This is an interesting insurance coverage case under Texas law after Hurricane Harvey and involving a marina. For that reason, we bring it to your attention.
In the case of Playa Vista Conroe v Insurance Company of the West decided by the Fifth Circuit Court on March 5, they affirmed the Texas district court decision in an insurance claim for damage to the insured’s marina as a result of Hurricane Harvey. The insurance company contended that the damage was the result of flooding, which was excluded from coverage. The court held that the policy placed the burden of proof on the insurance company to demonstrate which of the various provisions under the flooding category were applicable. They found the insurer failed to carry that burden.
Playa Vista Conroe is a condominium association located outside of Houston, Texas. Its property sits on the north shore of Lake Conroe, a man-made lake on the San Jacinto River. Prior to Hurricane Harvey, that property included a dock with 22 boat slips. In May 2017, Playa Vista insured the dock and boat slips by purchasing insurance from Insurance Company of the West (“ICW”).
In August 2017, Hurricane Harvey hit the State of Texas. The storm caused unprecedented rainfall and flooding. In order to prevent the Lake Conroe Dam from overflowing and failing, the San Jacinto River Authority released from the dam 79,141 cubic feet of water per second – nearly the flow rate of Niagara Falls. Playa Vista’s boat slips were completely destroyed. Those 22 destroyed boat slips are the only property at issue here.
Playa Vista sought compensation for them based on its Policy. It filed a notice of loss with its insurer, ICW, describing the loss as “[d]estruction of various components of the condominium property from severe weather, including complete destruction of [the] boat dock, damage to condominium buildings, damage to garages, bulkhead damage, fencing damage, landscaping damage, pool damage, awning damage, and other miscellaneous damage.”
ICW initially sent a reservation-of-rights letter, before denying coverage. ICW stated that the damage “appear[ed] to be the result of Hurricane/Tropical Storm Harvey,” and that Playa Vista’s “policy d[id] not cover flooding caused by a hurricane or tropical storm.”
The burden then shifted to ICW to prove that an exclusion applied. ICW pointed to three potential exclusions and insisted that the language of the exclusions was sufficient standing alone to warrant judgment as a matter of law in its favor. They were wrong.
First, the policy had a “difference in conditions form” (“DICF”) document, which was 23 pages long and provided the framework for the parties’ insurance agreement. The DICF generally excluded losses arising from a “flood” and specifically excluded “damage resulting from waterborne material involved in the flood.” But, that same exclusion said: “if flood coverage is endorsed to and made part of this policy, we will way [sic] pay for loss subject to the limited coverage provided by that endorsement.”
Playa Vista did in fact purchase separate flood coverage – the “FE” – so the flood provisions in the DICF were found to be irrelevant.
Second, the FE provided: “We will not pay for loss or damage caused by ‘flood’, arising from . . . [a h]urricane or tropical storm.” The FE further defines a “flood” as “a general and temporary condition of partial or complete inundation of 2 or more acres of normally dry land areas or of 2 or more distinct parcels of land (at least one of which is your property) with water.” It is undisputed that the FE’s definition of “flood” did not apply to Playa Vista’s boat slips; they obviously existed on water, not two or more acres of normally dry land.
Because the FE only applied to normally dry land, it too was found by the Court to be irrelevant.
Third, the Policy also expressly excluded “flood” damage to boat slips and docks. This is the “BSE”. But, the BSE suffered from the same problem as the second exclusion – it only applied to a “flood.” It was unclear why ICW drafted its BSE to exclude “flood” damage to property that normally appeared on water rather than dry land. But, it was ICW’s Policy to draft, so ICW was found to have assumed the perils of its chosen language. (“Ambiguous insurance contracts will be interpreted against the insurer. The policy of strict construction against the insurer is especially strong when the court is dealing with exceptions and words of limitation. [W]e must presume that the objective of the insurance contract is to insure, and we should not construe the policy to defeat that objective unless the language requires it.”)
Finally, ICW made two efforts to undo its litigation mistakes. Neither was found by the court to have merit.
ICW first argued that it creatively drafted its insurance contracts to avoid any burden to prove anything. However, the Court pointed out Texas law established a burden-shifting framework under which the insured must establish coverage, but then the insurer must prove an applicable exception. ICW said it anticipated this problem and drafted the DICF coverage provision to include an exclusionary clause with the hope that its customers would get stuck with the burden of proving both coverage and the absence of an exclusion. The Court stated: “We doubt that insurers can avoid Texas law so easily. It would be odd that insurers carry the burden to establish exclusions only when the contract separates them from the coverage provisions and not when the coverage and exclusion provisions appear in the same contractual section. It would be particularly odd for that result to obtain when the insurer is the one who writes the contract. And it would be odder still for that result to obtain when ICW can point to no state-law authority for it.”
Second, ICW said it snatched victory from the jaws of defeat by negotiating the Stipulation after losing at summary judgment. After the district court ruled in Playa Vista’s favor at summary judgment, the only issue that remained for the district court was Playa Vista’s request for damages and fees. The Fifth Circuit stated that, “If ICW wanted to rely on the governmental-body exclusion, it was obligated to raise it (at the latest) at summary judgment.” Since it did not, the appeals court affirmed in whole the lower court decision.
Click here to read the decision in its entirety.