Judge Brian E. Sandoval of the U.S. District Court in Nevada awarded a partial summary judgment to a leading national gaming operator. Pinnacle Entertainment, Inc., in an insurance coverage case arising out of Hurricane Katrina.
The case is one of many high-profile insurance coverage suits stemming from Hurricane Katrina. In August 2005, Pinnacle's facility in Biloxi, Mississippi was extensively damaged by Katrina, sustaining property damage and business interruption loss. In its 10-K dated February 29, 2008, Pinnacle disclosed that it is pursuing a loss in excess of $300 million, including interest arising out of the insurers’ delayed indemnity and any bad faith damages.
Two of Pinnacle's insurers, Allianz Global Risks US Insurance Company and RSUI Indemnity Company (together providing more than $100 million of excess coverage), took the position that coverage for all storm surge damage falling within their policy layers was precluded by flood exclusions contained within their policies.
After filing suit in August 2006 the law firm of Irell & Manella LLP representing Pinnacle moved for partial summary judgment on this issue in April 2007, with cross-motions subsequently filed by the insurers. There was a two-hour oral argument on the motion. Irell & Manella partner Marc Maister, who served as Pinnacle's lead counsel, made the following points in his argument:
* That the primary policy specifically covered the peril of a “Weather Catastrophe Occurrence,” including flooding occurring in conjunction with the WCO, and that such coverage was incorporated by the following-form excess policies.
* That the WCO and “Flood” perils were separately defined and separately covered perils in the primary policy, and that by incorporating the term “Flood” from the primary policy to form the scope of their “Flood” exclusions, the excess insurers incorporated the WCO v. Flood dichotomy of the primary policy.
* That the excess insurers had not met their burden of proof to show that the “Flood” exclusion clearly and explicitly precludes coverage for WCO-related “flood.”
* That exclusions are read narrowly, not broadly, and they must be specific.
* That ambiguities in an exclusion are strictly construed against an insurer.
* That the excess insurers had every opportunity and incentive to add their own “Flood” exclusion or specifically exclude WCO or wind-driven water or flood. They did not.
“Weather Catastrophe Occurrence” is defined in the Perils Definition section of the primary policy as:
[a]ll loss or damage occurring during a period of 72 consecutive hours which is caused by or results from a storm or weather disturbance which is named by the National Weather Service or any other recognized meteorological authority. Storm or weather disturbance includes all weather phenomenon associated with or occurring in conjunction with the storm or weather disturbance, including, but not limited to flood, wind, hail, sleet, tornadoes, hurricane or lightning.
“Flood” is also defined in the Perils Definition section of the primary policy as:
1. A general and temporary condition of partial or complete inundation of normally dry land areas from:
(a) the overflow of inland or tidal waters;
(b) the unusual and rapid accumulation or runoff of surface waters from any source; or
(c) mudslide or mud flow caused by accumulation of water on or under the ground; or
(d) tsunami
2. the release of water impounded by a dam;
3. water that backs up or flows from a sewer, drain or sump.
Loss or damage caused by flood shall include all covered loss or damage to covered property resulting directly or indirectly from flood, except loss or damage from resulting Fire or loss or damage otherwise excluded by this policy.
The primary coverage defense asserted by the excess insurers was that WCO was not a separately covered peril under the policies. Rather, they argued, the policies cover wind, and their excess policies exclude “Flood.” As a consequence, they argued that Pinnacle’s loss, which they say included wind and storm surge damage, did not trigger their policies as the total amount of covered wind damages did not equal or exceed their attachment points.
After the oral argument on the motion, Judge Sandoval took the motion and cross-motions under submission. On March 26, he issued his ruling in Pinnacle's favor. The judge applied the following rules of insurance policy interpretation:
* That it is Allianz’s burden to prove the damage was excluded;
* That exclusions, which are read narrowly, not broadly, must be specific; and
* That ambiguities in an exclusion are construed against an insurer.
A copy of his ruling is available.
According to Mr. Maister, the order granting Pinnacle partial summary judgment (and denying the insurers' cross-motions) was based on the language of the policies at issue and eliminates the insurers' primary coverage defense.
Mr. Maister said, "The judge's opinion is extremely well-reasoned, based on the specific policy language in question and applies long-standing rules of insurance policy interpretation. It reaffirms the bedrock principle that insurers must be clear when drafting their exclusions, doing so in a way that puts a reasonable insured on notice of the intent to exclude a specific peril or damage. Pinnacle bought $400 million of coverage that specifically covered Weather Catastrophe Occurrences like Hurricane Katrina, including related flooding. If the defendant excess insurers intended to exclude that WCO-related flooding, they should have done so specifically when the coverage was placed. Judge Sandoval correctly noted that the defendants did not do so in this case, and that they therefore could not meet their burden to show that storm surge is excluded under their policies."
"As a practical matter," Mr. Maister added, "insurers should not sell broad coverage for hurricanes and related weather phenomenon without proactively (and expressly) addressing whether storm surge and other forms of wind-driven flooding will be excluded from that coverage."
The victory on the motion comes on the heels of a settlement with another of Pinnacle's excess insurers, Arch Specialty Insurance Company, who paid Pinnacle $36,750,000 on March 14, 2008, bringing its total insurance recovery thus far to $141,750,000. In addition to the contractual claim under the policies, Pinnacle is pursuing a bad faith claim against Allianz and RSUI.