A Chubb Corp. unit had the duty to defend a landlord in a discrimination case under its excess policy because it had the only policy that explicitly provided coverage for discrimination, a California appellate court has ruled.

The decision Monday in Federal Insurance Co. v. Steadfast Insurance Co. and Liberty Surplus Insurance Corp. by the state appellate court in Los Angeles related to a lawsuit filed in 2006 by the U.S. Justice Department against landlord Donald T. Sterling and other parties charging housing discrimination on the base of race, national origin and family status.

The complaint charged that the defendants refused to rent to non-Korean prospective tenants, misrepresented the availability of apartment units to non-Korean prospective tenants, and provided “inferior treatment” to non-Korean tenants in the Koreatown section of Los Angeles, according to the DOJ.

The lawsuit also charged the defendants had refused to rent to African-Americans and misrepresented the availability of apartment units to African-American prospective tenants in Beverly Hills.

The Sterling defendant's primary insurers — Schaumburg, Ill.-based Steadfast Insurance Co., a unit of Zurich North America, and Liberty Surplus Insurance Corp., a unit of Boston-based Liberty Mutual Group — insured against claims for wrongful eviction, wrongful entry and invasion of the “right of privacy occupancy,” according to the ruling.

Federal, the excess and umbrella insurer, insured against those claims and also specifically insured against claims for discrimination, said the ruling.

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In the complex litigation, Federal sought a determination it had no duty to defend and claimed reimbursement from Steadfast and Liberty for the $317,000 it had spent in defense fees on behalf of the defendants. Steadfast sought reimbursement from Federal and Liberty for the $5.3 million in defense costs and the $1 million it spent to settle the litigation. Liberty did not incur any expense in the litigation, according to the ruling.

Federal said it owed no duty until Steadfast and Liberty's policy limits were exhausted, according to the ruling.

The ruling states that Federal's umbrella policy said it provided coverage for “discrimination, harassment or segregation based on person's age, color, national origin, race, religion, or sex,” which was not in either of the primary policies.

The three-judge panel's unanimous ruling, which affirmed a lower court ruling, said Federal was obligated to pay the defense costs. “The Federal, Steadfast and Liberty policies all provided coverage for personal injury arising from wrongful eviction, wrongful entry and invasion of the right of privacy occupancy,” said the ruling.

“The Federal policy also provided coverage for discrimination claims … Neither Steadfast nor Liberty policies contained such explicit coverage for discrimination claims,” the ruling said.

“Accordingly, because there was no coverage of potential for coverage under the Steadfast or Liberty policies … neither Steadfast nor Liberty had a duty to defend in that action. Federal, however, did have a duty to defend the insureds,” said the ruling.

The umbrella coverage in the Federal policies “'dropped down' to fill the gap in the Steadfast and Liberty policies and provide primary coverage in the Sterling action,” the ruling said.