In its recent decision Crestdale Associates, Inc. v. Everest Indemnity Ins. Co., 2011 U.S. Dist. LEXIS 84380 (D. Nev. Aug. 1, 2011), the United States District Court for the District of Nevada addressed the issue of whether an insured is entitled to a refund of earned advanced premium on the grounds that the risk intended to be covered under the policy never came to fruition.
The insured, Crestdale, had purchased three commercial general liability policies from Everest, each covering a different planned residential development. An advance premium was calculated for each of the policies based on anticipated receipts from the sales of the homes. Each policy contained an endorsement stating that the advance premium would be fully earned twelve months after the policy’s date of inception. A final premium amount would be determined based on a subsequent audit. The endorsement expressly stated that:
Premium audit adjustment calculations will be made to determine additional premiums only. There will be no downward adjustments of the advance premium resulting from the premium audit provisions of this policy. … There will be no return of any portion of the advance premium in the event of cancellation of the policy after [the date the advance premium becomes fully earned].
Notwithstanding this express language of this provision, the insured argued that it should be entitled to a refund of premium since the anticipated receipts from the developments never happened. The advance premium had been calculated at the height of the real estate market. Just after the policies were issued, however, the market collapsed, causing Crestdale to dramatically alter its plans for the developments. In fact, Crestdale completely abandoned one of the developments and ended up selling the vacant lots to a competitor. It was this abandoned development – referred to as the “Hacienda” development – that was the subject of competing summary judgment motions before the Crestdale court.
The policy covering the Hacienda development had a thirty-six month policy period. Pursuant to the policy’s premium endorsement, the advance premium became fully earned after twelve months. Crestdale cancelled the policy just prior to the two-year anniversary of the policy. Crestdale claimed that it was entitled to a full refund of the advance premium paid on the Hacienda policy, claiming that the policy could not be considered a valid contract since the necessary risk never attached. In other words, argued Crestdale, there was no consideration for the premium paid. Crestdale also argued that Everest would be unjustly enriched if it retained the advance premium among under such circumstances.
The court disagreed, holding that an actual risk did attach to the policy since the policy was issued, thereby binding Everest to provide coverage for the Hacienda development for the period that it was in effect. During this period, the court explained, Everest “remained contractually obligated to anticipate risks resulting from the fact that Crestdale could have begun construction at any time … .” That Crestdale never commenced such construction did not render the policy invalid for lack of consideration. The court further rejected Crestdale’s claim for unjust enrichment, holding that Nevada law does not recognize such a cause of action when there is an express written contract, such as the Hacienda policy.