Court Enforces Plain Language of Insurance Policy

Plaintiff, Castle Oil Corp., operated a fuel oil terminal in the Bronx, receiving and supplying fuel. The terminal was insured by defendant ACE American Insurance Co. for “direct physical loss or damage” during the policy period. The policy included provisions for flood damage, including from storm surges, which carried a $2.5 million annual limit. The policy had a deductible provision specifically for flood damage that was equal to “2% of the total insurable values at risk,” with a minimum of $250,000. During Superstorm Sandy, Castle’s terminal suffered flood damage of $2.2 million. When Castle submitted an insurance claim, ACE declined to pay claiming that applying the 2% deducible against the entire insurable value of the $124,701,000 policy resulted in a deducible amount of $2,494,202, which was more than the loss.

Castle disputed that computation, claiming that the deductible was not be setoff against the value of the entire property and operation, but only against the property that was “at risk” from flood loss. Because the limit for flood loss “at risk” was $2.5 million, the 2% deductible was $250,000. Castle also pointed out that the $124 million amount was for “premium purposes only,” meaning, to determine the policy cost, but not for deductible calculation.

The Court first recited the law applicable to interpreting insurance policies–according to their plain terms and definitions. The Court’s role was to look at the policy as a whole and attempt to enforce the policy as intended, so that all provisions of the policy are defined and implemented. In this case, the court noted that “at risk” was not defined in the policy. If the policy was interpreted as ACE argued, the term “at risk” would be redundant and the provision “premium purposes only” would be irrelevant. Finally, the court pointed out that following ACE’s logic, the $2.5 million limit on flood damage would also be meaningless, as the deductible amount would always be more than the flood loss limit. Given that the approach proposed by ACE left provisions of the policy without any import or meaning, the Court rejected that position and found for Castle.

Two important lessons can be gleaned here: First, words matter and second, insurance companies try hard to avoid paying on policies.

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