The Eleventh Circuit recently found that an insured had not paid enough to satisfy its policy’s deductible and would thus be required to pay more before coverage would be available. The court’s holding turned on the meaning of a “tenants and neighbors” provision that extended coverage, but only for claims arising in countries that apply a civil law system. As explained below, this ruling underscores the value of retaining experienced coverage counsel to identify potential gaps and deficiencies in coverage.

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Battery-making can be a dangerous business: To power the batteries, manufacturers often fill them with sulfuric acid. This acid can mist into the air, seeping into walls and eroding surrounding structures.

That’s exactly what happened to Exide Technologies, Inc. Like most, Exide makes batteries with sulfuric acid. To house its battery-making operations, Exide rented commercial space from The Wattles Company in the state of Washington. After learning that sulfuric acid had corroded parts of the leased building, Wattles sued Exide in Washington state court. Wattles claimed, among other things, that Exide breached its tort duty to avoid acts that would damage the property.

Wattles ultimately won, obtaining a final judgment of over $2 million. The judgment had three parts: (1) about $1.4 million for the verdict; (2) $840,000 for Wattles’ attorneys’ fees; and (3) $360,000 in post-judgment interest.

Around this time, Wattles and Exide turned to Exide’s insurer, Ace American Insurance Company (Chubb), for payment. During the lease term, Chubb insured part of Exide’s risks, both foreign and domestic, under an international property insurance program. This policy had three key features that related to this claim: a Georgia choice-of-law provision, a $2 million deductible and a tenants and neighbors coverage provision (T&N provision). The T&N provision extended coverage to “liability which the Insured incurs as a tenant for damage to real or personal property by a peril insured against.” But the T&N provision featured a unique limitation: It applied only to liability incurred in countries “in which a Napoleonic or other civil or commercial code applies.”

Seeking to avoid coverage, Chubb filed a declaratory action in the Northern District of Georgia. The insurer argued that even if the policy covered the $1.5 million judgment, it did not cover the awards for Wattles’ attorneys’ fees and post-judgment interest. And so, according to Chubb, there was no coverage because the total claim had not exceeded the $2 million deductible.

At summary judgment, Wattles argued that the awards for attorneys’ fees and post-judgment interest fell within the T&N provision since Washington has adopted several civil law codes, like the Occupational Safety and Health Act and the International Building Code. Wattles also asserted that the court should credit Exide’s defense costs (totaling $500,000) toward the deductible. These amounts, Wattles claimed, combined with the verdict to exceed the deductible. Chubb argued in response that the T&N provision did not apply since the United States is a common law country, not one “in which a Napoleonic or other civil or commercial code applies.” Various states in the US do, however, apply a civil or Napoleonic code, such as Louisiana and Puerto Rico.

The district court ultimately agreed with Wattles. It reasoned that the T&N provision was ambiguous since one could read it to apply in countries formed on a civil law system, or in common law countries that also use codified regulations. Because the United States uses civil codes along with common law, the court construed the provision to extend to claims arising within the United States.

But on appeal, the Eleventh Circuit reversed. In so doing, the court reasoned that the T&N provision applies to countries that are based on a civil law system, not common law countries that use civil codes. It also held that this reading was unambiguous given the provision’s language; the fact that it falls within an international property policy that grants worldwide coverage; the fact that “Napoleonic” is a term of art that both parties would understand to reference a legal system based on the Napoleonic code; and since, in the context of the worldwide coverage grant, this provision was more aptly read to cover claims arising out of civil law systems like those found in France or Germany. Reasoning then that the United States rests not on a civil law system but instead on a common law system that sometimes uses civil codes, the court held that the T&N provision did not apply. As a result, the claim did not exceed the deductible, and there was no coverage. However, the court recognized that its analysis may have differed had the claim arose in a civil law state, like Louisiana or Puerto Rico. It thus left that issue open for another day.

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This cautionary tale highlights the value of obtaining in-depth coverage analysis from qualified coverage counsel before agreeing to such coverage. Had the insured done so, coverage counsel could have highlighted the risk associated with this unclear Napoleonic-code provision and worked with the insured’s broker to remove or alter the language. At the very least, the insured would have known the risk it was leaving uncovered and considered this gap when shopping for property coverage. The moral: Insureds should invest in a comprehensive coverage review up front to avoid potential coverage gaps, which, as this case shows, can lead to negative rulings and unrealized recovery.