Real Estate Developers Fail to Recover Premiums They Paid for Insurance for Projects They Never Completed

June 30, 2011 | Insurance Coverage

Real estate developers obtained insurance for the construction and sale of homes they were building, primarily against claims of defective construction. The developers received $10 million of coverage on each of two projects and paid the insurer an “advance premium” of approximately $1.3 million. Due to the deteriorating real estate and credit markets, however, the projects were not completed. The developers informed the insurer that the projects had not reached the scope of construction anticipated when the policies were issued, and demanded that the insurer return the difference between the advance premium paid and the premiums they contended the insurer actually had earned. After the insurer refused, the developers sued, arguing that they were entitled to recover some of the amount they had paid on the ground of “mutual material mistake of fact.” The insurer moved to dismiss. 

In its decision, the court rejected the developers’ contention that the premiums were calculated based on the planned scope of each project, finding that the “unambiguous language of the policies” stated that the advance premium was not computed based on any rate or formula, but was a flat rate. In the court’s view, that negated the developers’ premise that the scope of project completion was a future contingency the parties had assumed in the calculation of the premiums.

Moreover, the court continued, the developers’ premise also was precluded by a policy provision that rendered the premiums non-refundable.

The court also rejected the developers’ argument that their inability to complete the projects caused a failure of consideration so as to warrant rescission or restitution. The court observed that the developers had not contended that they had not had the benefit of insurance coverage for the portion of each project they completed, and that one therefore could not reasonably infer that they received nothing at all from the insurer in exchange for the premiums.  The fact that the insurance coverage turned out to be less valuable to the developers than anticipated did “not render the policies or their premium provisions unenforceable for lack of consideration.”

The case is Watermark Granite La Quinta, LLC v. American Int’l Specialty Lines Ins. Co., No. 10cv1011-L (CAB) (S.D. Cal. May 23, 2011).

Case & Point

Recent noteworthy decisions

Allegedly Defamatory Statements Excluded from Policy’s Coverage

A complaint asserted that statements allegedly made by corporate executives were “slanderous per se” and had been “willfully made with an intent to defame the character and reputation” of another person. The court found that the insurance company that had issued a liability policy to the executives’ company did not have to defend the executives. It observed that the policy excluded coverage for oral or written statements that slander or libel a person when done with knowledge that the person’s rights would be violated and injury would occur, or when done with knowledge of the statement’s falsity. The court ruled that the allegations contained in the complaint “very clearly” fell within these exclusions, and it granted summary judgment in favor of the insurer. [Quad/ Graphics, Inc. v. One2One Comm., LLC, No. 09-CV-99 (E.D. Wisc. May 16, 2011).]

Conclusory Allegations Insufficient to Provide Adequate Notice to Insurer, Court Finds

Homeowners alleged that their home had been damaged during Hurricane Ike and that they had submitted a claim under their homeowners’ insurance policy, but that the insurer had denied their claim for repairs even though the policy provided coverage for those losses. The court said that “[l]ike many other pleadings submitted by [the homeowners’] law firm for the same claims,” the homeowners’ petition conclusorily recited their allegations; the homeowners, however, failed to specify at least some particular facts personal to their situation. Accordingly, the court ruled that the homeowners had not given the insurer “adequate notice of the claims against it,” and it granted the insurer’s motion for partial dismissal. [Garcia v. Nationwide Property and Casualty Ins. Co., H-10-4088 (S.D. Tex. May 16, 2011).]

 Reprinted with permission.  All rights reserved.

Related Publications

Legal updates and news delivered to your inbox