A property insurance policy cannot have a flood damage deductible nearly as high as the insurance limit because that would render the policy “illusory,” a White Plains judge has determined.
The ruling was a victory for the owner of a fuel oil terminal in the Bronx that was severely damaged during Superstorm Sandy.
Westchester Supreme Court Justice Mary Smith ruled on Jan. 2 in Castle Oil v. ACE American Insurance, 55812/13, that the deductible for the policy in question is only $250,000, not nearly $2.5 million as ACE American Insurance claimed.
The case concerns a fuel oil terminal owned by Castle Oil in the Port Morris neighborhood in the Bronx. The terminal was insured through a commercial property insurance policy issued by ACE. The policy covered all kinds of damage, but included a $2.5 million limit for flood damage. It said the deductible for flood damage was 2 percent of “the total insurable values at risk per location subject to a minimum of $250,000.”
In October 2012, the terminal suffered close to $2.3 million in damages from Superstorm Sandy. ACE responded that the total insurable value of the property, set forth in an endorsement attached to the policy, was over $124,701,000, and that the 2 percent deductible was therefore $2,494,020. Since the deductible was higher than the claimed damages, ACE disclaimed coverage.
Castle Oil countered that the policy specifically said that the total property value was for premium purposes only, not for calculating the deductible. The deductible, the company argued, was 2 percent of the amount insurable for flood damage, given the policy’s limit that is $2.5 million. Since 2 percent of $2.5 million is less than the minimum deductible of $250,000, it said, the actual deductible is $250,000.
Castle Oil sued ACE, and both sides moved for summary judgment.
Smith found in favor of Castle Oil, saying that ACE’s interpretation went against both the plain language of the policy and the intention of the insured. She noted that the policy specifically stated the property value was for premium purposes only and agreed that the deductible must be calculated with the policy limit.
“[T]o accept defendant’s interpretation of how the deductible is to be calculated clearly and impermissibly results in the Policy language ‘at risk,’ which language defendant itself had drafted and included in the subject endorsement, as being without meaning,” she wrote.
Furthermore, she said, the practical effect of ACE’s interpretation was that Castle Oil would get no coverage for a multimillion dollar loss.
“Manifestly, this could not have been the plaintiff’s intent, and said construction necessarily would render the flood damage sublimit of $2,500,000 absolutely meaningless and the flood insurance plaintiff believed it had procured illusory,” she said.
Finley Harckham, a shareholder at Anderson Kill who represents Castle Oil, called the ruling a “very well-reasoned decision.”
“The insurance company argued a very interesting interpretation of the deductible provision, which is that the policyholder could have submitted a claim for any amount it wanted, and then the deductible would be calculated from that,” regardless of the fact that claims were subject to a limit, he said.
“It’s an issue that we’re seeing with a number of Superstorm Sandy claims, so I think this is going to be a very helpful decision for policyholders,” Harckham said.
He said that none of the similar claims he was aware of had reached litigation, and that Smith’s ruling could prevent them from reaching that point.
Charles Rocco, a partner at Foran Glennon Palandech Ponzi & Rudloff, who represents ACE, could not be reached for comment.
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