Three Pillars Capital Sues Bancorp Bank Over “Excessive” Insurance

Three Pillars Capital is suing lender Bancorp Bank after it forced insurance coverage on one of Three Pillars’ Houston properties.

The Houston-based company, led by founder George Goyal, alleges that Bancorp exploited a commercial agreement to force-place “excessive insurance coverage” while siphoning funds from the company’s escrow account without permission.

The lawsuit, filed in New York County, alleges breach of fiduciary duty and breach of contract. Three Pillars alleges that Bancorp’s actions constitute a disregard for Three Pillars’ financial interests.

The lawsuit involves the Del Mar Apartments, a 544-unit Class C complex located at 10909 Gulf Freeway, 4 miles southeast of the William P. Hobby Airport. Three Pillars borrowed $47 million from Bancorp in June 2022 as part of its purchase of the 413,000-square-foot property, from local firm Juniper Investment Group.

The loan agreement included a mandate for Three Pillars to secure insurance coverage equivalent to the full replacement cost of the property. However, the rapidly changing insurance landscape in 2022 and 2023, marked by inflation and surging reinsurance, made potential costs prohibitive for Three Pillars, according to the lawsuit.

The suit outlines Bancorp’s alleged insistence on the contractual agreement with the lender, opting to force-place insurance coverage on the Del Mar property’s $63 million insurable value. Efforts to reach Bancorp were unsuccessful.

The coverage placed on the Del Mar apartments, which took effect in June, equates to an annual premium of over $2.3 million per year — a cost Three Pillars Capital says is taking a toll on the company.

“The force coverage that they’ve forced down our throats is resulting in negative cash flow. It’s unsustainable,” Goyal said. “The property produces certain income and after the expenses to debt service, the property is losing a decent coin. We’re in a tough spot here. If the lender had to operate this property themselves, with this insurance policy, they would not be able to operate it and make it financially viable.”

Three Pillars attempted to negotiate lower coverage limits with Bancorp, the lawsuit states. Three Pillars hired experts to perform catastrophe risk assessments, which found the required coverage exceeded the actual risk by upwards of $23 million for a 10,000-year windstorm event.

Three Pillars alleges that Bancorp’s decision to secure coverage from its own servicer, at a higher cost, could involve undisclosed financial incentives.

“They informed us that they had made concessions for other properties; they didn’t give us any reason at all as to why they would refuse to do it for us,” said Jason McManis, an attorney with AZA Law who is representing Three Pillars.

Insurance rates spiked over 20 percent at the start of the year, according to the Council of Insurance Agents and Brokers. Rates shot up especially in coastal regions where natural disasters are common. For example, insurance rates are expected to jump 45 to 50 percent in South Florida.

“The insurance market is tight. A lot of owners and operators are going under not only because of insurance, but because the insurance market has gone haywire, and they can no longer afford to buy insurance,” said George Goyal, CEO of Three Pillars.