Claimant/Named Insured Limited to $30K Statutory Minimum when Houston First Court Declines to Find a “Separation of Insureds” Implied in Auto Policy
A closer look at Texas Farm Bureau Mutual Ins. Co. v. Minchew.
by Tae Andrews
A recent Supreme Court of Texas decision reemphasized well-established rules of insurance policy interpretation that benefit policyholders. In 2005, the Lynd Company purchased two layers of insurance to cover various properties. Westchester Fire Insurance Company provided primary coverage up to $20 million per occurrence. RSUI Indemnity Company provided excess coverage for losses exceeding $20 million, up to $480 million per occurrence.
One such “occurrence”—Hurricane Rita—struck in September 2005. The storm damaged fifteen of Lynd’s properties. The parties agreed that a single “occurrence” caused all of the damage and that Lynd’s losses totaled just over $24.5 million. After Westchester paid its $20 million limit, RSUI refused to pay the remaining $4.5 million and instead paid Lynd $750,000.
RSUI cited the excess policy’s “Scheduled Limit of Liability” endorsement as the basis for its denial of coverage. Lynd sued RSUI to recover the difference between its $24.5 million in losses and the $20,750,000 Westchester and RSUI paid out under the policies. As a result, the question of whether coverage existed under the excess policy depended on the interpretation of the “Scheduled Limit of Liability” endorsement.
The endorsement read:
ALL COVERAGE PARTS
It is understood and agreed that the following special terms and conditions apply to this policy:
a. The actual adjusted amount of the loss, less applicable deductibles and primary and underlying excess limits;
b. 115% of the individually stated value for each scheduled item of property insured at the location which had the loss as shown on the latest Statement of Values on file with this Company, less applicable deductibles and primary and underlying excess limits. If no value is shown for a scheduled item then there is no coverage for that item; or
c. The Limit of Liability as shown on the Declarations page of this policy or as endorsed to this policy.
To determine its limit of liability, RSUI examined each of the coverage items at each of the damaged locations and compared the three alternatives in order to determine “the least” of them. For thirteen properties, RSUI applied the limit under Part 1a (the “actual adjusted amount of the loss”), because that amount was less than the amounts under Part 1b and 1c. However, for two locations, RSUI applied the limit under Part 1b, because that amount was less than the amounts under Part 1a and 1c.
By contrast, Lynd argued that the policy required RSUI to compare the three alternatives and apply “the least” of them only once, for all of the covered locations. That would have meant that RSUI should have applied the Part 1a limit for all covered locations, because that amount was less than the amounts under Parts 1b and 1c. Ultimately, that would also mean that RSUI should have paid $24.5 million—the “actual adjusted amount” of all losses at all of the properties—minus the policy’s $25,000 deductible and the underlying policy’s $20 million limit.
On appeal, the Supreme Court of Texas analyzed the language of the excess policy in order to determine whether Lynd or RSUI had the correct interpretation.
To determine the meaning of the introductory phrase, “In the event of loss [under the policy],” the Court turned to the policy’s definitions section. The policy defined “loss” to mean “a loss or series of losses arising out of one event or occurrence.” The parties agreed that Hurricane Rita amounted to one “event or occurrence.” As a result, the phrase “In the event of loss [under the policy]” could be reasonably read to mean “in the event of [each loss]” and “in the event of [the entire series of losses].” (emphasis added). Under the applicable canons of construction for the interpretation of insurance policies, a ‘tie’ goes to the insured, so this ambiguity in phrasing worked in Lynd’s favor.
Likewise, when interpreting Part 1a’s limit, the Court determined that because the limit referred to “[t]he actual adjusted amount of the loss, less applicable deductibles, and primary and underlying excess limits,” it could be read to refer to either each loss or the entire series of losses. Once again, the policy’s definition of “Loss” was consistent with both parties’ interpretations.
The Court then turned to examine the second alternative limit—Part 1b—of the endorsement, which limited RSUI’s liability to “115% of the individually stated value for each scheduled item of property insured at the location which had the loss as shown on the latest Statement of Values.”
Under RSUI’s interpretation of the endorsement, it could determine the “actual adjusted amount of the loss” and “115% of the individually stated value for each scheduled item of property insured at the location which had the loss as shown on the latest Statement of Values on file with the Company,” compare them, select the lesser of the two for each covered property, then subtract the deductible and primary and underlying excess limits from the total.
However, because both 1a and 1b separately included language requiring subtraction of the policy’s deductible and primary and underlying excess limits, the Court concluded that RSUI’s item-by-item interpretation was “difficult at best.” Instead, the Court found Lynd’s approach more persuasive. Under Lynd’s interpretation of the endorsement, RSUI had to determine the actual amount of the “series of losses” and subtract the deductible and primary limit from that amount, determine “[the total of every] individually stated value of each scheduled item” and subtract the deductible and primary limit from that amount, then compare the two in order to determine which was “the least.” The Court went on to write that Lynd’s interpretation was “one appropriate way” to construe Part 1b, and therefore supported Lynd’s aggregate approach for determining the alternative limits.
As far as the Part 1c limit goes, the Court ultimately found that it was superfluous and neither supported nor contradicted either party’s interpretation of the endorsement.
Longstanding legal maxims governing the interpretation of insurance policies played a decisive role in the Court’s decision. The Supreme Court noted that if only one party presents a reasonable interpretation of a policy, the policy is unambiguous and a reviewing court must adopt that party’s construction. However, if both parties present reasonable interpretations of a policy’s language, a reviewing court must conclude that the policy is ambiguous. In that event, the Court must resolve the uncertainty by adopting the construction that most favors the insured—even if the construction proposed by the insurer appears to be more reasonable or a more accurate reflection of the parties’ intent. In other words, if the insured presents a reasonable interpretation of a policy, a court must enforce that construction, even if the insurer also presents a reasonable interpretation. Ultimately, the Court determined that the Limit of Liability endorsement was ambiguous, because it could reasonably be read to support either party’s proposed interpretation. As a result, the Court had to adopt the interpretation of the policy most favorable to the insured—Lynd’s.