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The United States District Court for the District of South Carolina, applying South Carolina law, has held that a property damage exclusion did not bar coverage for a lawsuit filed by property owners against an insured homeowners' association (HOA) asserting breach of fiduciary duty based on the HOA's alleged failure to create a reserve fund to replace a seawall. Colleton River Club, Inc. v. RSUI Indem. Co., 2026 WL 114953 (D.S.C. Jan. 15, 2026).
A group of property owners filed suit against the HOA, alleging that the HOA breached its fiduciary duty to create a reserve fund relating to a seawall and that, if the HOA had fulfilled those obligations, a reserve account funded by contributions from past and present owners of those lots could have been used to replace the seawall when necessary. The HOA settled the lawsuit with its D&O insurer's consent, and then filed suit against the insurer to establish coverage for the settlement under its D&O policy.
The D&O policy at issue contained a property damage exclusion that barred coverage for loss in connection with any claim "[a]lleging, arising out of, based upon, attributable, or in any way involving, directly or indirectly: . . . Damage to or destruction of any tangible property[.]" On cross-motions for summary judgment, the insurer argued that the property damage exclusion precluded indemnity coverage for the underlying lawsuit and settlement because they involved property damage due to the HOA's alleged neglect in maintaining and repairing the seawall.
The court found in favor of the HOA, holding that the property damage exclusion did not apply because the underlying lawsuit did not concern or necessarily involve property damage; rather, it concerned the HOA's alleged failure to properly fund a reserve fund and the financial burden that alleged omission imposed on future owners. The court also held that the insurer failed to adequately reserve the right to require the HOA to allocate between covered and noncovered damages when the insurer took the position that there was no need for such allocation because none of the damages were covered.
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