When a Policy is Clear Enough its Language Must Be Applied
Hurricane Harvey was the second-costliest natural disaster in U.S. history, ranking just behind Hurricane Katrina. Harvey claimed 68 lives and inflicted $125 billion in damage, mostly from catastrophic flooding as the slow-moving storm, the wettest on record, stalled over southeast Texas, dumping up to 60˝ of rain over four days.
In Pan Am Equities, Incorporated v. Lexington Insurance Company, No. 19-20363, United States Court Of Appeals For The Fifth Circuit (May 26, 2020) the court dealt with one of the many insurance coverage suits from the litigation deluge that naturally followed the Hurricane.
- For “Flood” losses, $100,000 “shall be deducted from any adjusted loss due to Flood”; and “Flood” is contractually defined as: “surface water; rising waters; waves; tide or tidal water [etc.] . . . regardless of any other cause or event contributing concurrently or in any other sequence of loss.”
- For “Windstorm” losses, $100,000 “shall be deducted from any adjusted loss due Windstorm” . . . “except as follows:”5% of the total insurable values (TIV) at the time of loss at each location involved in the loss or damage arising out of a Named Storm . . . in Tier 1 Counties . . . regardless of the number of coverages, locations or perils involved (including but not limited to all Flood . . . .)”
Translation: The deductible is much higher for losses caused by a Named Storm such as Hurricane Harvey. And again, if two or more deductibles apply to a single loss, the Policy’s Anti-Stacking clause specifies that “the largest deductible applicable” will govern.
Harvey-induced flood damage to two office buildings owned by Pan Am Equities and insured by Lexington Insurance resulted in a dispute over deductibles. The litigants are each adamant that the policy language “unambiguously” must be interpreted their way.
There are two competing deductibles: (1) the generic “Flood” deductible (favored by Pan Am), which covers “any . . . loss due to Flood”; and (2) the pricier “Windstorm” deductible (favored by Lexington), which covers “Flood” damage “arising out of a Named Storm.” The Policy also has an Anti-Stacking clause that says if multiple deductibles apply, then the largest one trumps. The district court sided with Lexington that the unequivocal language of the “Windstorm” deductible controls and Pan Am recovered nothing from Lexinton.
Pan Am filed a claim with Lexington. Lexington agreed the claim was covered but instead of applying the Flood deductible it applied the Policy’s “Windstorm and Hail” deductible, relying on the subsidiary “Named Storm” provision. under the “Windstorm” TIV-based deductible, and since Pan Am’s loss was less than the TIV based deductible it could recover nothing.
The paramount rule of insurance contract interpretation is that courts enforce unambiguous policies as written. Therefore, the Fifth Circuit concluded it must honor plain language, reviewing policies as drafted, not revising them as desired.
A policy is not ambiguous merely because different parties—or different judges—offer conflicting interpretations. If its wording “can be given a definite . . . meaning, then it is not ambiguous . . . .” Because the court must presume that contracting parties intended all that they enacted, it examines the entire contract in order “to harmonize and give effect to all provisions so that none will be meaningless.”
The “Windstorm” deductible applies to all “loss due to Windstorm.” And the accompanying “Named Storm” provision enlarges what qualifies as a “loss due to Windstorm” to plainly encompass Harvey’s flood damage to Pan Am’s buildings. Holding otherwise would not “give effect to all [Policy] provisions.”
In SEACOR Holdings, Inc. v. Commonwealth Insurance Co., dealing with a different hurricane, the Fifth Circuit concluded that the Named Windstorm deductible applied since “Katrina’s winds were the proximate cause of SEACOR’s water-related damages.”
Since the Policy expressly anticipates that multiple deductibles will sometimes apply to a single occurrence and when this happens, the Anti-Stacking provision imposes the ‘largest deductible applicable’—here, the 5% TIV-based ‘Windstorm’ deductible.”
Pan Am placed undue interpretive weight on the fact that the Policy’s “Named Storm” provision is found within the “Windstorm” deductible. When the Fifth Circuit interprets a contract, insurance or otherwise, location (where the provision is) matters far less than locution (what the provision says). The Policy’s “Named Storm” provision sweeps in a slew of associated perils explicitly untethered from wind, specifically “Flood.” By defining what a “loss due to Windstorm” means, the provision makes clear when the “Windstorm” deductible applies. The express inclusion of “Flood” damage within the “Named Storm” provision compels the court to read “loss due to Windstorm” broadly to include all loss or damage—”including . . . Flood”—”arising out of a Named Storm.”
To read the Policy such that “Flood” losses caused by a “Named Storm” exclusively fall under the “Flood” deductible would render the “Named Storm” provision, which explicitly incorporates “Flood” damage,” a nullity.
The decision tree is straightforward: If the “Flood” deductible and the “Windstorm” deductible concurrently apply, then the Anti-Stacking clause mandates the more expensive deductible: “5% of the total insurable values.”
Any Harvey-caused flooding falls plainly within the “Named Storm” provision and, therefore, within “loss due to Windstorm.” It is important to a court deciding a coverage issue to consider what the Policy says. It must be read as a cohesive, harmonious whole—and here, the “Named Storm” provision, by specifically including the “Flood” peril, clearly expands the lead-in “loss due to Windstorm” language. Because Pan Am’s flood damage was caused by Hurricane Harvey, the 5% TIV-based “Windstorm” deductible applies — period. Since the Policy yields one unambiguous interpretation, the district court’s grant of summary judgment was affirmed.
The Fifth Circuit noted, attempting to understand why the litigation took place, that although the Policy, like many insurance policies, may not rank as first-rate legal craftsmanship the Policy is clear enough. Inartful is not the same as equivocal or ambiguous. When read, as every person and court interpreting a policy must, as an interrelated, contextual whole, this Policy is unambiguous. Since the dollar amount of loss did not exceed the 5% of Total Insured Value deductible the Fifth Circuit concluded the insurer owed nothing.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts
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