MaClaff, Inc. (MaClaff) represented McDonald’s Corporation (McDonald’s) fast food franchise owners/operators in the Lafayette, Louisiana area. They sustained losses to signs, food spoilage, and lost revenue at their respective locations when Hurricane Lili struck southern Louisiana on October 3, 2002. At the time of the loss, these franchises had an executive summary of an Arch Insurance Company (Arch) policy that provided property and casualty insurance. The franchisees’ insurance that the agent arranged with Arch closely mirrored the coverage that Zurich American Insurance Company (Zurich) had written that met McDonald’s franchise insurance requirements. The coverage was effective October 1, 2002.

Each franchisee received a quotation for its own operation accompanied by a one-page Executive Summary of the coverages provided, limits, and deductibles. The deductibles were as follows:

• $1,000 on Signs
• $1,000 on Food Spoilage
• $1,000 on Business Interruption
• 2% Total Insured Value for Named Storm (named storm wind deductible)

The following statement was at at the bottom of the Executive Summary: “The coverages shown are only intended to summarize the basic policy coverages and optional coverages. All coverage is subject to declarations, terms, conditions, and exclusions of the actual policy.”

All of the franchisees accepted the provisions of the Executive Summary without reviewing the completed policy. They relied on the information in the Executive Summary and the oral information the agent provided with respect to the policy’s terms, especially the details he gave about the named storm wind deductible and the meaning of Total Insured Value.

The franchisees coverage effective October 1, 2002 was confirmed on October 14, 2002 when Arch delivered its Confirmation of Binding (binder) to the agent. Among other things, the binder listed the policy’s coverage and deductibles, including disclosure of a $25,000 minimum deductible for named storm wind claims as follows: “Deductible(s): 2% of the total insurable values at risk at place and time of loss, subject to $25,000 minimum per occurrence as respects the peril of “Named Storm.”

The Executive Summary did not expressly disclose the $25,000 minimum. The dispute that led to this litigation took place after the franchisees filed claims that resulted from Hurricane Lili. They claimed this was the first time they were aware of the minimum Named Storm wind deductible. Arch contended that the deductible was applied according to the language on endorsement #4 of the policy it issued in February 2003.

The franchisees filed suit against Arch and the insurance agent, claiming negligent misrepresentation on the binder. They also claimed that the percentage should be applied to only the value of their individual interests in the properties, excluding any value that McDonald’s held in the properties. They claimed that doing otherwise would virtually eliminate their property coverage and would be against public policy. Their final argument was that Arch arbitrarily and capriciously failed to pay their claims after it received proof of loss. They stated that this should trigger penalties and attorneys’ fees under laws that penalize insurance companies for untimely claims payments.

The trial court rendered a partial summary judgment in Arch’s favor. It stated that there was no genuine issue as to the material fact that the franchisees’ losses arose out of Hurricane Lili were subject to a deductible that applied to the Total Insured Value. The franchisees appealed. The sole issue on appeal was that the trial court erred in finding that the wind deductible applied because neither it nor the Total Insured Value was explained to them.

The appellate court noted that the franchisees’ appeal was based on the Executive Summary’s ambiguity because it did not define Total Insured Value and the ambiguity should have been construed in their favor. The court pointed out that the fact that the Executive Summary should not serve as the insurance contract had already been established. It stated that the insurance contract should be examined for the interpretation of the Named Storm wind deductible because endorsement #4 in the policy clearly defined it. It also noted that the agent deposed under oath that he orally explained the policy’s terms, especially the details about the Named Storm wind deductible and the meaning of Total Insured Value.

The appellate court affirmed the trial court’s partial summary judgment in Arch’s favor.

Court of Appeal of Louisiana, Third Circuit. MaClaff, Inc., et al. v. Arch Ins. Co., et al. No. 07-1182. Feb 27, 2008. Rehearing Denied
April 23, 2008. 970 So.2d 482, 2007-1182 (La.App. 3 Cir. 2/27/08)