‘Ambiguous’ Flood Deductible May Cost Carriers That Insured New Orleans Hotel

The redevelopment of the historic Jung Hotel and Residences in downtown New Orleans flooded four times before renovations were complete.

The two insurers that issued a builder’s risk policy for the project thought they had limited their risk, but a decision Friday by a panel of the 5th Circuit Court of Appeals may cost them more than $12 million.

The 5th Circuit reversed a district court’s ruling that no coverage was owed because the flood deductible was more than the amount of damages claimed. The appellate panel ruled that because the policy was ambiguous, the trial court must determine whether extrinsic evidence resolves the ambiguity. It also directed the district court to decide whether the usual presumption that coverage is owed when a policy is ambiguous should apply in the case.

“We set no limits on what proceedings the district court should conduct on remand, and we do not mean to intimate what decisions it should reach,” the opinion says.

Starr Surplus Lines Co. and Lexington Insurance Co. in 2015 sold a builder’s risk policy to McDonnel Group, the general contractor hired to renovate the Jung Hotel and Residences on Canal Street. The hotel was built in 1908 as a ten-story structure and then expanded with an 18-story addition in 1925. The hotel was listed on the Register of Historic Places, but had been a vacant eyesore for much of the past 30 years.

Heavy rains caused flooding on the construction site four times: on March 10, April 21, July 22 and Aug. 5, 2017. McDonnel filed a notice of loss to the insurers claiming damages of $3,226,164.30.

“Our owner invested $145 million in this property in an effort to show his enthusiasm and commitment to the city of New Orleans and rejuvenating this end of Canal Street, and yet this area continues to flood,” general manager Mark Wilson told Fox8 News in July 2017. He said summer rains dumped a foot and a half of water in the hotel lobby.

Starr and Lexington denied the developer’s claims. The insurers say a flood deductible in the policy requires coverage only when damages exceed 5% of the total insured values. The policy valued the project at $86,086,833. The building was 80% complete at the time of the flood, so the value at the time of the loss was $68,860,506, the insurers contended.

The insurers argued the deductible was 5% of that amount, or $3,443,475, so the damages were not great enough to trigger coverage.

McDonnel, Mechanical Construction co., Jung L.L.C and All Star Electric — each which were insured by the policy, filed separate lawsuits. They said the deductible was $500,000.

The policy language that limited coverage to 5% of the insured value should be interpreted to mean 5% of the flood insurance obtained, the plaintiffs argue. They say Starr and Lexington should have paid $2,726,164.30 — the amount of damage less 5% of the amount insured.

When the insurers refused to pay, all four companies filed lawsuits that seek coverage for more than the amount lost because of the insurers’ alleged bad faith. Jung, the hotel owner, claims damages of more than $12 million. McDonnel is seeking more than $5 million.

U.S. District Judge Greg Gerard Guidry, with the Eastern District of Louisiana in New Orleans, consolidated the four lawsuits. He found the policy was “clear and unambiguous” and granted partial summary judgment to the insurers on that point.The plaintiffs appealed.

The 5th Circuit panel said the flood deductible could be interpreted to mean what the insurers say it means, but also could be understood the way the plaintiffs read it.

“The policy is ambiguous,” the opinion says.

The panel said previous decisions have established that insurable values are something different than insured values. Insurance policies often limit risk according to insurable values, or the amount that could have been insured. McDonnel’s policy based the deductible on the insured value, which means total value for which the insured actually purchased coverage.

Typically, Louisiana courts presume that coverage is owned to a plaintiff when an insurance policy is ambiguous. But there is an exception to that maxim “where the insured is a sophisticated commercial entity that itself drafts or utilizes its agents to secure desired policy provisions,” the opinion says.

In those instances, the court can look to extrinsic evidence — meaning testimony or documents that are not a part of the insurance contract — to determine intent. The panel opinion says the plaintiffs and defendants both presented documents to support their interpretations, but the trial court never considered them because he found that the policy was clear and unambiguous.

The appellate panel directed the trial court to decide whether the presumption should apply. If he determines that the plaintiffs are “sophisticated parties” exempt from the presumption, he must examine the extrinsic evidence to decide who has the correct interpretation.

“We are pleased with the Fifth Circuit’s ruling and look forward to returning to the trial court to try this matter,” stated plaintiff’s attorney James M. Garner, with Sher Garner Cahill Richter Klein & Hilbert, in an emailed statement.