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(Article from Insurance Law Alert, December 2015)

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A Rhode Island federal district court ruled that tax liens on residents’ property are insured property and that an insurer is obligated to indemnify losses caused by erroneous tax bills.  Pfeiffer v. Am. Alt. Ins. Corp., 2015 WL 7016319 (D.R.I. Nov. 12, 2015). 

The Central Coventry Fire District in Rhode Island has authority to tax the businesses and residents within its geographical region in order to fund fire-fighting and rescue services.  Under local law, the tax bills are a lien on the taxed property.  In 2010, the tax collector made several errors in calculating the District’s budget, resulting in a significant shortfall for that fiscal year.  The mistakes went unreported and were repeated the following year, further compounding the shortfall.  Thereafter, a special master was appointed to oversee the District’s finances.  The special master made a claim to the District’s insurer seeking coverage for the losses incurred in the two tax billing cycles.  The insurer denied the claim. 

The policy covered the “[f]ailure of any ‘employee’ to faithfully perform his or her duties as prescribed by law, when such failure has as its direct and immediate result a loss of your covered property.”  The term “covered property” was defined as property “that you own or hold; or for which you are legally liable.”  The crux of the parties’ dispute was whether the budget shortfall constituted “covered property.”  The court held that it did.  The court reasoned that the tax liens could be considered property that the District “owned or for which it was legally liable” because, under governing local law, the District was charged with the responsibility of assessing taxes and those taxes constituted “a lien on the real estate, due and owing until collected.”  In so ruling, the court rejected the insurer’s argument that the loss was a speculative projection, or “monies not due the District” because of the accounting errors.