An American International Group Inc. unit that refused to defend a real estate company in connection with a fire that killed three and injured a fourth person must pay a $3 million consent decree, a federal appeals court said in affirming a lower court ruling.

Hamilton Specialty Insurance Co. sold Transition Investment LLC an insurance policy covering three Detroit properties, according to Friday’s ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in Hamilton Specialty Insurance Co. v. Transition Investment, LLC.

After the fire at one of the properties, which also destroyed the building, the deceaseds’ estates and the injured party sued Transition, contending it had failed to provide a habitable premise and neglected to maintain the property’s stove, which allegedly caused the fire, according to the ruling.

Hamilton refused to defend Transition, claiming its insurance policy did not cover damages caused by a fire.  The litigation led to a $3 million consent judgment against Transition by the state court. Hamilton filed suit against Transition in U.S. District Court in Detroit, seeking a declaration it was not liable for the consent agreement. 

The district court ruled against Hamilton. The court “thought it ‘outrageous’ that Hamilton denied coverage and criticized Hamilton’s refusal to participate” in the litigation because the company could have done so “without giving up any rights,” the appellate court ruling said.

The three-judge appeals court panel affirmed the lower court.  The plaintiffs “alleged that Transition’s negligent maintenance of its property led to the fire and the resulting injuries. Nothing in the complaint suggests that Transition violated terms in its insurance contract or took any action nullifying Hamilton’s duty to defend,” the ruling said.

“So when Hamilton received the complaint it lacked surefire evidence that Transition’s policy unarguably barred coverage,” the appeals court panel said, adding, “We fail to understand how Hamilton divined that it had no duty to defend Transition in state court.”

The appeals panel added, “Michigan law makes it difficult for insurers to deny coverage absent clear-cut language precluding coverage. And Hamilton cannot show that coverage was unambiguously barred under the policy when it decided to not defend Transition.”

Attorneys in the case did not respond to a request for comment.