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Plain Language of the Insurance Policy Trumps Follow Form Rules

“An insurance policy is a contract between the parties and should be construed using the general rules of interpretation of contracts set forth in Civil Code.” As such, the courts generally try to confine their analysis of an insurance agreement to the language within the contract. They try to determine the common intent of the parties when they entered the contract, and do not want to make the contract any more inclusive than it was intended to be. That is exactly what happened with a New Orleans School Board sued under an insurance contract regarding flood insurance.

The School Board argued that two of their insurance carriers had flood coverage because they were “follow form” policies. That is, they “followed” the form of another insurance carrier, the primary insurance company, which the school also used. Follow form policies are designed to be very similar to the primary insurance company, but cover large loss amounts that the primary insurance company may not cover. For example, if the first insurance company covers only $100 of loss, then the secondary, or excess, insurance company may cover the an additional $50 of the same type of loss. Generally, they cover the same things, but the amounts may be larger or specifically state that they will cover above a certain amount that the primary insurance company covers.

It is not uncommon for large structures to have several insurance companies. The School Board in this case actually had five insurance policies that built upon one another and covered various hazards. The school had already settled their complaints with their other three insurance companies. The major concern in this case, however, was flood damage relating to Hurricane Katrina. Even in mid-2012, individuals and insurance companies were still dealing with the complications that Katrina created.

In this case, the policy that the excess insurance companies followed had some flood coverage, specifically for electronic media, so the school argued that these other carriers also offered flood coverage. In addition, the policy also had a coverage for “fungus, wet rot, dry rot, and bacteria” that may imply partial coverage for flood insurance.

However, the two other insurance carriers’ polices specifically stated that they did not offer any flood coverage. Therefore, although some of the language in the contract may have appeared to offer some coverage, the contract negated that appearance by specifically stating that no flood insurance was provided. An excess carrier is allowed to include extra exclusions that do not completely follow from the primary insurer.

The court concluded that where the insurance company specifically stated that it did not cover flood, the court would not create that inclusion: “We decline to create flood coverage out of an exclusion to an exception.” The court notes that although the “fungus” provision may look like it covers flood slightly, it also specifically states that the fungus, wet rot, dry rot, and bacteria can only be a result of hazards that are covered in the insurance policy, namely, not flood.

The plain language of the contract won in this case, which gave the school less coverage than they may have anticipated. It is important to read through your insurance contracts so that you are aware what they do and do not cover.

If you have any legal questions related to hazard insurance, contact The Berniard Law Firm toll free at 1-866-574-8005.