Seemingly minor changes to a single word in an insurance policy can make a big difference to coverage. In McDonnel Group, L.L.C. v. Starr Surplus Lines Ins. Co., 20-30140, 2021 WL 4352309, __ F.4th__ (5th Cir. 9/24/21), the Fifth Circuit made clear that something as simple as a suffix can have significant implications for the meaning of an insurance policy provision.
It Never Rains but It Pours
McDonnel involved the interpretation of the flood deductible provision in an all risks insurance policy that insured the renovation of a hotel building in New Orleans, Louisiana. McDonnel was the named insured and general contractor for the project. A rainstorm flooded the project during the renovation, causing $3,226,164 in damage.
Deducing the Deductible
The policy contained a flood sublimit of $10 million. It also contained the following deductible for flood damages, which became the source of contention between the insureds and insurers:
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 insurers argued that the deductible should be calculated at 5% of the total value of the project at the time of the loss – $68,860,506.00. Consequently, because the deductible was $3,443,475 – more than the damage – they denied the claim.
McDonnel contended that, due to the $10 million flood sublimit, the most it could ever recover for a flood claim was $10 million. In other words, the “total insured values” at risk for a flood event was $10 million. Thus, McDonnel argued, the correct deductible was $500,000, and it was entitled to a $2,726,164 payout.
Quibble about “Insurable” vs. “Insured”
The dispute in McDonnel boiled down to whether the policy deductible was calculated as a percentage of the sublimit, or as a percentage of the total amount at risk (i.e. the value of the property). In support of the latter result, the insurers cited Castle Oil Corp. v. Ace Am. Ins. Co., with flood deductible language that stated: “2% of the total insurable values at risk per location subject to a minimum of $250,000.” In support of the former, McDonnel cited Terra-Adi Int'l Dadeland, LLC v. Zurich Am. Ins. Co., where a windstorm deductible language stated: “5% of the total insured values at risk at the time and place of loss subject to a minimum deduction of $250,000.”
The Fifth Circuit noted that there is a stark difference between the term “total insurable values at risk” versus “total insured values at risk.” It recognized that “insurable values” denotes the aggregate risk of a project or piece of property (i.e. the total value that the insured could have insured), whereas “insured values” signifies the actual amount of coverage purchased by the insured. The opinion also appeared to suggest that McDonnel’s interpretation is not far-fetched in that, if a flood deductible, subject to a sublimit, is calculated on the total value of the project, then it is theoretically possible for the deductible to exceed the sublimit if the project value reached a certain threshold.
McDonnel clearly has implications for insurance policies that insure construction projects – particularly those that insure high-value projects or those that calculate deductibles as a percentage of the insured (or insurable) value. However, it also poses lessons for all insurers and insureds, especially where many insurance policies calculate deductibles as a percentage of the value of the property or the value of the loss.
While an insurer might believe its policy language clearly links a deductible to the total value of an insurable risk – clearly the insurers in McDonnel thought so – something as simple as a word ending could render such a provision ambiguous, regardless of the insurer’s intent. Insurers, especially those that want to tie a specific peril’s deductible to the aggregate risk, rather than the peril’s sublimit, should reevaluate their policy language to clarify that a deductible is not calculated on a sublimit, rather than the intended, aggregate risk.
Indeed, the opinion even noted that the policy used the phrase “total contract value” many times in the policy to denote the total value of the project, yet the flood deductible provision did not use that phrase. Consistency in term usage – or, perhaps, simplifying the deductible language – could have left no doubt that the flood deductible was a percentage of the total project value.
For insureds, while they should already be closely reading their insurance policies before experiencing a loss, McDonnel shows that something as simple as a suffix could mean the difference between a denial and succeeding on a multi-million dollar claim.