Manager Charged Tenant Impermissible Insurance Premiums

Facts: Between 1998 and 2005, a tenant signed lease agreements for 15 of its electronics stores in various shopping centers managed by a real estate investment trust. The lease agreements required the manager to obtain property and liability insurance for the common areas of the centers. Each tenant in the centers was responsible for reimbursing the manager for its pro rata share of the cost. To fulfill its requirement, the manager procured a blanket insurance policy—that is, a single policy that covers multiple locations—with a high deductible from a third-party commercial insurance company to cover all of the properties that it managed.

The manager assumed responsibility for losses within the high deductible (referred to as the “first dollar program” because it paid the first dollar of any loss) and billed all tenants in the centers for their proportionate cost of taking on that risk. The manager referred to the bills as “first dollar premiums.”

In 2005, the first dollar coverage was renamed “captive coverage” because the manager had created two captive insurance companies to provide it. The owner paid the premiums, which it called “captive premiums,” to the captive insurance companies for insuring the risk that fell within the high deductible; it then billed center tenants for their pro rata share of the premiums.

Reconciliation documents provided by the manager at the end of every year showed under- or over-payments by the tenant for CAM fees and insurance anticipated at the beginning of the year, but did not explain how the insurance charges were calculated. When the tenant learned that it had been billed for the first dollar and captive premiums for several years, it alleged that it had been overcharged for insurance-related costs under each of its 15 lease agreements.

The tenant argued that the owner had breached the lease agreements by billing it for the first dollar and captive premiums when the lease agreements unambiguously permitted it to charge only for the cost of procuring and maintaining insurance from third-party commercial insurance companies. It asked the district court for judgment without a trial in its favor.

Decision: The trial court ruled in favor of the tenant.

Reasoning: The manager breached the lease agreements, reasoned the trial court, because the lease provisions unambiguously established that the lease agreements permitted charges solely for third-party commercial insurance. Any other type of charge—including premiums from manager-created captive insurance companies or manager-implemented first dollar programs—was impermissible.

• Best Buy Stores, L.P. v. Developers Diversified Realty Corp., July 2009