NY Court Weighs in on Ambiguous Deductible Terms

Many property policies contain “all perils” deductibles and/or deductibles for specified perils. Frequently, these deductibles are written as fixed dollar amounts or percentages of the insured value. Insurers may construe these deductible provisions to avoid coverage, which is what Ace American Insurance Company tried to do after Castle Oil Corp. suffered nearly $2.3 million in Superstorm Sandy flood losses. Fortunately for Castle Oil — and for New York policyholders — a New York court in Castle Oil Corp. v. Ace American Insurance Co. recently rejected Ace’s argument that the flood deductible in its policy should be calculated based on a percentage of the total value of the property instead of the value actually insured against flood loss.

Discussion of the Ruling

Castle Oil, the owner and operator of a New York City fuel oil terminal with a total insurable value of $124.7 million, was insured by Ace at the time of Castle Oil’s flood loss in late October 2012. Ace’s all-risk commercial property policy had been endorsed with flood coverage subject to a $2.5 million sublimit. An additional endorsement provided that the deductible for flood damage in special flood hazard areas would be “2 [percent] of the total insurable values at risk per location subject to a minimum of $250,000.”

Ace contended that the appropriate calculation for the flood deductible was 2 percent of $124.7 million of the total insurable value, which equaled approximately $2.49 million. According to Ace, because this deductible amount exceeded Castle Oil’s $2.28 million claim, Ace did not owe coverage for the loss. Castle Oil, however, argued that a policy endorsement expressly stated that the total insurable values provided are “for premium purposes only,” and contended that the flood deductible applies only to insurable values “at risk” of flood damage. The value of the property actually at risk of flood loss, according to Castle Oil, was the $2.5 million flood sublimit. Because 2 percent of the flood sublimit is less than $250,000, Castle Oil asserted that the proper deductible is the minimum deductible of $250,000.

Westchester County Supreme Court Justice Mary Smith granted Castle Oil’s partial summary judgment motion for a declaratory judgment that the applicable flood deductible is 2 percent of the flood sublimit, subject to the $250,000 minimum.

The court found three reasons to reject Ace’s position.

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