A recent Louisiana case1 demonstrates the difficulty of interpreting deductibles when sub-limits of a peril apply. The case is significant because many high limit commercial policies have similar deductible clauses, which courts have found ambiguous and afforded the policyholder a much greater recovery.

The federal court noted the policy language and the issue:

The insurance policy originally valued the project and insured it for $76,086,833. That amount was increased, via multiple endorsements, to $86,086,833. The deductibles, sub-limits, and term aggregate limits, however, remained unchanged from the original policy. As relevant here, the policy included a term aggregate limit of liability, confining the amount that the insured parties could claim from flood damage to $10,000,000. The policy also included a deductible for flood damage of ‘5% of the total insured values at risk at the time and place of loss subject to a $500,000 minimum deduction as respects as respects [sic] FLOOD*.’

The correct deductible amount, and thus the millions of dollars at stake, hinge on the correct interpretation of ‘5% of the total insured values at risk.’ McDonnel contends that, because of the flood sub-limit, ‘the maximum amount that an insured … could ever recover for a claim arising from flood damage is $10 million.’ Thus, ‘the total amount insured’— the ‘total insured values at risk’—for flood damage was limited to $10,000,000. Under the plaintiffs’ interpretation, therefore, the deductible is $500,000.

The court then recited Louisiana insurance law regarding ambiguity:

Where a policy is ambiguous, it is ‘generally construed against the insurer and in favor of coverage.’….A policy provision is ambiguous only if it ‘is susceptible to two or more reasonable interpretations.’…Courts may not ‘authorize a perversion of the words or the exercise of inventive powers to create an ambiguity where none exists … when the terms express with sufficient clearness the parties’ intent.’….

Where ‘a contract can be construed from the four corners of the instrument without looking to extrinsic evidence, the question of contractual interpretation is answered as a matter of law.’…Where there is an ambiguity in the policy, however, ‘the court may look to extrinsic evidence to determine the parties’ intent.’….’Each provision … must be interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole.’ La. Civ. Code art. 2050 (2021).

The policyholder relied on a Florida federal case which the court agreed with finding:

The plaintiffs rely heavily on Terra-Adi International Dadeland, LLC v. Zurich American Insurance Co., No. 06-22380-CIV-HUCK/SIMONTON, 2007 WL 675971 (S.D. Fla. Mar. 1, 2007). In Terra-Adi, the district court interpretated a policy provision similar to the one here. It included a sub-limit of $10,000,000 for damage from windstorms and stated the following deductible: ‘5% of the total insured values at risk at the time and place of loss subject to a minimum deduction of $250,000, as respects the peril of WINDSTORM.’…

The court in Terra-Adi determined that the insured’s interpretation of the policy was reasonable: Because the $10,000,000 sub-limit was the maximum total insured value at risk for windstorms, the correct deductible calculation was 5% of $10,000,000 instead of the insured value of the entire project. See id. The court observed that the insurer’s contention that the term ‘total insured values at risk’ referred to ‘the aggregate value of physical property insured under the [policy]—not merely the value of the property insured against the peril of windstorm’—was a ‘different, but also reasonable’ interpretation…Florida law, like Louisiana law, commands that where ‘more than one interpretation of a policy provision is possible, [the court] must resolve the ambiguity against the insurer who drafted the language of the insurance contract.’…Thus, the court granted summary judgment to the insured party….Interpreting a nearly identical deductible, we determine that the language is ambiguous here too.

The case is not over, however. The appellate court, having found that the trial court made an error in not finding the wording as ambiguous, remanded the matter back to the federal trial court to consider whether extrinsic evidence would alter the outcome.

The case is an important example of how wording in a policy can be read in more than one manner and afford greater recovery to a policyholder.

Thought For The Day

Life is full of confusion. Confusion of love, passion, and romance. Confusion of family and friends. Confusion with life itself. What path we take, what turns we make. How we roll our dice.
—Matthew Underwood
1 McDonnel Group, LLC v. Starr Surplus Lines Ins. Co., No. 20-30140, — F.4th — (5th Cir. Sept. 24, 2021).