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Property Insurance

Update—Florida Windstorm Deductibles

Douglas Berry | June 1, 2002

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Hurricane view from space

June 1 marked the beginning of Hurricane Season 2002. As such, a review of some hurricane-related issues is in order.

Following Hurricane Andrew, the Florida Legislature enacted amendments to Fla. Stat. § 627.701 to permit insurers to apply deductibles expressed as a percentage of the amount insured, rather than a flat dollar amount, to losses to residential property caused by hurricanes or other named windstorms. The Legislative intent was:

to encourage the use of higher hurricane deductibles as a means of increasing the effective capacity of the hurricane insurance market in this state and as a means of limiting the impact of rapidly changing hurricane insurance premiums. [Fla. Stat. § 627.701(5)(a).]

Insurers, both personal and commercial lines writers, immediately began rewriting their deductible provisions to increase substantially the deductible to be applied in the event of a loss due to a hurricane or other named windstorm event. The application of these increased deductibles following a loss can be quite expensive to an insured and, as a consequence, has spawned several legal issues, two of which have recently been resolved.

In Shoreline Towers Condominium Owners Assoc. v. Zurich American Ins. Co., 196 F. Supp. 2d 1210 (S.D. Ala. 2002), the Plaintiff was a time-share condominium association located in Gulf Shores, Alabama, and was an additional insured as 1 of approximately 40 locations insured under a policy issued to Resort Development, Inc., which owned, developed, or managed these properties. Following Hurricane Opal, Zurich determined the covered damages to be $334,901. Zurich applied a $40,000 deductible under the following policy provision:

The Windstorm or Hail Deductible, as shown in the Schedule, applies to the loss or damage to Covered Property, caused directly or indirectly by Windstorm or Hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage.

Following further adjustment, Zurich paid an additional $86,000 in covered damages. Shoreline, however, contended in its lawsuit 1 that the deductible should be applied to the total loss—both covered and uncovered damages—not simply to reduce the indemnity due for the covered loss. The court disagreed, finding the windstorm deductible clause "clear and unambiguous." The court stated:

Shoreline's contention that the deductible should be applied to the loss caused by both covered and excluded causes of loss is contrary to the plain language of the insurance contract and results in a tortured interpretation of the policy.

In Paulucci v. Liberty Mutual Ins. Co., 190 F. Supp. 1312 (M.D. Fla. 2002), the insured sought coverage for loss to the roof of a warehouse following Tropical Storm Gordon. Under a windstorm deductible provision nearly identical to the one at issue in the Shoreline Towers case, the insured contended the language "regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage" negated the applicability of the policy's "anti-concurrent causation" provision. In ruling against the Plaintiff/Insured, the court stated:

I cannot agree. This provision only modifies the scope and application of the deductible should windstorm be a contributing cause. The first two sentences read together indicate the following. First, the intention of the provision is to apply the windstorm or hail deductible when windstorm or hail directly or indirectly contributes to the loss, and second when another "covered" loss occurs, such as fire damage, that would not have happened but for windstorm or hail, the other covered loss will be treated as part of the windstorm or hail with respect to the deductible. Because the windstorm and hail deductible clause modifies application of the deductible only, it does not negate anti-concurrent language in the exclusion section of the policy's General Policy Conditions.

Of course, to get to this point, the court first had to uphold the validity of the "anti-concurrent causation" language. In doing so, the court relied on State Farm Fire & Casualty Co. v. Metropolitan Dade County, 639 S.2d 63 (Fla. 3rd DCA 1994), and, interestingly, reached outside of Florida to rely on Front Row Theatre, Inc. v. American Manufacturer's Mutual Ins. Co., 18 F.3d 1343 (6th Cir 1994), since the form at issue in that case was the same as in Paulucci. This appears to be only the second reported Florida decision to discuss this specific language.

As another hurricane season unfolds, we can expect other deductible issues to unfold and, eventually, be resolved.

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1 Although suit was filed in Alabama, the policy was issued in Florida, the location of the majority of Resort Development's properties, three of which were also damaged by Hurricane Opal.