Hurricanes Katrina and Rita: Exposing Settled (?) Insurance Coverage Issues

After any natural disaster, people who suffered property damage eventually look for sources of money to repair their damage and/or replace their loss with insurance being the first source for those with policies. In this respect, the reaction to the damage inflicted by Hurricanes Katrina and Rita on the Texas, Louisiana, Mississippi and Alabama Gulf Coast area, is no different, except that it is on a much greater scale than typical.

Unfortunately, it is only after damage occurs that most people actually read their insurance policies and begin to understand that they may not have any coverage for their damage or loss and/or that their coverage is more limited than they expected.

While virtually all of the property damage and loss resulting from Hurricanes Katrina and Rita was caused by wind, water or some combination of the two, the more serious and expensive damage was caused by water intrusion, particularly in Louisiana and Mississippi. However, it has been estimated that more than half of all of the people affected by these hurricanes, at least in those two states, had no flood insurance. Newspaper reports suggest that many people did not buy flood insurance because it was not required by their home mortgage lender and/or they were told their home was not located in a flood plain. Even for those who did buy flood insurance, it is anticipated that a significant number will be underinsured for their losses, either because they purchased coverage of less than $250,000-the maximum amount of coverage available under the federal flood insurance program or because $250,000 of flood coverage will not be enough to repair or rebuild their homes to their prior condition.

Under these circumstances, people likely will scrutinize their homeowners all risk policies, which typically in this area provide protection against hurricane damage, for coverage of their water related damage and that litigation will arise as people seek additional sources of money to repair or replace their uninsured or underinsured property. Law-suits have already been filed in Louisiana and Mississippi, including an action filed by the Mississippi Attorney General, seeking coverage under homeowners insurance policies for property damages and losses resulting from Hurricanes Katrina and Rita.

Not surprisingly, numerous allegations and assertions have been made, which raise a host of insurance coverage issues. There are two principal arguments being made in support of coverage under homeowners policies for all hurricane water related damage: (1) the exclusions in homeowners insurance policies for damage caused by flood waters or wave action are ambiguous and/or deceptive; and (2) the flooding in the greater New Orleans area was caused by negligence, and therefore should be covered under homeowners policies.

Typical coverage

Typically, homeowners policies cover property damage caused by windstorms, such as hurricanes, but exclude damage caused by flood waters or wave action, and usually specify that such damage is excluded whether or not the water or wave action is wind driven-generally referred to as the “flood exclusion.” (The flood exclusion typically excludes damage caused by “flood, surface water, waves, tidal water, overflow of a body of water or spray from any of these, whether or not driven by wind.”)

It is generally accepted in the insurance industry that homeowners policies cover damage caused by water that enters the property by or as a result of the force of wind during a hurricane, whether blown in through existing openings in a structure, or by creating openings through which the water then enters, such as blowing off a roof. However, damage caused by flood waters, even during or in conjunction with a hurricane, is generally understood to be excluded by homeowners policies and covered instead by separate flood insurance.

Exclusions ambiguous or deceptive

The basic premise underlying the argument that standard flood exclusions in homeowners policies are ambiguous or deceptive to insureds is that hurricanes and floods are commonly understood to be distinct and separate types of natural disasters. Hurricanes are windstorms, but one natural and expected consequence of a hurricane is that the force of its winds will invariably cause damage by pushing water onto the land, referred to as “storm surge.” Since homeowners policies are represented to insureds as providing coverage for property damage caused by hurricanes, which most insureds understand as including storm surge, it is misleading, deceptive or, at a minimum, ambiguous for the insurers issuing these policies to exclude coverage for hurricane damages caused by storm surge. A related argument is that the flood exclusion in homeowners policies will defeat the insured’s reasonable expectations if interpreted to exclude damage caused by storm surge during a hurricane.

The Texas Supreme Court has most clearly addressed this issue and found that flood exclusions in homeowners policies are not ambiguous simply because the policy provides coverage for hurricane damage in its insuring provision, and also contains an exclusion for damage from flood waters or wave action driven by wind action from a hurricane. Hardware Dealers Mutual Ins. Co. v. Berglund, 393 S.W. 2d 309 (Tex. 1965).

Louisiana and Mississippi courts appear to take the same position, although they have not expressly stated this position in connection with storm surges occurring during a hurricane. See Cotton Brothers Cypress Co. v. Home Ins. Co. of New York, 84 So. 792 (La. 1920); Lundy v. Lititz Mutual Ins. Co., 276 So. 2d 696 (Miss. 1973); Camden Fire Ins. Association v. New Buena Vista Hotel Co., 24 So. 2d 848 (Miss. 1946); Aujen Motor Hotel Corp. v. General Accident Fire & Life Assurance Corp., 379 F. 2d 265 (5th Cir. 1967) (applying Mississippi law).

All three states generally apply an insured’s reasonable expectations of coverage only when construing an ambiguous provision. See generally Forbau v. Aetna Life Ins. Co., 876 S.W. 2d 132 (Tex. 1994); Leblanc v. Babin, 786 So. 2d 850 (La. Civ. App. 5th Cir. 2001); American States Ins. Co. v. Nethery, 79 F. 3d 473 (5 Cir. 1996) (applying Mississippi law).

Thus, the case law would not appear to support the argument that flood exclusions are ambiguous, at least on this basis. How-ever, specific policy language and individual circumstances could cause a court to find ambiguity in some flood exclusions.

Flooding caused by alleged negligence

As has been widely reported, the extensive and widespread flooding in New Orleans in the aftermath of Hurricane Katrina was caused by the failure and/or breech of several levees protecting the city from storm surge. There have been allegations that the levee breeches were due to the negligent design and/or construction. In neighboring Jefferson Parish, water reportedly overflowed from canals located on the east bank of the parish or otherwise accumulated apparently because the pumps used to remove the water could not be turned on for several hours after the hurricane had passed since the pump operators had been evacuated to a location outside of the parish. A lawsuit has been filed alleging the parish was negligent in evacuating the pump operators so far from the pumping stations and that a significant portion of the flooding on the east bank would not have occurred had the pumps been turned on sooner.

There are at least two related bases for arguing that flood exclusions in homeowners policies are inapplicable to damage arising out of flooding caused by negligence, if such negligence is proven. The first is that flood exclusions apply only to naturally occurring floods and not to artificial or man made flooding. The few courts that have addressed this issue generally reject this distinction unless the policy itself make such a distinction. Kane v. Royal Ins. Co., 768 P. 2d 678 (Colo. 1989); E.B. Metal & Rubber Industries Inc. v. Federal Ins. Co., 444 N.Y.S. 2d 321 (N.Y. 1981).

The second basis is that if the ultimate cause of the flooding was the result of a covered peril, such as negligence, then the insured is entitled to recover all resulting damages. The Louisiana Supreme Court has held that an insured can recover under a windstorm policy where wind is the proximate or efficient cause of damages, “notwithstanding other factors contributing thereto.” Roach-Strayhan-Holland v. Continental Ins. Co., 112 So. 2d 680 (La. 1959).

However, while Louisiana courts have appeared willing to allow recovery for those damages for which wind was the sole or “but for” cause of the damage, they have generally not allowed recovery for damage caused by flooding, even though the flooding would not have occurred in the absence of the wind. See Urrate v. Argonaut Great Central Ins. Co., 881 So. 2d 787 (La. App. 5 Cir. 2004), writ denied, 891 So. 2d 686 (La. 2005).

Due to the magnitude of the damage caused by these hurricanes, particularly in Louisiana and Mississippi, and because each claim may involve different policy language and different factual circumstances, it is uncertain how these issues ultimately will be decided. The only thing certain is that disputes and lawsuits over who must pay for hurricane-related damage will continue for the foreseeable future.