ATLANTA (Bloomberg) — A subsidiary of Bermuda-based re/insurer Arch Capital has been sued for refusing to pay legal costs of company executives by Beazer Homes USA Inc., the Atlanta-based homebuilder that agreed in July to settle federal allegations of mortgage fraud.

Beazer claims Arch Insurance Co. wrongfully denied claims for losses incurred from defending the executives against shareholder and other litigation, the company said in lawsuit filed in federal court in Atlanta.

The Arch policy was designed to provide Beazer with coverage after its primary insurance policy and backup policies were exhausted, according to the complaint. As legal issues mounted, Beazer received about $36 million from the primary and backup policies, and Arch has refused to cover additional costs, according to the suit.

"Arch has deprived Beazer Homes of the benefit of the insurance coverage for which Beazer Homes paid substantial premiums," the company said in the court filing yesterday.

Beazer seeks a court declaration that New York-based Arch has to provide coverage and unspecified monetary damages for breach of contract. Arch spokeswoman Stefanie Frelick didn't immediately return a telephone call seeking comment.

Last spring, Beazer agreed to settle a shareholder class action suit for $30 million, with insurance companies covering the settlement costs. Some mutual funds opted out of the settlement and filed a separate lawsuit on September 18. The new suit claims statements Beazer made in fiscal 2006 and 2007 about financial results and business practices contained misrepresentations and omissions, causing investors to buy company stock at inflated prices.

Beazer agreed on July 1 to pay as much as $53 million to settle US Department of Justice allegations that it was involved in fraudulent mortgage originations. In September 2008, the company settled US Securities and Exchange Commission claims relating to the accounting probe by promising to refrain from similar misconduct.

The SEC sent Beazer chief executive officer Ian McCarthy a Wells notice on November 13 saying the agency may file a civil suit against him. The potential lawsuit would invoke a so-called "clawback" provision in the Sarbanes-Oxley Act, which can require CEOs and chief financial officers to refund bonuses or compensation and profits from stock sales following a financial restatement, even if they personally committed no wrongdoing.

Beazer rose 20 cents to $4.88 in New York Stock Exchange composite trading on Friday. The stock has more than tripled this year.