Jared Zola and Daniel R. Belzil
Almost two years after Hurricane Harvey devastated parts of Texas and Louisiana, Central America, and several Caribbean islands, the coverage issues arising out of it are far from resolved. The court decisions addressing these coverage issues have not all been positive from the insured’s perspective. In particular, one recent decision in the United States District Court for the Southern District of Texas, Pan Am Equities, Inc. v. Lexington Insurance Company, No. H-18-2937 (May 2, 2019) (“Pan Am Equities”), should give insureds in Texas and elsewhere pause heading into the 2019 Hurricane Season.
The Dispute—Which Deductible Applies?
The insured in that case owned several commercial properties in Houston, including an apartment building and parking garage that sustained more than $6.7 million in flood damage as a result of Hurricane Harvey. Its properties were insured by a commercial property insurance policy that provided “Flood” coverages as well as coverages for loss caused by the peril of “Windstorm and Hail.”
The policy had a general deductible of $100,000 per occurrence, as well as certain peril-specific deductibles. The Flood deductible was $100,000 per occurrence for “any adjusted loss due to Flood.” The Flood deductible excepted flood damage to properties located within the National Flood Insurance Program’s (“NFIP”) designated “Special Flood Hazard Areas”—i.e., 100-year floodplains—which were subject to a $1,000,000 per location deductible.
The property policy also contained a Windstorm and Hail deductible applicable to “any adjusted loss due to Windstorm and Hail” of $100,000 per occurrence. The Windstorm and Hail deductible then excepted “loss or damage arising out of a Named Storm”—meaning storms designated by the National Weather Service as a Hurricane, Typhoon, Tropical Cyclone, Tropical Storm, or Tropical Depression—in all Tier 1 Counties such as Harris County, Texas. For those losses excepted from the Windstorm and Hail deductible, the policy imposed a steep deductible equal to “5% of the total insurable values at the time of loss at each location involved.”
It was undisputed that the damage to the insured’s apartment building and parking garage did not exceed 5 percent of their insured values and therefore, if the exception to the Windstorm and Hail deductible applied, the damages would not exceed the deductible. If, on the other hand, the Flood deductible applied, the insured would be entitled to recover insurance proceeds.
Summary Judgment Motion Practice
On cross-motions for summary judgment, the insurer found success dubbing the exception to the Windstorm and Hail deductible the so-called “Named Storm” deductible. Despite the insurance policy being completely void of any such provision, the Court adopted the insurer’s nomenclature, which was a bad sign for the insured.
The insured noted that the deductible on which the insurer relied was found within (indeed, was an exception to) the Windstorm and Hail deductible and therefore should only apply to loss or damage caused by “Windstorm and Hail.” Because it was undisputed that all of the damage sustained to the apartment building and parking garage was caused by flooding and none of it was caused by wind or hail, the insured argued that the Flood deductible should therefore apply.
Said another way, there must be a “loss due to Windstorm and Hail” implicating the Windstorm and Hail deductible in the first place before an exception to the Windstorm and Hail deductible can apply. In Pan Am Equities, the entire loss was “due to Flood” and, as a result, the exception to the Windstorm and Hail deductible should never be reached. There was no application of the original $100,000 Windstorm and Hail deductible from which to take exception because it was undisputed that there was no “loss due to Windstorm and Hail.”
The insured’s position was consistent with well-settled principles of insurance law, which require courts to read insurance policies—including deductible provisions—liberally in favor of coverage and in accordance with the insured’s reasonable expectations. The Texas Supreme Court has held that where the insured and the insurer offer competing plausible interpretations of an exclusionary provision, the court must adopt the construction urged by the insured as long as that construction is not unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties’ intent. Utica Nat. Ins. Co. of Texas v. Am. Indem. Co., 141 S.W.3d 198, 202 (Tex. 2004).
Notwithstanding this well-settled principle, the federal court rejected the insured’s interpretation of the policy’s deductible provisions and instead found that the higher so-called Named Storm deductible applied (that is, the exception to the Windstorm and Hail deductible). The court reasoned that the Windstorm and Hail deductible applied to loss “due to Windstorm,” it must be read to apply to more than loss and damage caused solely by wind and hail. It further reasoned that because a hurricane is a windstorm, any loss caused by a Named Storm, including a loss caused by flooding that resulted from the heavy rains associated with a Named Storm, would fall within the Named Storm deductible.
Additionally, the Court refused to consider an affidavit proffered by the insured from its expert witness who opined that the industry custom and usage in commercial property insurance policies, “Windstorm” does not include “Flood,” and that “Named Storm” provisions in deductibles applicable to one peril do not apply to deductibles applicable to other perils. The Court also rejected the insured’s application under Rule 56(d) seeking discovery from the insurer regarding its custom and usage interpreting such deductible provisions. The Court found that it could not consider extrinsic evidence of the insured’s reasonable expectations in light of the policy’s allegedly “unambiguous” deductible language.
In this instance, the federal court appears to have deviated from ordinary principles of insurance policy interpretation by rejecting the insured’s seemingly plausible interpretation of the policy’s deductible language in favor of a strained interpretation that favors the insurer. Although this decision may be considered an outlier (which may be rectified on appeal), insureds should be aware of the Pan Am Equities decision.
One takeaway for insureds is to consider purchasing an “all-risk” commercial property insurance policy, as opposed to an “insured peril” (sometimes called a “named peril”) commercial property insurance policy. Doing so may provide broader coverage and shift the burden of proof. It may also have the added benefit of providing streamlined deductible provisions.