The U.S. Court of Appeals for the Fifth Circuit has reversed the decision of the lower court, finding that a policy that listed windstorms among the covered perils did not cover flood damages caused by Hurricane Harvey, even though flooding was not specifically excluded. The case is Landmark Am. Ins. Co. v. SCD Mem'l'l Place II, L.L.C. No. 20-20-389, 2022 U.S. App. LEXIS 3128 ( 5th Cir. Feb 3, 2022).
In 2016, Landmark Insurance Company (Landmark) issued an insurance policy to SCD Memorial Place II, L.L.C. (SCD) that covered several SCD properties, including an office building in Houston with an insured value of $71,100,000. The policy was a "deductible buy back policy," (DBBP) designed for insureds to purchase if their primary insurance policy has a high deductible. If the insured makes a claim on the primary policy, the DBBP may cover all or a portion of the required deductible, reducing the out-of-pocket costs for insureds.
In this case, the primary policy was an "all risks" policy issued by the Lexington Insurance Company, covering "all risks of direct physical loss or damage including flood, earth movement, and equipment breakdown." Because the Lexington policy had a high deductible, the insured purchased the separate Landmark policy to help cover the cost of that deductible.
When Hurricane Harvey struck Houston in 2017, Buffalo Bayou overflowed its banks after water was released from reservoirs upstream, and the SCD building in Houston was inundated with water.
The damage was undisputedly caused by the named storm, and Lexington paid out $15 million under the "all risks" policy for damages exceeding the amount of the deductible.
SCD asked Landmark to pay what it owed under the DBBP, which had a limit of $1,527,500. Landmark argued that its policy did not list flooding as a named peril, and SCD argued that the policy did say that it contained the same warranties and conditions as the primary insurer's policy. Landmark denied the claim, arguing that it is undisputed that the damages to the property were caused solely by flooding, which is not listed as a named peril in the policy. In a reply brief, the insurer said that SCD's interpretation that its policy should cover all of the same perils named in the Lexington policy was "baseless."
Landmark filed a lawsuit seeking a declaratory judgment that no coverage was owed. A magistrate judge sided with the insured, and a U.S. District Court judge accepted the recommendation to grant a motion to dismiss Landmark's suit.
Landmark argued that although its policy covered the perils of "windstorm or hail" that are associated with a named storm, it does not mean the policy covers all perils associated with a named storm. The policy is a "named perils" policy, not an all risk policy like the policy issued by Lexington. The 5th Circuit panel agreed, reversing the district court and rendering judgment in favor of Landmark.
In the opinion, the 5th Circuit panel noted that if "SCD's interpretation of the policy were correct, then the Landmark policy simply could have stated that all damage from a Named Storm is covered (regardless of the peril that caused the damage). "The Landmark policy does not state this. Instead, the policy frames its coverage as applying to specific '[c]overed perils.'"
Editor's Note: Whether a policy is all risks, opened perils or named perils is key to understanding the coverages provided in a policy. Likewise, what exactly those named perils are makes a difference. While a named storm consists of both wind and water, both causes of loss are not necessarily covered. There were many suits that resulted from Hurricane Katrina that dealt with this exact issue and the policies anti-concurrent causation language.
Related articles: