Fifth Circuit Determines a Deductible Buyback Policy Was a Named Perils Policy for Hurricane Harvey Flood Damage

The Fifth Circuit Court of Appeals recently reversed a federal Texas court’s order granting summary judgment in favor of the insured, holding that its “deductible buyback policy” was a “named perils” policy that did not provide coverage in relation to the insured’s flood-related damage sustained by a commercial building during Hurricane Harvey.

The insured’s primary “all-risks” policy, which provided insurance for several of the insured’s properties, had a high deductible that would need to be paid by the insured in the event of a covered claim. In an attempt to minimize the insured’s potential out-of-pocket expenses in such an event, the insurer issued a “deductible buyback policy” that would provide insurance for all or part of the primary policy’s deductible for covered claims involving wind or hail.

While both policies were in effect, Hurricane Harvey made landfall in August 2017, causing Buffalo Bayou to overflow its banks, leading to water flowing onto one of the insured’s properties. The insured submitted a claim under the primary policy, which paid out millions of dollars for physical loss or damage in excess of the deductible, which prompted the insured to file a claim under the insurer’s deductible buyback policy. During the investigation of the claim, an independent adjuster confirmed that there was no reported wind or hail damage to the property. As a result, the insurer filed a declaratory judgment action that sought a declaration that the policy did not apply to the alleged loss sustained.

After litigation ensued, the federal magistrate judge issued a memorandum and recommendation in favor of granting the insured’s motion for summary judgment, which the district court adopted in full. The insurer then timely appealed the decision to the Fifth Circuit. Prior to providing its analysis, the Fifth Circuit noted in its opinion that both parties agreed that the policy was unambiguous. “Namely, they contend that the phrase ‘Perils Covered: Windstorm or Hail associated with a Named Storm’ has only one reasonable interpretation. Naturally, both parties contend that the only reasonable interpretation cuts their way.”

Then, the Fifth Circuit took note that not all perils associated with a named storm were covered under the policy, whereby rendering the deductible buyback policy a “named perils” policy rather than an “all-risks” policy. Further, the court stated that the policy carefully defined what perils it covered (windstorm or hail) and that all other perils could be understood to be excluded based on the text of the policy. To reach this determination, the Fifth Circuit distinguished the instant matter from Pan Am Equities Inc. v. Lexington Insurance Co., 959 F.3d 671 (5th Cir. 2020), which the insured cited in support of its proposition that, under Fifth Circuit law, Hurricane Harvey was a “windstorm” and therefore the policy covered all perils associated with it.

The Fifth Circuit held that the policy would not have specified “windstorm” and “hail” as specific and separate perils when those perils could be associated with a number of weather events other than a “named storm.” The court held that in Pan Am, the “named storm provision” was very different from the policy at issue, where it had broadened, rather than constricted, what perils associated with a “named storm” were covered. Accordingly, the Fifth Circuit held that the instant policy did not cover the flood damage the insured’s property sustained by Hurricane Harvey.