A general liability insurer had no duty under California Insurance Code section 481.5(b) to refund advance premiums paid by its insured because those premiums were “fully earned” and there was no “reduction in coverage.” ( CRV Imperial-Worthington LP v. Gemini Insurance Co. (2011) 2011 WL 921654)
Facts
CRV Imperial-Worthington LP (“CRV”) was the owner and developer of residential housing projects located throughout California. Prior to commencing its development projects, CRV obtained several general liability insurance policies from Gemini Insurance Company (“Gemini”) to cover the risks associated with the construction and eventual sale of the homes. The policies required CRV to pay an advance premium that was based on the construction and sale of a pre-planned number of homes. Each of the policies contained an endorsement stating that “[i]t is hereby understood and agreed that the Total Advance Premium…is fully earned after the date shown below as the Fully Earned Premium Date. There will be no return of any portion of the Total Advance Premium … after the Fully Earned Premium Date.” CRV paid the advanced premium to Gemini pursuant to the terms of the policies.
CRV was unable to construct all of the homes it had anticipated building. Approximately three years after the last Gemini policy expired, CRV demanded a partial refund of premiums from Gemini based on California Insurance Code section 481.5(b), which states that “[w]henever a policy other than personal lines insurance terminates for any reason, or there is a reduction in coverage, the gross unearned premium shall be tendered to the insured….” When Gemini refused to make any refund to CRV, CRV filed suit against Gemini in the federal district court.
Gemini filed a motion to dismiss the complaint on grounds that CRV could not state a valid claim under section 481.5(b). Gemini argued that based on the terms of its policies, there were no “unearned premiums” and no “reduction in coverage” as required under section 481.5(b). CRV opposed the motion, arguing that its inability to construct all homes anticipated was a “reduction in coverage” that entitled CRV to a return of alleged unearned premiums.
Holding
The federal district court granted Gemini’s motion to CRV’s complaint. The court held that all the advance premiums CRV paid were fully earned, based on the terms of the endorsements included in all of Gemini’s policies. The court noted that CRV had not requested a refund of advance premiums until at least three years after the “Fully Earned Premium Date” set forth in the endorsements. By that time, based on the terms of the Gemini policies, the premiums were fully earned. Therefore, there were no unearned premiums and CRV could not state a valid claim against Gemini under section 481.5.
The court also found that there was no “reduction in coverage” within the meaning of the statute. The court concluded that the phrase “reduction in coverage” did not extend to CRV’s failure to build the homes, even if due to circumstances beyond CRV’s control. The court also noted that Gemini remained liable for any risks covered by the policies relating to the homes CRV had constructed.
Comment
Many liability policies require insureds to pay an advance premium. The CRV Imperial case is useful for insurers since it upheld contractual language limiting the insureds’ rights to obtain a refund of advance premiums. This case also rejected an argument that would have broadly interpreted the phrase “reduction of coverage” for purposes of Insurance Code Section 481.5(b).