Foran Glennon Palandech Ponzi & Rudloff

May 2017

New York Court of Appeals Finds Insurer’s Interpretation of Flood Deductible Provision To Be Reasonable In Sandy Claim

The Appellate Division, Second Judicial Department, of the State of New York ruled in favor of ACE American Insurance Company (“ACE”) in a fight over the interpretation of a deductible provision in a Sandy claim.  In a unanimous opinion, the Appellate Division reversed the Westchester County Supreme Court and agreed with ACE’s interpretation of the flood deductible applicable to Castle Oil Corporation (“Castle Oil”)’s losses.

This litigation arises out of Castle Oil’s insurance claim for flood damage caused by Superstorm Sandy to its Port Morris Terminal location.  At issue was the interpretation of the flood deductible provision, which states that the flood deductible is “2% of the total insurable values at risk per location subject to a minimum of $250,000.”  Castle Oil moved for partial summary judgment, arguing that the deductible should be calculated as 2% of the $2.5 million flood sublimit.  According to Castle Oil, therefore, the appropriate deductible was the minimum $250,000 flood deductible as 2% of the $2,500,000 sublimit was less than $250,000.  ACE opposed and cross-moved for summary judgment, arguing that the deductible should be 2% of $124,701,000, the total valuation of the Port Morris Terminal listed in the policy’s “Schedule of Locations Endorsement.”  According to ACE, the deductible was $2,494,020, and as such, Castle Oil could not recover because Castle Oil’s claimed $2,284,239.95 did not exceed that amount.

Judge Smith of the Westchester County Supreme Court agreed with Castle Oil’s position and granted Castle Oil’s motion.  She found that the language “values at risk” was not defined in the policy, and must necessarily refer to the sublimit amount of $2.5 million.  She reasoned that this interpretation was the only way to give meaning to the language “at risk” because the insurer is “at risk” of paying only the full amount of the sublimit.  Judge Smith also held that the total insurable values of $124,701,000 could not be used to calculate the deductible because the endorsement included a disclaimer that those values were set forth for “premium purposes only.”  She further concluded that ACE’s position rendered Castle Oil’s flood protection illusory.

The Appellate Division disagreed with the lower court’s interpretation of the flood deductible provision, and concluded that the only reasonable interpretation of the flood deductible provision was that set forth by ACE – namely, that the applicable deductible was 2% of $124,701,000, or $2,494,020.  Castle Oil’s interpretation, on the other hand, was unreasonable as it would render much of the deductible provision entirely superfluous.

In reversing Judge Smith’s decision, the Appellate Division found that the “total insurable values at risk” refers to an insured’s own risk of loss and damage, not the insurer’s limit of liability.  In addition, the Appellate Division rejected Judge Smith’s finding that the values in the endorsement cannot be the values referred to in the deductible provision because of the “for premium purposes only” notation.  That note simply indicated that the values were used to determine the premiums only, not the limitations of the policy.  As such, it did not preclude the use of these values in the calculation of the applicable flood deductible.  The Appellate Division also rejected Judge Smith’s finding that ACE’s interpretation would render the policy’s coverage illusory.  While the claim at issue fell within the $2,494,020 deductible, the Appellate Division explained that there were loss scenarios pursuant to which Castle Oil would have been out the $2,494,020 deductible, but also would have been paid the entire $2,500,000 sublimit for flood.  Therefore, as ACE’s interpretation of the flood deductible was the only reasonable interpretation, the Appellate Division reversed the lower court’s decision and ruled in favor of ACE.

Charles Rocco, Tom Orlando and Venice Yoo