Federal Appeals Court Sides with Lexington Insurance in Deductible Dispute

March 23, 2016

A federal appeals court has 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 federal Fifth Circuit Court of Appeals in New Orleans.

The case was brought on appeal by Saratoga from the U.S. District Court for the Southern District of Texas. In it, Saratoga alleges that the deductible calculated by Lexington on claims for damages on several Saratoga properties was incorrect and 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. On August 28, 2012, Hurricane Isaac made landfall in Louisiana and damaged several of Saratoga’s insured properties. Saratoga submitted a claim for $3,085,047.39 in damages. After an adjuster inspected the properties, Lexington paid $2,001,191.28 on this 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.”

Unable to convince Lexington that its calculation was in error, Saratoga sought a declaratory judgment and damages for breach of contract in the Texas court. Lexington argued that the language of its policy was unambiguous and also filed for summary judgment, which was granted by the Texas district court.

The Fifth District 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 language in the “Named Windstorm” paragraph lie at the heart of the dispute between the two companies.

The Fifth Circuit stated: “Lexington argues that 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, which is equal to $912,500.”

In Lexington’s view 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. It 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 court wrote.

The insured alleged that “the ‘Named Windstorm’ paragraph thus 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,’ which in this case is $400,000,” the Fifth Circuit’s ruling states.

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

Saratoga, the appeals court said, “seeks to depart from this ‘ordinary meaning’ — and is unable to establish that a “technical or different” meaning is warranted.”

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’s ruling states.

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