In Banta Properties, Inc. v. Arch Specialty, Ins. Co., —Fed. Appx.— , 2014 WL 274478 (11th Cir., January 24, 2014), the Eleventh Circuit recently held that a property manager’s insurable interest in the apartment complexes that it managed was limited to the income that it was entitled to receive under its contracts with the buildings’ owners. Under Florida statutes, the measure of insurable interest is the loss that the policyholder might sustain from damage to the property, and that was held to preclude the property manager from asserting such an interest and recovering on its own behalf for the property damage that the apartments sustained from Hurricane Wilma.
In October of 2005, Hurricane Wilma damaged three apartment complexes in Broward County, Florida. The property manager for all three was Banta Properties, Inc., a company owned by various Banta family members. The individual family members also owned two of the three properties at the time of the storm, having sold the third one (Parkcrest Apartments) to an unrelated, non-party entity two months beforehand.
Banta Properties was the named insured under a primary, $2.5 million commercial property policy from General Star Insurance Company. The defendant, Arch Specialty, provided $8.5 million in excess property coverage, and both carriers’ contracts of insurance listed the three complexes as additional named insureds.
The property manager alleged that the storm did approximately $6.1 million in physical loss or damage to the three properties. In addition, there was a $39,000 loss of rents. Banta Properties made claim under the General Star policy and ultimately settled with that carrier for its policy limits. It then came after Arch Specialty, but the excess carrier denied liability, contending that the property manager could not recover because it did not have an insurable interest in the physical loss or damage inflicted by the hurricane. A Southern District of Florida jury disagreed, and it awarded a seven figure sum to Banta Properties in January of 2012.
Last week, the Eleventh Circuit Court of Appeals reversed. As its per curiam opinion explained:
Florida law defines an insurable interest as an “actual, lawful, and substantial economic interest” in keeping the property “free from loss, destruction, or pecuniary damage or impairment.” Fla. Stat. §627.405(2). “The measure of an insurable interest in properties is the extent to which the insured might be damnified by loss, injury, or impairment thereof.” Fla. Stat. §627.405(3)[.]
In this case, “[t]he only right Banta Properties had at the time of loss was the contractual right to receive 4% of gross income in exchange for services as a property manager.” That amounted to 4% of the $39,000 in lost rents – approximately $1,600.
The Eleventh Circuit did not resolve the policyholder’s argument that it was asserting the interests of the Banta family members who owned the properties because those family members owned only two of the three complexes at the time of loss. Banta Properties asserted that those two parcels sustained only $2.6 million of the damage, and that meant that Arch Specialty’s attachment point was never reached because the General Star primary policy covered $2.5 million in property damage plus a $550,000 deductible. Banta Properties’ contention that it was contractually obligated to secure insurance on the three complexes was rejected as well because there was “no evidence of either a written or nonwritten obligation to procure insurance.”