Charles A. Yuen
November 2, 2012
Government representatives in certain East Coast states have just issued interpretative statements insisting that policyholders
will not have to pay “hurricane” or “named storm” deductibles on insurance claims
stemming from Sandy. Should policyholders welcome this good-hearted intervention? Many will, but some should not.
In seeking to assist policyholders, these representatives are trying to preclude consideration of complicated issues such as: the interpretation of policy wording; the interpretation of the name “Sandy”; whether the storm had hurricane force winds at landfall or at other times; and whether the storm was a “tropical” system.
The potential benefits to a typical policyholder are often straight-forward. Hurricane/named storm deductibles may be stated to deduct from policy recovery a percentage of the building’s insured value
. For a building with an insured value of $600,000, a policyholder might have to bear $30,000 of a loss. A homeowner whose loss is otherwise fully covered may obviously benefit if this deductible does not apply.
However, the policies issued to some insureds may contain additional provisions which contain the same or similar operative language as in the “hurricane” or “named storm” deductible. If so, application of the “hurricane” deductible might enhance a policyholder’s recovery.
Last year, the U.S. Fifth Circuit appellate court issued a decision illustrating this point. Seacor Holdings’ all-risk policy for 2005 treated “Named Windstorm” and “Flood” separately under the policy. The Named Windstorm deductible in Seacor’s policy was higher ($50,000) than the “Flood” ($25,000) deductible. Nonetheless, Seacor was able to convince the court that it should pay the high $50,000 Named Windstorm deductible.
The policy limit for “Named Windstorm” was $10 million, and the policy limit for “Flood” was $5 million. If the court determined that the damage was caused by a “Flood” rather than by a “Named Windstorm,” Seacor would lose $5 million in policy limit. Seacor, therefore, was happy to pay the higher deductible.
Using the East Coast governor’s interpretation of Sandy events, Seacor might have saved $25,000 in deductible while losing $5 million in policy proceeds. Fortunately for Seacor, East Coast governors did not intervene in its case.
In sum, one does not know whether any particular way of referring to the recent storm will be helpful or not until all of the policy provisions are considered. As always, coverage must be considered on an individual basis.
If you would like to discuss this topic or have any questions, contact me