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Windstorm Deductible Endorsement Does Not Expand Coverage for Hurricane Katrina Loss
Insurance Law Update
U.S. Fifth Circuit Court of Appeals
In Penthouse Owners Ass'n, Inc. v. Certain Underwriters at Lloyds, London, ___ F.3d ___, 2010 WL 2773427 (5th. Cir. July 15, 2010), the U.S. Fifth Circuit Court of Appeals reversed the district court’s holding that a windstorm deductible endorsement extends a policy’s coverage to include water losses associated with windstorms.
Penthouse Owners Association sought insurance coverage under an all-risk policy issued by Certain Underwriters at Lloyds, London for damage to condominiums caused by Hurricane Katrina. The Lloyds policy excluded water damage, including damage from floods. The policy also contained an “anti-concurrent causation” clause, which stated that “such [water] loss or damage is excluded regardless of any other cause of loss or event that contributes concurrently or in any sequence to the loss.” In addition, the policy included a windstorm deductible endorsement stating that it applies to “loss or damage to covered property caused directly or indirectly by windstorm or hail, regardless of any other cause or event that contributes concurrently or any sequence to the loss of damage. If loss or damage from a covered weather condition other than windstorm or hail occurs, and that loss or damage would not have occurred but for the windstorm or hail, such loss or damage shall be considered to be caused by windstorm or hail and therefore part of the windstorm or hail occurrence.” Lloyds determined that the condominiums had been destroyed by flood and denied Penthouse’s claim.
Penthouse filed suit, contending that the loss was caused by the winds of Hurricane Katrina, several hours before the ensuing storm surge. The district court granted judgment for Penthouse on the question of Lloyds’ liability for all hurricane-related losses, determining that the deductible endorsement provided coverage for hurricane damage regardless of whether the damage was caused by wind or flood.
However, the Fifth Circuit, applying Mississippi law, vacated the district court’s order, finding that the endorsement does not create or extend coverage. The court reasoned that “a deductible clause can only logically be applied after a covered loss has been established, and it is unnatural to interpret a deductible clause as a mechanism that increases the risk of the insurer by expanding the scope of coverage.” The court acknowledged that while some of the endorsement language may be misleading if read in virtual isolation, “[w]hen the [d]eductible is read in its proper context of the policy as a whole, and with the common understanding of how deductibles operate in insurance policies, any ambiguity about the effect of this language on the scope of coverage vanishes.”
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