Judge Nancy Atlas of the Southern District of Texas cut through competing arguments to resolve a high-profile dispute involving a Hurricane Harvey claim through Contract Interpretation 101.
Lexington Insurance Company issued a policy to Pan Am Equities, Inc. (Pan Am) covering a property development in downtown Houston, Texas. The development sustained more than $6.7 million in flood damage due to Hurricane Harvey, a disaster that flooded homes and buildings across the city, but often left the structures undamaged by wind. This was the case with Pan Am’s downtown property development.
The policy contained several different deductibles. As an exception to the general deductible, the policy had a $100,000.00 per occurrence Windstorm Deductible. The Windstorm Deductible was itself subject to an exception, a Named Storm Deductible calculated at 5% of the total insurable value for property within a designated territory. Houston is within the territory. The Named Storm Deductible stated that it applied “regardless of the number of coverages, locations or perils involved (including but not limited to all Flood, wind gusts, storm surges, tornados, cyclones, hail or rain).” This broad language turned out to be critical in the court’s analysis.
Lexington asserted that Pan Am’s claim was below the 5% Named Storm Deductible. Pan Am disagreed and filed suit.
The Court began its analysis by reminding the parties that it interprets insurance policies as it does contracts generally. The Court also asserted that a policy is not ambiguous simply because the parties disagree about the meaning of the terms and that extrinsic evidence cannot be used to create an ambiguity or vary unambiguous language in the policy.
Judge Atlas quickly disposed of Pan Am’s argument that the Windstorm Deductible did not apply because the property was not damaged by wind. She found that the relevant policy language was unambiguous. The court observed that the Named Storm Deductible was part of the Windstorm Deductible. She observed that “Windstorm” was not a defined term in the policy. The Court further observed that the policy language did not limit “Windstorm” damage to only damage caused by wind. The Court cited the broad language in the policy regarding application of the Named Storm Deductible, i.e., it applied to any loss caused by a Named Storm, including flooding that resulted from the Named Storm’s heavy rains.
Crucially, the Court also reasoned that the Named Storm Deductible excepts a Named Storm from the Windstorm Deductible. The definition of a Named Storm includes a hurricane. The court further cited Fifth Circuit authority that relied on a dictionary definition of “hurricane” as a storm “usually involving heavy rains.” Since heavy rains caused the flooding that damaged the development, the Named Storm Deductible applied.
Pan Am argued that this interpretation meant the lower Flood Deductible was superfluous. The Court disagreed, noting that the plain language of the policy contemplated that more than one deductible may apply and that the highest applicable deductible would apply. The court also disallowed an affidavit from Pan Am’s purported expert in insurance policy interpretation because the policy was unambiguous.
The court granted Lexington’s motion for summary judgment and denied Pan Am’s.
There are some important lessons here:
(1) the way the policy is constructed can be just as important as the words in the policy;
(2) flood remains one of the most unique risks and courts are disinclined to turn traditional property policies into flood policies; and
(3) despite its clarity, policyholder’s unfamiliarity with the Named Storm Deductible and the amount of money involved means there will be more litigation involving this deductible and
(4) most importantly, Named Stormed Deductibles are not ambiguous and mean what they say.
Karl Schulz has extensive experience assisting insurers with resolving complex coverage matters arising out of hurricanes, windstorms and appraisals. He is based in the Houston office.
