After the Flood: Texas Appeals Court Limits a Sublimit's Reach

Calculating the policy limits of a first party policy can be a challenging task.  Property policies contain various different coverage grants, each of which can have its own limits and attendant sub-limits, which may or may not cross-reference each other.  In The Hanover Casualty Company v. Seven Acres Jewish Care Services, Inc., No. 14-20-00736-CV (Tex. App. Aug. 25, 2022), a Texas appeals court addressed the relationship between a flood endorsement and the business interruption coverage.  The court rejected the insurance company’s attempt to restrict coverage, and held for the policyholder.

The policyholder in Seven Acres, a not-for-profit licensed nursing facility and licensed assisted-living facility in Houston, Texas, suffered extensive flood damage due to Hurricane Harvey.  The policyholder had to suspend operations for several months until its facility was repaired and relicensed with the State. Its insurance policy included both building and contents coverage and business income coverage.  Id. at *3.  The policy also contained a flood endorsement in the amount of $4,500,000.  The policyholder’s combined property damage and business income loss exceeded $4,500,000.  However, the insurance company refused to pay anything above that amount.  It argued that the flood endorsement applied to and subsumed all other policy coverages. 

The policyholder filed a partial summary judgment motion seeking judgment as a matter of law that the policy’s flood limit did not control the amount of coverage available for its business income losses.  The policyholder argued that the business income coverage had separate premiums and limits from the property coverage.  Given that the flood endorsement added flood as a coverage cause of loss under the policy, the policyholder argued that the flood endorsement and its limit applied only to “direct physical loss.”  Id. at *7.

The court agreed with the policyholder and refused to read into the flood endorsement a broader exclusion than intended. The court found that the flood endorsement did not subject the business income or extra expenses claims resulting from the aftermath of a flood event to the flood limit.  The court explained that the business-income form was part of and related to the other parts of the policy, but the purpose of purchasing business-income coverage was for a policyholder to protect itself against losses when it had to temporarily suspend its business.  Therefore, a claim for business-income was intended is to coexist with a claim for damage, or physical loss, to a building or other covered property. And if the insurance company intended to restrict the business-income claim resulting from a flood event, it would have included language in the flood endorsement to that effect as is commonly done in other endorsements. Id. at 10.  Therefore, the court found that the flood endorsement did not control the amount of coverage available for the policyholder’s claimed business-income losses resulting from Hurricane Harvey.

Sublimits can seriously impede coverage. But insurance companies often try to take them beyond their…limits. Don’t let them.