Texas’ risky decision on multiproperty insurance
In response, rates spiked, many insurers stopped writing new homeowners business and at least one major insurer threatened to leave the state entirely. Ultimately, the Texas Department of Insurance adopted a revised set of forms that brought Texas back in line with nationwide liability standards.
Texas may be tempting fate again, albeit on a smaller scale. In RSUI Indemnity v. Lynd Co., the Texas Supreme Court has interpreted standard language in a multiproperty insurance contract in a way that could greatly increase insurer liability for multiproperty policies.
The case involved a dispute over an excess insurance policy that Lynd had taken out on more than 100 properties in 11 different states. Under its terms, Lynd was required to list values for each of the covered properties. Premiums were based on a percentage of the total value of the listed properties and liability was limited the least of (a) the adjusted loss, (b) “115 percent of the individually stated value for each scheduled item of property” or (c) the policy limit of $480 million.
At issue in the case was whether the 115 percent limit applied to each property individually, or whether it applied to the total value of all damaged properties. Applying the limits in the aggregate allowed Lynd to recover a substantially larger amount, because it could use the value of properties that were only slightly damaged to effectively raise the limit for properties where damages were more than 115 percent of the value stated in the policy.
Most other jurisdictions have found that this contractual language imposes separate liability limits for each property. A majority of the Texas Supreme Court, however, concluded that the provision was ambiguous, and so construed the provision in the manner most favorable to the policyholder (which is a longstanding legal practice).
Yet as Chief Justice Nathan Hetch noted in his dissenting opinion, the court’s decision leads to the highly peculiar result that the policy “pays more of the losses for one property if others are damaged at the same time.” The court’s interpretation also creates an incentive for policyholders to strategically undervalue some of their properties (and hence lower their premiums) because they can still recover the full amount based on the value of other properties.
Several amici in the case have argued that imposing this blanket liability on insurers could make multiproperty policies unaffordable in Texas. Given the more limited scope of this market, the ramifications of the decision aren’t going to be as big as with the mold crisis. But it is still odd that the court would choose to go down this road again.