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Flood Deductibles and Sublimits

With the start of hurricane season, one issue that receives frequent attention in claims adjustment and subsequent litigation is the flood deductible and/or sublimit under a property insurance policy.

A 2021 decision by the Fifth Circuit Court of Appeals in McDonnel Grp., L.L.C. v. Starr Surplus Lines Ins. Co. serves as a useful reminder of the complicated nature of these issues.  In that case, a hotel owner hired McDonnel, a general contractor, to perform renovations. The general contractor obtained a builder’s risk policy from the defendant, which listed the total value of the renovation work as approximately $68 million and included a flood sublimit of $10 million. In 2017, the project was flooded after a heavy rain storm, resulting in $3,226,164.30 in damages. 

The deductible read as: “5% of the total insured values at risk at the time and place of a loss subject to a $500,000 minimum deductible as respects flood.” The parties, predictably, disputed the proper application of the deductible to the claim.  The carrier argued that the 5% applied to the total value of the entire hotel renovation project, $68 million, in which case the deductible would encompass the entire loss ($3,443,475). The plaintiff argued that the 5% applied to the $10 million flood sublimit, making the deductible $500,000. 

The Fifth Circuit found the deductible provision to be ambiguous because both interpretations offered by the parties were reasonable.  The case was set back to the U.S. District Court for the Eastern District of Louisiana to resolve the ambiguity.  Based on our review of the dockets, as of the date of this posting (July 7, 2023) the issue still has not been resolved.

HKR works hard to stay on top of developments in these complex commercial property concepts and will continue to report on any new developments.

If you would like more information about this issue, please contact any member of HKR’s team.