Fifth Circuit: Total Loss Amount Caps Insured’s Recovery Even Under Multiple Policies Covering Different Risks

We don’t usually cover cases dealing with Standard Flood Insurance Policies (SFIPs) issued pursuant to the National Flood Insurance Program, but a Texas case decided by the federal Court of Appeals earlier this month addresses a broader issue – where the policyholder has multiple policies covering the same property against mutually exclusive risks, such as an SFIP covering flood and a homeowner’s policy covering wind, can his or her recovery ever exceed the total loss amount.  In Lowery v. Fidelity Nat’l. Prop. & Cas. Ins. Co., 2015 WL 6848323, 2015 U.S. App. LEXIS 19443 (5th Cir., Nov. 6, 2015), a unanimous panel of the Fifth Circuit answered no, in reliance on the insurance principle that bars a double recovery.

shutterstock_223733386The insureds owned a two-unit residential building in Galveston that was “left in shambles” after Hurricane Ike in September 2008.  An appraiser had estimated the market value to be $195,000 the year before.  The policyholders had both a SFIP and a separate contract of wind insurance, and they made claim under both.  The wind carrier paid $66,766 and the SFIP insurer paid $76,968 for building damage, bringing the total recovery to $143,734.  The insureds then sold the property, unrepaired, for an additional $58,000.  The policyholders still “felt shortchanged,” however, and they sued the flood carrier, seeking to recover the full limit of liability under that policy.

The trial court conducted a bench trial and found in favor of the insurer.  The judge applied Texas’ “one satisfaction rule,” which bars a party from recovering more than once for the same injury, and he held that the insureds’ total recovery could not exceed the property’s pre-Ike market value of $195,000 – a sum already exceeded by the two insurance payments and the $58,000 sale price.

On appeal, the Fifth Circuit panel affirmed.  The opinion by Judge Gregg Costa – the court’s newest member — began by noting that federal common law and not state law governed the interpretation of a SFIP.  That meant that “standard insurance principles” rather than the Lone Star State’s one satisfaction rule should be applied, and one such principle was the rule against a “double recovery.”

The rule flows from the principle that “[p]roperty insurance creates a contract of indemnity.” . . . “The fundamental principle of a property insurance contract is to indemnify the owner against loss, that is to place him or her in the same position in which he would have been had no accident occurred.”

Under that principle, Judge Costa held that “[t]he total amount that an insurer recovers under all applicable insurance policies cannot exceed the amount of the loss.”

The insureds argued that the rule was inapplicable where the two contracts of insurance cover mutually exclusive risks – in this case, flood and wind.  The Circuit disagreed, citing Bradley v. Allstate Ins. Co., 620 F.3d 509 (5th Cir. 2010) for the proposition that if “the insured has already been fully compensated by payments under wind and flood insurance . . . the homeowners’ insurer is not liable for further payments to the insured because additional payments would result in a double recovery.”

Finally, the court sanctioned the use of the broad evidence rule for calculating the maximum payment – which is to say the total loss amount – in double recovery situations.  As judge Costa explained:

The broad admissibility rule makes sense.  In a well-functioning market, any difference between the fair market value of a residential property and its replacement cost minus depreciation should be minimal.

Unlike relying solely on fair market value, the use of the broad evidence rule “allows the factfinder to weigh . . . competing calculations and determine which is most credible for the particular case” and “provides flexibility.”

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Posted in Actual Cash Value, Depreciation, Flood, Homeowners Coverage, Hurricane, Hurricane Ike, Replacement Cost, Valuation, Water, Windstorm
About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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