A federal district court in North Carolina held that an insured's failure to indemnify a third party does not constitute "property damage," even if that third company was seeking indemnification for "property damage." American Reliable Insurance Company v. Five Brothers Mortgage Company and Securing, Inc., 2018 WL 538747 (W.D. N.C. Jan. 23, 2018), appeal filed (4th Cir., Feb. 22, 2018).

An insurer filed a declaratory judgment seeking a determination that it had no duty to defend or indemnify an insured mortgage company with respect to a suit in which it was alleged that the insured breached an indemnity clause because the allegations did not allege a "personal injury" or "property damage," as defined by the policy. The underlying complaint alleged that the insured breached an indemnity clause in a contract by failing to indemnify another party for a claim that it trespassed on another's property. The third party sued the insured for failure to honor an indemnity agreement, and the insured sought coverage for the underlying lawsuit. In the coverage action, the insurer argued that the underlying lawsuit did not trigger the policy because the underlying lawsuit merely alleged breach of an indemnity agreement, which does not constitute "personal injury" or "property damage." The insured argued that because its indemnity obligation related to property damage committed by the third company, its alleged failure to indemnify the third company for property damage constituted "property damage" and triggered the policy.

The court disagreed, and noted that the alleged damages in the underlying lawsuit arose out of the breach of contract and, therefore, were purely economic and did not constitute "personal injury" or "property damage." Accordingly, the court held that the allegations in the underlying complaint did not trigger the policy, and thus the insurer had no duty to defend.

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