenant discrimination coverage is often separate from the policy’s main liability coverage and thus may be subject to different liability limits. 

Rule #4: Work Together with an Insurance Professional

When purchasing tenant discrimination insurance, make sure you get the most coverage available for the premium you’re willing to pay. While available in all 50 states, tenant discrimination policies aren’t as abundant as other landlord policies. “Tenant discrimination insurance policies are mostly written by surplus lines insurers, available through wholesalers,” explains Colorado insurance consultant Arthur Proulx. “It’s important for landlords to engage their insurance professional in the process.” Depending on the landlord, such professionals might include:

• An insurance agent that has a written contract to represent and make binding agreements on behalf of one or more specific insurance companies;
• An insurance broker that has similar arrangements but with more insurance companies and without binding contractual authority; and
• A captured agent who’s employed by a specific insurance company. 

Rule #5: Ensure Tenant Discrimination Policy Covers All Prospective Complainants

Like most insurance policies, tenant discrimination policies are typically very specific about what they do and don’t cover. So, read the policy carefully and ensure that it protects you, your company, officers, directors, partners, shareholders, trustees, employees (to the extent they’re acting within the scope of their employment) and, if necessary, your lender and/or the regulatory agency that requires you to obtain the insurance, against claims from:

• Tenants or ex-tenants relating to eviction, rent, reasonable accommodations, and other lease matters;
• Rental applicants relating to the tenant screening and leasing process;
• Government agencies like the federal Department of Housing and Urban Development (HUD), Department of Justice, and their state and municipal counterparts; and
• Private, nonprofit fair housing advocacy organizations representing victims of discrimination.

Rule #6: Ensure Tenant Discrimination Policy Covers Complaints and Lawsuits

You can incur fair housing liability costs as a result of not only a lawsuit but also a complaint filed with a regulatory agency. So, it’s important to verify that the policy covers both complaints and lawsuits (including settlements), not just one or the other. This will ensure that you’ll be covered if somebody files a complaint with HUD or equivalent state, regardless of whether the complaint ripens into a full-blown lawsuit.

Rule #7: Don’t Count on Tenant Discrimination Insurance to Protect You from Deliberate Discrimination

It’s important to realize that tenant discrimination insurance protects only against unintentional discrimination—that is, policies or practices that appear neutral on their face but are demonstrated to have discriminatory effects. Insurance doesn’t cover discrimination that’s committed intentionally. In most states, insurers aren’t allowed to insure landlords against intentional discrimination even if they wanted to.

Example: A New York landlord that paid $81,000 to settle allegations of intentional racial discrimination sued its commercial general liability insurer for failing to defend it in the suit. While conceding that the mental stress the victim suffered as a result of the alleged discrimination was “bodily injury” under the policy, the insurer argued that the loss wasn’t covered because the act was intentional. The federal court agreed, finding that intentional discrimination didn’t count as an “occurrence” of bodily injury covered by the policy. The court also cited Circular Letter 1994-6 issued by the New York Superintendent of Insurance stating that coverage for a claim alleging deliberate discrimination violates New York public policy [Rosenberg Diamond Development Corp. v. Wausau Insurance Co., 326 F. Supp. 2d 472 (S.D.N.Y. 2004)].

Rule #8: Don’t Count on Tenant Discrimination Insurance to Cover Punitive Damages

Another loss that tenant discrimination insurance generally doesn’t cover is the punitive damages courts award to punish landlords for violating fair housing laws and deter others from committing like offenses. As with deliberate discrimination, punitive damages are generally not insurable under state law. That bar extends to claims that are finally determined to be in any way related to any dishonest, fraudulent, criminal, or malicious act or omission committed by an insured. However, the exclusion may not apply to damages that result solely from the “vicarious liability” of the named insured—that is, the liability a landlord assumes for the actions of an employee or other agent.

Rule #9: Don’t Count on Tenant Discrimination Liability Insurance to Cover Pre-Existing Claims

It’s important to understand what kind of liability coverage you’re getting. There are two basic kinds of liability policies, Proulx explains:

Claims made policies cover claims made while the policy is in force rather than the dates the events that gave rise to those claims actually occurred. So, for example, a claims made policy that’s in effect only between 2024 and 2025 won’t cover a fair housing complaint filed in 2026 for discrimination allegedly taking place the year before. “When a claims made policy ends, so does the coverage,” notes Proulx. “And once it expires, it’s as if the policy never even existed.”

Proulx notes that you can also acquire coverage retrospectively for claims covering events that occurred before the policy takes effect. “This might be a sensible option for a landlord that acquires a portfolio of new properties that it isn’t entirely sure were properly managed from a fair housing perspective,” he explains.

Occurrence policies provide coverage that remains in effect forever starting from the date the policy takes effect.

However, for these reasons, occurrence coverage, if it’s even available, is more expensive than claims made coverage, especially in the first years of the policy. You also need to disclose all claims and potential claims that you know or should reasonably know about to the insurer before the policy is issued so it can properly weigh the risks and set a fair price for coverage, including the deductible or amount you must pay out-of-pocket on a claim up-front before the coverage kicks in.

Bottom line: Talk to your attorney and insurance professional about the coverage type and duration you need. In doing so, be mindful of the statutes of limitation that apply to the fair housing claims you’re likely to face. The general statute of limitations for a federal fair housing offense is up to two years after the final alleged act of discrimination occurred. However, limitation periods may vary based on the type of claim involved and, if the claim is based on state law, the state law under which it’s filed.

Rule #10: Decide Between Duty to Defend & Duty to Reimburse

Consider not just the coverage and price, but other key provisions of the policy, including how your legal defense will work in the event somebody brings an actual fair housing claim against you. There are two basic models:

Duty to defend liability insurance policies require the insurer to select the attorney from a list of pre-approved law firms with whom it has an existing contract. Once the claim is submitted, the insurance company is obligated to defend the claim and cover 100 percent of the defense expenses as long as at least one allegation is covered by the policy and remains open.

Duty to reimburse policies leave the insured/landlord in charge of selecting and paying for defense counsel and waging the legal defense. The insurer’s obligation is to reimburse the landlord, either after the case ends or as expenses are incurred, subject to the insurer’s review. Timing of reimbursement may be a key element of negotiation, especially for a landlord with limited cash flow. Unlike duty to defend, an insurer’s obligation under a reimbursement policy extends only to the claims that the terms of the policy cover.

Compliance strategy: A reimbursement policy might make sense for landlords that have a long-standing relationship with an attorney or law firm that they want defending them in a fair housing case. However, duty to defend might still be a viable option to the extent that the landlord is satisfied with the firms on the insurer’s list—which may actually include the landlord’s own firm. If not, the insurer may be willing to add the landlord’s firm as outside counsel by endorsement to its duty to defend policy form.

Rule #11: Negotiate for Voice in Settling Fair Housing Claims

The reason that having some control over the legal defense is so important is that the insurer’s interests may differ from yours at some point during the proceedings. One common potential problem area is in deciding whether to settle the fair housing claim out of court. In the interest of containing costs, the insurer may insist on settling a claim that you believe is totally devoid of merit without consideration of how a settlement would affect your property’s reputation, standing in the community, risks of liability for repeat offenses, and/or future liability insurance premium costs. So, you’ll want to ensure your policy gives you some voice over settlements.

But you also need to recognize that a policy that gives the insured the right to make settlement decisions may also contain what’s called a “hammer clause” ending the insurer’s obligation to pay the insured’s defense at the point it determines is the appropriate time to settle the case. Result: You must choose between an unfavorable settlement and defending the claim on your own and at your own expense.

If your policy does have a hammer clause, ask your insurer whether it’s negotiable. Even if you can’t completely remove it, you may be able to modify it. For example, some insurers will agree to allow the insured landlord to elect to continue fighting a lawsuit after the insurer recommends a settlement subject to a modified hammer clause making the insured responsible not for all subsequent legal costs but only the monetary difference between the amount the insurer recommended and the amount that’s actually awarded.

Rule #12: Understand & Properly Follow the Claims Process

Having the right insurance policy won’t do you much good if you don’t know how to navigate the claims process when you need to use the insurance. The first step is to notify your insurer immediately upon receiving or becoming aware of a potential fair housing claim against you. Prompt reporting is often a policy requirement and ensures that the insurer can begin its process without delay.

Upon receiving your notification, the insurer will typically assign a claims adjuster or legal representative to handle the case. Be sure to provide that person with all relevant documentation, including any communication with the tenant, rental agreements, property policies, and records of any related incidents. The insurer will next evaluate and perhaps investigate your claim and decide on a strategy, which may include entering into settlement negotiations. 

Regardless of how the defense process works and who leads it, you’ll need to maintain close communication with the insurer so that both sides know what’s going at all times. In addition to meeting your policy obligations, communication and transparency will significantly bolster your legal defense.

COACH’S SOURCE

Art Proulx: President, Blades, Crout & Proulx LLC, Leadville, CO; (908) 672-1507; https://bladesrisk.com/