Published in Property Insurance Law Committee Newsletter, Spring 2007. Copyright © 2007 by the American Bar Association. Reprinted with permission.
In Landscapes Unlimited, et al. v. Lexington Ins. Co., 2006 U.S. Dist. LEXIS 84465 (D. Neb. 2006), a Nebraska federal judge examined the meaning of the phrase “values at risk” in a flood deductible provision. In granting summary judgment for the insured, the Landscapes court determined that the phrase “value at risk” should be interpreted to mean value of the risk for the insurer, rather the value of the insured property that was damaged.
Landscapes Unlimited LLC and Landscapes Holdings LLC (“Landscapes”) were constructing two 18-hole golf courses in Maryland when the project was damaged by a flood. The property was insured under an all risk policy issued by Lexington. The covered and reimbursable loss was calculated to be $407,733.18 less the applicable deductible. Lexington calculated the deductible as being 5% of the value of the property to the insured, and issued payment of $161,263.30 to Landscapes for the flood damage.
Landscapes sued Lexington in the United States District Court, District of Nebraska, for breach of contract and bad faith and alleged that Lexington had improperly calculated the flood deductible.
Choice of Law
As a preliminary matter, Landscapes claimed that the law of Nebraska applied to this case, whereas Lexington argued that the law of Maryland should apply. The Lexington policy at issue covered risks for Landscapes’ projects anywhere in the United States and Canada, but no specific jobs or choice of law was identified.
Nebraska courts generally follow the Restatement Second of Conflicts of Laws in determining the choice of law to apply to insurance contracts and the Landscapes court was guided by these principles in making its determination. The court determined that Nebraska was the state with the most significant interest in resolving and interpreting the deductible language. In particular, the Landscapes court recognized the following Nebraska connections: the place of contracting and negotiation was in Nebraska; Landscapes and the insurance broker were located in Nebraska; Nebraska law was contemplated because Landscapes filed a Nebraska Surplus Lines Tax Consent Form; Landscapes was domiciled and incorporated in the Nebraska; and all but two of the named insureds were entities organized and existing under the laws of Nebraska.
Interpretation of the Deductible Provision
The Lexington policy issued to Landscapes insured “all risk of direct physical loss of damage including flood or earthquake.” The policy limit was $7,500,000 per occurrence and was subject to a $500,000 sub-limit on coverage per occurrence for each peril of flood. The flood deductible was to be calculated as 5% of the “values at risk” for the peril of flood, with a minimum $25,000 deductible.
The policy did not define “values at risk” and the insured argued that the terms should be interpreted to mean the value at risk to the insurer. Whereas Lexington argued that the phrase was best understood to mean the value of the property to the insured. The Landscapes court found that the phrase “values at risk” was ambiguous because it was susceptible to both of these reasonable, but conflicting interpretations. Under Nebraska law, ambiguous insurance contacts are construed in favor of the insured, and the Landscapes court adopted that reasoning.
In so doing, the court stated that it would be unreasonable to calculate the deductible, as advanced by the insurer, at an amount of $375,000 (5% of $7,500,000) in the context of a $500,000 maximum per occurrence under the flood sub-limit. In addition, the court disagreed with Lexington’s assertion that insured’s interpretation of the deductible converted a 5% of values at risk deductible with a minimum of $25,000 to a flat rate deductible of $25,000. The court reasoned that the policy language was not rendered superfluous because there was “no evidence to suggest that the deductible minimum is not fixed, while the amount of insurance coverage changeable.” In other words, Lexington’s policies could always contain a $25,000 minimum deductible, while the amount of coverage is changeable. Thus, although the $25,000 minimum also happened to be 5% of the value at risk in the Landscapes action, it need not always be so. If for example, the insurance coverage were $1,000,000, the deductible as written would be at a minimum $25,000, but it could also be as much as $50,000 if the claim was for the maximum coverage value of $1,000,000.
Applying the insured’s interpretation of the contract language, the court determined that the proper deductible was calculated as $25,000–5% of $500,000, which was the maximum risk to Lexington for flood damage under the policy. Implicit in the court’s reasoning is the apparent assumption that the flood coverage of $500,000 was reduced by the deductible rather than in excess of the deductible. That assumption is, at least, questionable.
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