Federal Appeals Court Sides with Lexington Insurance in Deductible Dispute

A federal appeals court in Louisiana, in an opinion published March 22, upheld a lower court’s ruling in favor of an insurance company in a breach of contract suit brought by a Houston-based oil and gas exploration and production company.

The dispute in Saratoga Resources Inc. v. Lexington Insurance Company concerns the calculation of a deductible in a Lexington-issued insurance policy held by Saratoga, according to the Fifth Circuit Court of Appeals in New Orleans.

The case was first heard in the U.S. District Court for the Southern District of Texas. In it, Saratoga alleges the deductible calculated by Lexington on damage claims for several Saratoga properties was too high.

The appeals court explained:

“Lexington issued an insurance policy to Saratoga covering the period from May 18, 2012 through May 18, 2013. This policy insured several oil and gas properties owned by Saratoga. Under the policy, each of the properties had a different insured value.”

After several of Saratoga’s insured Louisiana properties were damaged by Hurricane Isaac in August 2012, Saratoga filed a claim for $3,085,047.39. An adjuster inspected the properties and Lexington paid $2,001,191.28 on the claim.

“This amount reflected Lexington’s calculation of the applicable deductible as $912,500. Saratoga disagreed with this calculation of the deductible, arguing that it should be $400,000, not $912,500,” the court said.

Unable reach agreement with Lexington, Saratoga sought declaratory judgment and damages for breach of contract in the Texas court. Lexington argued that its policy language was unambiguous and filed for summary judgment, which was granted by the Texas district court.

Saratoga appealed.

The Fifth Circuit Court identified the primary language at issue in Lexington’s policy as:

“Earth Movement/Flood/Named Windstorm:

• 5% of Total Insurable Values at the time and place of the loss, subject to a minimum of $250,000 any one occurrence.
• If two or more deductible amounts apply to a single occurrence, the total to be deducted shall not exceed the largest deductible applicable unless otherwise stated in the policy.”

Differing interpretations of the “Named Windstorm” paragraph lie at the heart of the dispute between the two companies.

In Lexington’s view, “the plain language of ‘5% of Total Insurable Values’ sets the deductible at 5% of the aggregate sum of the insured value of each damaged property,” or $912,500, the Fifth Circuit stated.

Therefore, according to Lexington, there should be only one deductible amount for Saratoga’s claims and the “two or more deductible amounts” language is not applicable.

Saratoga had an alternate theory, however.

The company maintained that the term, “‘Total Insurable Values,’ does not refer to the ‘Total’ of the ‘Insurable Values’ of the damaged properties, but instead is the plural form of a term referring to the individual insured value of each property.”

The insured alleged that the language in the “Named Windstorm” paragraph requires “the calculation of ‘mini-deductibles’ that represent 5% of the insured value of each damaged property. Once the $250,000 minimum is reached, so the argument goes, the ‘two or more deductible amounts’ paragraph applies and the total deductible may not exceed the highest ‘mini-deductible,'” or $400,000, the Fifth Circuit explained.

The appeals court concluded, however, that the Texas district court had relied on “the ‘ordinary meaning’ of the term ‘Total Insurable Values'” and was correct to do so.

Saratoga sought to “depart from this ‘ordinary meaning'” but the insured is “unable to establish that a ‘technical or different’ meaning is warranted,” the appeals court said,

The Fifth Circuit found Saratoga’s interpretation of the policy to be unreasonable.

“Under Texas law, when there is only one reasonable interpretation of an insurance policy, the court must ‘construe it as a matter of law.’ We agree with the district court that this is the case here and adopt Lexington’s interpretation of the deductible provision,” the Fifth Circuit stated.

Boston-based Lexington is an AIG member company.

Topics Texas