As another hurricane season is upon us, we can expect to see damage and losses in the billions associated with the heavy winds and flooding caused by these catastrophic weather events. Indeed, each year these losses increase. For example, last year’s Hurricane Harvey that devastated Houston, Texas had losses which were estimated to exceed $180 billion—one of the costliest disasters in United States history—second only to Hurricane Katrina in 2005. For the businesses and individuals fortunate enough to have property insurance to cover their losses, these insureds should be aware of the different deductibles in their insurance policies and that the burden to establish that anything other than the lowest deductible applies rests on the insurer.
Typically, property insurance policies cover losses to real property (e.g., land and the buildings on it) caused by “all perils” or “all risks.” Some of these policies provide coverage for all causes of loss that are not otherwise excluded. Other policies insure “named perils,” which, as the name suggests, include only those perils expressly stated.
All perils and all risks insurance policies provide broad coverage such that an insured need only establish that it suffered a loss and then the burden shifts to the insurer to establish that the loss is not covered or is limited. For example, in SMI Realty Mgmt. Corp. v. Underwriters at Lloyd’s, London, 179 S.W.3d 619, 627 n.3 (Tex. App.—Houston [1st Dist.] 2005, pet. denied) the court explained “As a general rule, an all-risks policy creates a special type of coverage in which the insurer undertakes the risk for all losses of a fortuitous nature that, in the absence of the insured's fraud or other intentional misconduct, is not expressly excluded in the agreement.” Similarly, the California Court of Appeal explained:
“[I]n an action upon an all-risks policy such as the one before us (unlike a specific peril policy), the insured does not have to prove that the peril proximately causing his loss was covered by the policy. This is because the policy covers all risks save for those risks specifically excluded by the policy. The insurer, though, since it is denying liability upon the policy, must prove the policy’s noncoverage of the insured’s loss.”
Strubble v. United Servs. Auto. Ass’n, 35 Cal. App. 3d 498, 504 (1973).  See also Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33, 41 (2d. Cir. 2006) (applying New York law) (under an all-risk policy, losses caused by a fortuitous peril not specifically excluded under the policy will be covered).
Although all risk and all perils based policies provide broad coverage, an insured could face major limitations to its coverage depending on the applicable deductible. A deductible represents a pre-determined amount or formula that an insured must first pay before an insurance company must contribute toward a loss. For example, a policy may provide for a flat deductible of $100,000 for “all perils” but may have a different deductible such as “5% per unit of insurance involved in loss or damage subject to a minimum of $1,000,000 any one occurrence with respect to Named Storms . . . .” By further example, if the insured’s building that sustained damage was valued at $60,000,000, under the Named Storms deductible, the deductible would be $3,000,000. Thus, the difference between the “all perils” and the Named Storms deductible is substantial and may be the difference between an insured recovering for its loss and bearing the entire loss out of pocket.
However, because the higher deductible acts as a limiting provision, before it can apply, an insurer must establish that it does. See, e.g., Tex. Ins. Code § 554.002 (“In a suit to recover under an insurance . . . contract, the insurer . . . has the burden of proof as to any avoidance or affirmative defense that the Texas Rules of Civil Procedure require to be affirmatively pleaded. Language of exclusion in the contract . . . constitutes an avoidance or an affirmative defense.”); Beaumont-Gribin-Von Dyl Mgmt. Co. v. California Union Ins. Co., 63 Cal. App. 3d 617, 623 (1976) (“[w]hile technically a deductibility clause may not be an exception to insurance coverage or an exclusion therefrom, inasmuch as it too functions as a limitation on the liability of the carrier, it must be treated the same as other such limitations”), disapproved on other grounds, B.H.D., Inc. v. Nippon Ins. Co., 46 Cal. App. 4th 1137 (1996); Great American Ins. Co. v. Gaspard, 608 So.2d 981 (La. 1992) (insurers that set out exclusions as special defenses to coverage claims have the burden of proving their applicability). Often these burdens are difficult for insurers to meet.
For instance, after Superstorm Sandy hit the eastern seaboard in October 2012, an insured sought coverage under its all perils property policy. The insurer asserted that the policy’s much larger Named Storms deductible applied even though the weather system that hit New York City did not fall within the definition of Named Storm. The insured prevailed at trial and the policy’s lower deductible applied because the insurer could not establish that the weather system fit within the Named Storms definition or that the storm surge that flooded the insured’s parking garage was caused by Sandy while it was still a hurricane—that is before it was reclassified to be a post-tropical cyclone. See ARE-East River Science Park, LLC v. Lexington Ins. Co., 2014 WL 12587051 (Mar. 27, 2014 C.D. Cal.). Surprisingly, few insureds challenged the application of Named Storms deductibles after Superstorm Sandy leaving many insureds to shoulder substantial portions of their losses.
In addition to challenging the application of deductibles, insureds also should closely scrutinize their insurers’ attempts to apply exclusions. As noted above, the insurer also bears the burden of proving that an exclusion applies. By holding insurers to their burdens, insureds may be able to maximize their property insurance recovery for Hurricane Harvey and other losses.