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AIG unit prevails in hurricane damage coverage dispute with oil firm

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An American International Group Inc. unit has prevailed in a dispute with an oil exploration company over how the deductible in its property policy should be calculated.

Lexington Insurance Co., a Boston-based unit of AIG, had issued a policy to Houston-based Saratoga Resources Inc. covering the period from May 18, 2012, through May 18, 2013, that insured several oil and gas properties owned by Saratoga, according to Tuesday's ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Saratoga Resources Inc. v. Lexington Insurance Co.

On Aug. 28, 2012, Hurricane Isaac made landfall in Louisiana and damaged several of Saratoga's insured properties, according to the ruling.

Saratoga, which filed for bankruptcy protection in June 2015, submitted a claim for $3.1 million in damages, but after an adjuster inspected the properties, Lexington paid $2 million on the claim, which reflected Lexington's calculation that the applicable deductible was $912,500.

A provision in the policy states that if there is a named windstorm, the deductible will be “5% of total insurable values.” On the basis of this, Saratoga was required to pay a 5% deductible, which amounted to the $912,000.

However, a provision in the policy stated that if “two or more deductible amounts apply to a single occurrence, the total to be deducted shall not exceed the largest deductible applicable unless otherwise stated in the policy.”

On the basis of this provision, Saratoga contended the deductible should be calculated to be 5% of the value of the highest total insured value, which was $8 million. Five percent of $8 million leaves a deductible of only $400,000, according to court papers in the case.

Both parties filed a motion for summary judgment. The U.S. District Court in Houston ruled in Lexington's favor in May 2015. Saratoga appealed, and a three-judge panel of the 5th Circuit unanimously upheld that ruling.

“Only Lexington has advanced a reasonable interpretation of the insurance policy,” said the ruling. Under applicable Texas law “the ordinary meaning” under the policy should be used, which in this case is “5% of the aggregate sum of the insured value of each damaged property,” said the appeals panel, in upholding the lower court ruling.

In January, the 5th Circuit ruled that Lloyd's of London and other insurers were not obligated to provide $17 million in coverage for a damaged oil rig because there were two incidents, each of which fell under the policies' $10 million deductible.