Banta Properties, Inc. v. Arch Specialty Insurance Co., No. 12—14186, 2014 WL 274478 (11th Cir. January 24, 2014).
The Eleventh Circuit reversed the District Court’s judgment against Arch Specialty Insurance Company in a first-party property case, ruling as a matter of law that the insured, whose sole interest in the property was the contractual right to receive 4% of gross income, had insufficient property and business income losses to trigger an excess policy. The Eleventh Circuit outlined applicable Florida law regarding insurable interest but ultimately found that under any view of the amount of the insured’s insurable interest, the insured could not collect insurance proceeds pursuant to Arch’s excess property policy.
Banta Properties, Inc. is a property management company that bought property insurance for three separate apartment complexes in South Florida. Banta Properties is one of many companies owned by members of the Banta Family, which also owned the subject apartment complexes at the time of policy procurement through other legal entities. Banta Properties bought its primary property policy from General Star Indemnity Company, and this policy had coverage up to $2.5 million, not including a deductible of approximately $500,000. Banta Properties procured excess coverage from Arch.
The three apartment complexes suffered property damage in October 2005 as a result of Hurricane Wilma. Banta Properties submitted insurance claims to its primary insurer, General Star, for its property and business losses suffered from the storm. General Star ultimately paid its policy limits of $2.5 million whereupon Banta Properties then submitted claims to Arch. Arch denied the claims for a variety of reasons, one of which being Banta Properties’ lack of insurable interest.
The case proceeded to trial where Arch procured several key admissions from the corporate representative of Banta Properties. First, the Banta Family sold one of the apartment complexes at issue to a nonparty before Hurricane Wilma struck South Florida. Of the $6.1 million in damages Banta Properties alleged, approximately $3.5 million was related to the property that was sold before the loss. This meant that without the previously sold property, Banta Properties alleged $2.6 million in damages to the other apartment complexes. The corporate representative also admitted that Banta Properties’ sole revenue stream from the apartment complexes was that the company received 4% of the monthly rental revenue. Banta Properties’ total lost rents from Hurricane Wilma amounted to approximately $39,000, with 4% of that amounting to approximately $1,600.
The jury ultimately found that Banta Properties had a $5 million insurable interest and suffered $4 million in losses related to that insurable interest. The trial court entered a $1,299,646.26 judgment in favor of Banta Properties after accounting for the amount previously paid by General Star, the deductibles, and prejudgment interest.
Under Florida law, what is the extent of a nonowners insurable interest in real property?
The Eleventh Circuit found that pursuant to Florida Statute § 627.405(1), property insurance contracts are enforceable only where the insured has an insurable interest in the covered property at the time of the loss. The Court recognized that an insured does not need to actually own the property to have an insurable interest, citing Aetna Insurance Co. v. King, 265 So. 2d 716, 718 (Fla. 1st DCA 1972). The definition of “insurable interest” was noted as “an ‘actual, lawful, and substantial economic interest’ in keeping the property ‘free from loss, destruction, or pecuniary damage or impairment.'” Banta, 2014 WL 274478 at *2 ( citing Fla. Stat. § 627.405(2)). The amount of an insurable interest is measured by “the extent to which the insured might be damnified by loss, injury, or impairment thereof.” Fla. Stat. § 627.405(3).
The Eleventh Circuit held that pursuant to Florida law, Banta Properties’ insurable interest in the apartment complexes was restricted only to the potential loss of the 4% rental revenue that Banta Properties was entitled to pursuant to its contract as property manager. The Court noted that all business losses caused by Hurricane Wilma, including the 4% Banta Properties was entitled to, were paid by the primary insurer, General Star. The Court then went one step further and held that the Banta Family, regardless of legal entity or insurable interest, could not collect insurance proceeds under the Arch excess policy as a result of selling the most-damaged apartment complex before the loss. As the remaining complexes only suffered at most $2.6 million in damages, the Arch policy was never triggered since the General Star policy contained a $2.5 million limit and $500,000 deductible.
The Eleventh Circuit recognized the validity of Arch’s argument at trial that the named insured, Banta Properties, lacked an insurable interest in insurance proceeds that could ever trigger the Arch excess policy. (Arch was represented by Butler Pappas at the trial level.) The Arch excess policy amounted only to a wagering contract in regards to Banta Properties, an entity that admitted at trial it did not suffer any damages above the amount previously paid by the primary insurer, General Star.