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A federal appeals court reversed a lower court ruling in favor of American International Group Inc. and Starr Insurance Cos. units Friday, holding that the deductible provision in their coverage is ambiguous.
Metairie, Louisiana-based McDonnel Group LLC, which served as general contractor for New Orleans-based Jung Hotel and Residences’ renovation project, purchased insurance from AIG unit Lexington Insurance Co. and Starr unit Starr Surplus Lines Insurance Co., according to the ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in McDonnel Group, LLC, Jung LLC., v. Starr Surplus Lines Insurance Co.; Lexington Insurance Co.
During the spring and summer of 2017, the project suffered water intrusions, culminating in a heavy rain that caused $3.2 million in damage, the ruling said.
A dispute ensued between McDonnel and Jung and the insurers as to the applicable deductible. McDonnel filed suit in U.S. District Court in New Orleans, which granted the insurers partial summary judgment, holding the policy was unambiguous.
The ruling was overturned by a unanimous three-judge appeals court panel. “The difference in interpretation reduces, in large part, to the interpretation of a key sentence of the flood deductible,” the ruling said.
Essentially, the ruling said, plaintiffs said the 5% deductible applies to the $10 million flood sublimit and is $500,000. They said they were therefore entitled to payment of $2.7 million, which was the flood damages, less $500,000.
The insurers said the deductible applied to the “total insured values at risk,” which is $68.9 million, making the deductible $3.4 million. The $3.2 million claim, in that case, fell below the deductible.
“Both parties’ interpretations are reasonable, so the policy is ambiguous, “ the court said in reversing the lower court and remanding the case for further proceedings.
On remand, it said, the district should determine “whether the presumption in favor of coverage in the case of an ambiguity applies here.” It should also consider extrinsic evidence in interpreting the policy, it said.
Jung attorney James M. Garner, co-managing member of Sher Garner Cahill Richter Klein & Hilbert LLC in New Orleans, said in a statement he was pleased with the ruling and the finding that the policy language was ambiguous. “We look forward to returning to the trial court to try this matter,” he said.
Insurer attorneys did not respond to a request for comment.