Seemingly minor one-word changes in an insurance policy can make a big difference to coverage. In McDonnel Group, LLC v. Starr Surplus Lines Ins. Co., 20-30140, 2021 WL 4352309, __ F.4th__ (5th Cir. 09/24/21), the fifth circuit made it clear that something as simple as a suffix can have important implications for the meaning of ‘an insurance policy provision.
It never rains, but it pours
Mcdonnel involved the interpretation of the flood deductible clause in an all-risk insurance policy that provided for the renovation of a hotel building in New Orleans, Louisiana. McDonnel was the named insured and the general contractor for the project. A rainstorm flooded the project during the renovation, causing $ 3,226,164 in damage.
Deduct the deductible
The policy contained a flood sub-limit of $ 10 million. It also contained the following deductible for flood damage, which became a source of contention between policyholders and insurers:
5% of the total of the insured values at risk at the time and place of the loss, subject to a $ 500,000 minimum deduction for [sic] FLOOD*
Insurers argued that the deductible should be calculated at 5% of the total project value at the time of loss – $ 68,860,506.00. Therefore, because the deductible was $ 3,443,475 – more than the damages – they rejected the claim.
McDonnel argued that because of the $ 10 million flood sub-limit, the maximum he could ever recover for a flood claim was $ 10 million. In other words, the “total insured values” at risk in the event of a flood was $ 10 million. So, according to McDonnel, the correct deductible was $ 500,000 and she was entitled to a payment of $ 2,726,164.
Quarrel over “Insurable” versus “Insured”
The dispute in Mcdonnel it boiled down to whether the policy deductible was calculated as a percentage of the sub-limit or as a percentage of the total amount at risk (i.e. the value of the property). In support of this last result, insurers have cited Castle Oil Corp. vs. Ace Am. Ins. Co., with wording deductible in the event of a flood which read: “2% of the total insurable values at risk per site, subject to a minimum of $ 250,000.” In support of the first, McDonnel cited Terra-Adi Int’l Dadeland, LLC v. Zurich Am. Ins. Co., where the wording of a windstorm deductible read: “5% of the total insured values at risk at the time and place of the loss, subject to a minimum deduction of $ 250,000.” “
The Fifth Circuit noted that there is a glaring difference between the term “total insurable values at risk ”versus“ total insuranceed values at risk. He recognized that “insurable values” denoted the overall risk of a project or asset (that is, the total value that the insured Could have insured), while “insured values” means the actual amount of coverage purchased by the insured. The opinion also seemed to suggest that McDonnel’s interpretation is not exaggerated in that, if a flood deductible, subject to a sub-limit, is calculated over the total value of the project, then it is theoretically possible that the deductible exceeds the sub-limit if the value of the project has 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 insured (or insurable) value. However, this also poses lessons for all insurers and policyholders, especially when many insurance policies calculate deductibles as a percentage of the property’s value or claim value.
While an insurer may believe that the wording of its policy clearly links a deductible to the total value of an insurable risk – it is clear that insurers in Mcdonnel I thought so – something as simple as an ending could make such a provision ambiguous, regardless of the insurer’s intention. Insurers, especially those who wish to tie the deductible of a specific risk to the overall risk, rather than the sub-limit of the risk, should re-evaluate their policy wording to clarify that a deductible is not calculated on the basis of the risk. a sub-limit, rather than the overall expected risk.
Indeed, the opinion even noted that the police used the expression “total contract value” on several occasions in the policy to denote the total value of the project, but the provision on the deductible in the event of flood did not use not that expression. The consistency in the use of terms – or, perhaps, the simplification of the language of the franchise – could not have left any doubt that the flood franchise was a percentage of the total value of the project.
For policyholders, while they should already carefully read their insurance policies before suffering a loss, Mcdonnel shows that something as simple as a suffix could make the difference between a denial and the success of a multi-million dollar claim.