Key Points

  • The Sixth Circuit affirmed summary judgment for an insurance broker, an insurer and an underwriter sued by lender Sinmier LLC over losses at the Maui Sands Resort and Waterpark in Sandusky, Ohio.
  • Applying Ohio law, the court held that a mortgagee's insurable interest extends only to the amount of the debt and ends when the debt is paid or released.
  • Sinmier's settlement treating a deed in lieu of foreclosure as payment in full of the borrower's debt extinguished its mortgagee interest, and every claim it brought depended on that interest.
  • The court held that Sinmier forfeited its argument that the deed and settlement conflicted, and its theories that two negligence claims against the broker survived, by not raising them in the district court; it also rejected the deed argument and the failure-to-secure-coverage theory on the merits.
  • Judge Sutton wrote for a panel that included Judges Gibbons and Davis; no judge wrote separately.

A federal appeals court on Monday upheld the rejection of a commercial lender's lawsuit against the insurance broker, insurer and underwriter it blamed for leaving its stake in a flood- and fire-damaged Lake Erie waterpark resort unprotected. The court held that the lender gave up those claims when it accepted the resort's deed as payment in full of the borrower's debt.

A three-judge panel of the U.S. Court of Appeals for the Sixth Circuit affirmed summary judgment for the defendants in a suit by Sinmier LLC. Circuit Judge Sutton wrote the opinion for a panel that also included Judges Gibbons and Davis. No judge wrote separately.

The decision turns on a lender's insurable interest. Applying Ohio law, the panel held that this interest lasts only as long as the debt does. Once Sinmier released the debt through a deed in lieu of foreclosure, a transfer of the property to the lender in place of a foreclosure sale, it had no mortgagee interest left to sue over.

Sinmier, a commercial real estate lender, loaned Vintro Hotels and Resorts $7 million in 2018 to buy the Maui Sands Resort and Waterpark in Sandusky, Ohio, and recorded a mortgage that September. Vintro was obligated by contract to insure the property. It used a broker, Bankers Insurance, now known as Bearing Insurance Group, to find coverage.

Everest Indemnity Insurance Co. and another carrier, Berkley, each issued a policy in August 2018, and both cancelled their policies when the proposed closing did not go forward on time. After the broker sought a revised quote with an Oct. 19, 2018, effective date, Everest issued a second policy. That policy named Sinmier only as an additional insured under its commercial general liability portion, not as a mortgagee.

"Then came a rough Ohio winter," Judge Sutton wrote. A frozen pipe burst and flooded the resort. "Two HVAC systems located on the roof froze, and then (surprisingly) caught fire, leaving a smoky, humid waterpark," the opinion said. Everest advanced Vintro $350,000 on its claim and settled the claim for an additional $775,000 in June 2019.

Vintro had defaulted on the loan by then, and Sinmier sued it in March 2019, seeking foreclosure. The two sides settled that October. Vintro handed over a deed to Maui Sands that the agreement said would be "considered payment in full of Vintro's monetary obligations under the Note or Mortgage." Vintro and its owner, Inderjit Grewal, also agreed to pay Sinmier $627,375 within nine months, secured by a consent judgment.

Because it still had not recovered its full investment, Sinmier then sued Bankers, Everest and EverSports & Entertainment Insurance Inc., an underwriter, in the Northern District of Ohio. It brought contract claims as a third-party beneficiary, along with negligence, misrepresentation and fraud claims against the broker. U.S. District Judge James R. Knepp II granted summary judgment to each defendant.

On appeal, the panel said every claim depended on Sinmier's status as mortgagee. "A mortgagee's insurable interest exists to protect payment of the debt and dissipates when the borrower pays the debt or the lender releases it," Judge Sutton wrote. The court relied on Barwick v. State Farm Fire & Casualty Insurance Co., a 2011 Ohio Court of Appeals decision holding that the amount a bank received in a sheriff's sale of a fire-damaged home partly extinguished its interest in the insurance proceeds.

"This is not a new idea," the opinion said, citing rulings from four other states and two insurance law treatises. Measured against that rule, the settlement ended Sinmier's interest. "In freely and voluntarily ending Vintro's mortgage debt to it, Sinmier likewise ended its insurable interest as a mortgagee," Judge Sutton wrote.

Sinmier had no other stake, the court said. "It was not an owner. It was not an investor," the opinion said. Quoting an 1846 Ohio decision, the panel described Sinmier as a "mere creditor, who ha[d] a specific lien on the property for the payment of [its] debts."

Sinmier argued that the deed conflicted with the settlement, because the deed said the mortgage would remain a valid lien. The panel held that Sinmier forfeited that argument by telling the district court the settlement agreement was clear. The argument also failed on the merits. Another sentence of the deed let Sinmier extinguish the mortgage lien "by releasing it, foreclosure, or otherwise," and the settlement did exactly that.

The panel also rejected Sinmier's reliance on an Everest clause preserving a mortgage holder's right to payment after it starts "foreclosure or similar action." "Sinmier did not start a 'similar action' by signing the settlement agreement and accepting the deed in lieu of foreclosure. It ended the action," Judge Sutton wrote. The policy paid mortgage holders only "as interests may appear," and once the settlement extinguished Sinmier's interest, the court said, those interests "no longer 'appear[ed].'"

Two negligence theories against Bankers fared no better. Sinmier argued that two claims, over the broker's failure to report the Berkley cancellation and its failure to secure mortgagee coverage, arose before the October 2019 settlement. The panel held that Sinmier forfeited both theories. Sinmier said it had raised one of them "implicitly," but the court answered that "as a general rule, implicit theories of relief do not count as preserved theories of relief."

The second theory also failed under Barwick, the court said. Any claim that Bankers owed Sinmier insurance proceeds "would not have ripened until the insurable event occurred," and by then the amount owed would have shrunk to the extent the debt was satisfied.

Matthew I. Henzi of AsherKelly Law, PLLC argued for Sinmier. Daniel F. Gourash of Seeley Savidge Ebert & Gourash Co., LLP argued for Everest and EverSports.

The ruling leaves in place the final judgment for all three defendants. The panel noted that Sinmier apparently has not fully recovered the $627,375, a shortfall that "concerns Vintro, not the three defendants, and concerns the remaining value, if any, of the consent judgment."