/>iWell-established law requires that an insured be made whole before recoveries benefit an insurer. When an insured’s losses exceed policy limits, any additional recovery made by the insured should inure to the benefit of the insured to offset losses above policy limits. Only after the insured is made whole is the insurer entitled to reimbursement. But what happens when an insurance company covers only a part of an insured’s losses, and the insured later recovers additional funds? Is the insurer entitled to reimbursement from the insured’s recovery of uncovered losses?
That was the question confronted by the Northern District of Texas in the case National Union Fire Insurance Co. of Pittsburgh, Pennsylvania v. RealPage, Inc., 2024 WL 4116824 (N.D. Tex. Sep. 5, 2024). In a split decision, the court found that the insurer was entitled only to the insured’s subsequent recovery of losses directly resulting from a covered occurrence but remanded the case for further fact-finding.
The insured, RealPage, headquartered in Richardson, Texas, helps property managers collect rent from tenants using an online platform. In 2018, hackers successfully diverted over $10 million from RealPage, with $9 million of the funds consisting of rental proceeds owed to RealPage’s customers. The remaining $1 million consisted of RealPage’s transaction fees. RealPage reimbursed its customers for the $9 million in rental proceeds and then sought coverage for the full $10 million under its commercial crime policy issued by National Union. National Union determined that its policy only covered the approximately $1 million in transaction fees – not the rental proceeds due to the customers – and eventually issued payment of $1.2 million to RealPage. RealPage sued, seeking coverage for the full amount of its losses. Both the Northern District of Texas and the Fifth Circuit ultimately agreed with National Union’s coverage determination, holding that only the transaction fees were covered.
In the meantime, the United States Secret Service investigated the theft, which ultimately led to the seizure of $2.9 million of the stolen funds. The Secret Service returned this money to RealPage.
National Union then demanded that RealPage reimburse it for the $1.2 million in coverage it provided, citing the Allocation of Recovery Provision (ARP). RealPage refused, and National Union sued for breach of contract. RealPage counterclaimed for a declaratory judgment that the ARP did not apply to recovery of uncovered losses and for violations of Texas Insurance Code 541.
Addressing the parties’ cross-motions for summary judgment on each count, the Northern District of Texas issued a split decision. In a win for RealPage, the court first determined that the policy’s ARP did not extend to recovery of uncovered losses. Specifically, the court found that the term “any recoveries,” as used in the ARP, necessarily referred only to recovery of losses directly resulting from a covered occurrence. The court further determined that – to the extent the recovered $2.9 million consisted of rental payments – those were not owed to National Union.
But the court determined that a genuine dispute of fact remained regarding whether the $2.9 million recovered by the Secret Service consisted solely of the stolen rent payments or if it also encompassed the stolen transaction fees for which National Union provided coverage. Based on this lingering factual issue, the court allowed National Union’s breach of contract claim to survive. The court dismissed RealPage’s claims under the Texas Insurance Code alleging National Union’s deceptive trade practices because RealPage alleged no damages beyond having to litigate the ongoing suit. Policyholders should carefully consider the recovery allocation provisions of their policies to see whether they may give undue benefits to the insurer at the expense of the insured. Sophisticated insureds with the desire and ability to pursue recovery beyond their available insurance should ensure that the allocation provisions won’t make the insurer the beneficiary of those efforts at the policyholder’s expense.
