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In Saratoga Resources, Inc. v. Lexington Ins. Co., Lexington Insurance Company (Lexington) issued an insurance policy to Saratoga Resources, Inc. (Saratoga) that covered various oil and gas properties. In 2012, when Hurricane Isaac hit Louisiana, many of Saratoga’s properties were damaged. Saratoga submitted a claim for more than $3 million. Lexington assessed the damage and made a payment to Saratoga for approximately $2 million after subtracting a $912,500 deductible. Saratoga disagreed with Lexington’s calculation and argued the deductible was closer to $400,000.

The dispute between the parties was based on their interpretations of the following policy language related to the deductible:

Deductible:        Each claim for loss or damage under this policy shall be subject to a per occurrence retention amount of $125,000 unless a specific deductible shown below applies:

Earth Movement/Flood/Named Windstorm:

5% of Total Insurable Values at the time and place of the loss, subject to a minimum of $250,000 any one occurrence.

If two or more deductible amounts apply to a single occurrence, the total to be deducted shall not exceed the largest deductible applicable unless otherwise stated in the policy.

Both parties agreed that Hurricane Isaac qualified as a “Named Windstorm.” The parties also agreed on the insured values of the properties. However, the parties did not agree on how to calculate the deductible when more than one property is damaged. Lexington argued that the language above set the deductible at 5% of the aggregate sum of the insured value of each property. Thus, there was only one deductible amount and the “two deductible amounts” language was not a factor.

On the other hand, Saratoga argued that language above required the calculation of deductibles that represented 5% of the insured value of each damaged property. In particular, Saratoga argued, “…the ‘Named Windstorm’ paragraph thus requires the calculation of “mini-deductibles” that represent 5% of the insured value of each damaged property. Once the $250,000 minimum is reached, so the argument goes, the ‘two or more deductible amounts’ paragraph applies and the total deductible may not exceed the highest ‘mini-deductible,’ which in this case is $400,000.” That is, once the $250,000 amount was reached from each separate calculation, the “two or more deductible amounts”  language applied and the total deductible could not exceed the highest mini-deductible $400,000.

The 5th U.S. Circuit Court of Appeals ultimately agreed with Lexington’s interpretation of the policy. The court reasoned that the “ordinary meaning” of “5% of Total Insurable Values” is 5% of the “Total” of the “Insurable Values” of the damaged properties, or “5% of the aggregate sum of the insured value of each damaged property.”   

In addition to analyzing this particular policy language, the 5th Circuit’s decision serves as a reminder that, even when the policy language is technical, courts are generally reluctant to depart from the “ordinary meaning” of policy language. That is, the 5th Circuit rejected Saratoga’s interpretation of this policy language as being unreasonable because Saratoga was “unable to establish that a ‘technical or different’ meaning is warranted.”  In the end, the 5th Circuit did not interpret the policy language to support Saratoga’s “mini-deductible” theory.