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Fifth Circuit: ‘Double recovery’ bar prohibited recovery under flood and wind policies in excess of property’s fair market value

A lower court’s application of the Texas “one satisfaction” rule was incorrect because federal common law applied in light of the interpretation of the federally-backed flood policy, but the analogous federal common law “double recovery” rule applied to bar owners of a property covered by a Standard Flood Insurance Policy and a separate wind damage policy from recovering losses beyond the value of the insured property, the U.S. Court of Appeals for the Fifth Circuit ruled. Use of the property’s fair market value was appropriate when considering the total loss in light of case precedent and the growing application of the “broad evidence rule,” the appellate court held (Lowery v. Fidelity National Property and Casualty Insurance Co., November 6, 2015, Costa, G.).

Background. A two-unit residential building in Galveston, Texas, was damaged by Hurricane Ike in 2008. The owners of the building, who also resided in one of the units, had been issued a government-backed Standard Flood Insurance Policy (SFIP) by Fidelity National Property and Casualty Insurance Company. A separate policy for wind damage coverage had been issued to the owners by the Texas Windstorm Insurance Association.

The property had been appraised in 2007 for $195,000. The SFIP limited coverage to $205,400 for the building, $50,000 for contents, both subject to a $1,000 deductible. The owners filed a claim with Fidelity, whose adjuster inspected the property and prepared a proof of loss. The owners signed the proof of loss and received $76,968.23 for the damage to the building and $30,367.49 for damage to their contents. The owners had separately recovered $66,765.84 from the wind damage insurer.

Feeling that the amount from Fidelity was inadequate, the owners’ attorney commissioned a new estimate. The losses were determined to be $175,180, but the owners’ attorney prepared a proof of loss for over $250,000, and Fidelity rejected the claim. The owners filed a lawsuit against Fidelity in 2011, a year after they sold their unrepaired house for $58,000. Fidelity prepared a new damage assessment, which came to be $147,340.01.

Following a bench trial, a magistrate judge concluded that the proof of loss for $175,180 was valid because it was supported by documentation and held that the owners were not responsible for the “unauthorized” claim overstatement made by their attorney. However, the magistrate determined that the most recent damage assessment for $147,340.01 was more credible than the one prepared by the owners’ attorney and, under Texas’s “one satisfaction rule,” the owners could not recover more than the assessed market value of the property before it was damaged by Hurricane Ike. Because the owners recovered $66,765.84 from the wind insurers, $76,968.23 from Fidelity, and $58,000 in the sale of the property, they recovered more than the property had been worth and, thus, were not awarded anything additional for damage to the building. The owners filed the present appeal.

“Standard insurance principle”. The Fifth Circuit agreed with both parties that the lower court erred when it applied Texas’s “one satisfaction rule,” holding that federal common law applies to interpret SFIPs. However, the appellate court agreed with Fidelity that a rule limiting recovery from multiple insurers was a “standard insurance principle” that applied, explaining that the label “one satisfaction rule” was not used generally outside of Texas and that the term “double recovery” prohibition was more commonly used. Accordingly, the double recover bar applied to SFIP coverage.

The owners’ argument that the flood and wind policies covered mutually exclusive risks was not persuasive in light of the appellate court’s rejection of a similar argument in a different case.  Consequently, the owners could not recover from all their insurers for damage caused by Hurricane Ike in excess of the total loss, even though the insurance policies covered different risks to the same property, the appellate court held.

Loss calculation. The “broad evidence rule” applied to permit consideration of fair market value when calculating total loss under the double recovery bar, the appellate court ruled. The owners asserted that the actual cash value of the property should have been considered when considering the limit on their recovery under the double recovery bar and, thus, contended that the lower court erred when it used the pre-hurricane fair market value of the property. Although the SFIP entitled the owners to an “actual cash value loss settlement,” and “actual cash value” had been defined as “[t]he cost to replace an insured item of property at the time of loss, less the value of its physical depreciation,” this definition did not control how the total recovery limit should be calculated.

When the double recovery bar applies, fair market value is considered the leading indicator in the governing appellate jurisdiction, especially as the “broad evidence rule” has been increasingly applied, the appellate court remarked. The appellate court explained that the rule “makes sense” because it permits the factfinder to determine which calculation is the most credible in the circumstances of each case and provides flexibility when other calculation methods may be frustrated by market weakness or failure. Accordingly, when evaluating total loss vis-à-vis double recovery, consideration of market value is permitted under the federal common law. Because the only evidence of total loss was the $195,000 fair market value, it was reasonable for the lower court to determine that the owners could not recover in excess of that amount, which they already had received. Therefore, the lower court’s ruling on the issue of the building losses was affirmed.

The case is No. 14-40135.

Attorneys: Martin L. Mayo (Martin L. Mayo & Associates PC) for Brian Lowery and Jeffrey M. Pye. Gerald Joseph Nielsen (Nielsen, Carter & Treas, LLC) for Fidelity National Property and Casualty Insurance Co.

Companies: Fidelity National Property and Casualty Insurance Co.