Coverage issues at core of Hurricane Katrina-related litigation
The amount of property damage caused by Hurricane Katrina in Mississippi and Louisiana has been extensively reported, as has the fact that many people in those states did not have flood insurance coverage. As a result, numerous lawsuits, including a number of class actions, have been filed in Mississippi and Louisiana, asserting various legal theories in an attempt to obtain coverage under homeowners insurance policies for losses resulting from Hurricane Katrina.
Despite the early stage of litigation, several opinions have been issued which address: (1) the applicability of flood exclusions in homeowners policies to the losses at issue; (2) the right of insureds to recover wind damage under homeowners policies when excluded water damage also incurred; and (3) the potential liability of insurance agents for failing to recommend and/or obtain the correct coverage.
Applicability of flood exclusions
One of the most significant coverage issues in the Hurricane Katrina litigation concerns arguments by insureds that the flood exclusions under homeowners policies do not apply to damage caused by the storm surge from Hurricane Katrina. Thus far, one District Court has issued an opinion specifically ruling on that issue. In Buente v. Allstate Ins. Co., et al.[1.], the Buentes’ home in Gulfport, Miss., was damaged by “hurricane wind, rain and/or storm surge from Hurricane Katrina.” [2.]
The Allstate homeowners policy covering the home excluded losses caused by “flood, including but not limited to surface water, waves, tidal water or overflow of any body of water, or spray from any of these, whether or not driven by wind.” The Buentes argued that since “storm surge” was not specifically listed as an excluded peril under this, or any other, provision in the Allstate policy, the damage should be covered.
In an opinion issued on April 12, 2006, citing prior Mississippi cases enforcing flood exclusions for damage caused by tidal water associated with hurricanes, the District Court rejected the Buentes’ argument and held that the policy’s exclusion for flood water was valid, enforceable and unambiguously excluded losses caused by “storm surge.”
Wind v. water
In the Buente case, the District Court also addressed, in ruling on a preliminary motion, the issue of whether the Allstate policy provided coverage for wind related damage when there was also water related damage. The Allstate policy contained an exclusion for losses where: “(a) there are two or more causes of loss to the covered property; and (b) the predominant cause(s) of loss is (are) excluded under Losses We Do Not Cover, items 1 through 22 above.”
Allstate argued that the Buentes’ lawsuit should be dismissed because the predominant cause of their losses was the flood waters from Hurricane Katrina, which was excluded under the policy’s flood exclusion.
In an opinion issued on March 24, 2006, the District Court denied Allstate’s motion. The court found that this exclusion relied on by Allstate was ambiguous “in light of the other policy provisions granting coverage for wind and rain damage and in light of the inclusion of a ‘hurricane deductible’ as part of the policy.” Accordingly, the District Court concluded that the policy provided coverage for those losses the Buentes proved were caused by the wind and/or rain entering their home through openings caused by the winds of Hurricane Katrina.
The court specifically held that the wind related damage would be covered even if there was subsequent flood or “storm surge” damage that was excluded from coverage.
Agents’ potential liability
Many of the Katrina related lawsuits also assert claims against insurance agents accusing them of negligence for failing to provide proper advice about obtaining flood insurance coverage. Although there do not appear to have been any decisions ruling in favor of or against these claims as of yet, the issue of whether the homeowners have the legal right to assert these claims has been addressed in several cases where the case was transferred from state court to federal court by the insurance company and the homeowners asked the federal court to remand or send the case back to state court. One basis given by the insurance companies for removing the lawsuits to federal court was that the citizenship of the insurance agent should be disregarded because the agent was “fraudulently joined.” [3.]
To determine whether an insurance agent has been “fraudulently joined,” the courts look to see whether there is any reasonable basis upon which the homeowner could recover against the insurance agent, assuming that all of the facts pleaded by the homeowners are true. The courts in both Mississippi and Louisiana that have addressed these remand motions have ruled that the homeowners could state a claim and potentially recover against their insurance agents.
In King v. Allstate Indemnity Co., the homeowner alleged that when she asked the agent from whom she purchased her homeowners policy whether she needed flood insurance, the agent told her that she did not because any damage likely sustained by her in a hurricane would be covered under the homeowners policy.
The District Court stated that under Mississippi law, an insurance agent who undertakes to obtain insurance has a duty to the customer to exercise reasonable care and that an insurance agent who acts with gross negligence, malice or reckless disregard while adjusting a loss or considering a claim may be individually liable for such acts. The court therefore concluded that under Mississippi law, the homeowner could assert the claim she alleged against her insurance agent.
The issue of the potential liability of an insurance agent under Mississippi law was also addressed in the Buente case. One of the allegations in that case was that an Allstate agent represented to the Buentes that their homeowners policy would cover hurricane damage, and, therefore, they did not need flood insurance coverage.
In denying Allstate’s preliminary motion to dismiss this claim, the District Court stated that under Mississippi law, an agent has no duty to advise customers what coverages are necessary to protect their property, but if the agent made representations concerning coverages in response to a customer’s inquiries, then the agent, and Allstate, as the agent’s principal and/or employer, might potentially be liable for all of the damage to the customer’s property. The District Court therefore concluded that the issue of the agent’s liability would have to be decided in a full trial on the merits.
Two district courts reached similar conclusions under Louisiana law.
In Landry v. State Farm Fire & Casualty Co., the homeowner alleged that prior to Hurricane Katrina, he asked his insurance agent to review his coverage so he would have the best coverage available. However, after Hurricane Katrina, the homeowner was told that he did not have Contents Coverage under his flood policy. The District Court noted that under Louisiana law, an insurance agent has a fiduciary duty to the insured and is liable if the plaintiff proves (1) an agreement or undertaking by the agent to obtain insurance, (2) failure of the agent to use reasonable diligence and (3) actions by the agent warranting an assumption by the plaintiff that he or she was properly insured. The District Court concluded that under Louisiana law, Landry’s allegations stated a claim against his insurance agent.
In Schwartz v. Chubb & Sons Inc., [6.] the court was faced with a slightly different question about the insurance agent’s potential liability. There, the issue was whether the time for filing suit against the insurance agent had passed. Louisiana law provides that claims against an insurance agent must be brought within one year from the date when the agent’s alleged negligence is or should have been discovered, but also may not be filed after three years from the date of the alleged negligence. [7.]
In Schwartz, it was alleged that the insurance agent failed to “properly inform” the plaintiffs of available insurance coverages related to hurricane damage. The insurer argued that the time for filing suit against the agent began running from the date the original policy was purchased.
The court, however, found that there was insufficient evidence to establish the date when the policy was purchased and also noted that the plaintiff had submitted an affidavit stating that the insurance agent had advised in April 2005 that no additional flood coverage was available. Accordingly, the court concluded that the insurer could not sufficiently establish that the time for filing suit against the agent had run and granted the motion to remand.
Comfort and warnings
Although only preliminary, the initial decisions from Hurricane Katrina lawsuits provide some comfort to both insurers and insureds and potential warnings to insurance agents.
The typical flood exclusion contained in homeowners policies has been found applicable to damage caused by “storm surge,” but homeowners may still be able to recover for wind related damage caused by Hurricane Katrina under their homeowners policies.
To the extent insureds have hurricane related damage which is not covered by their insurance policies, insurance agents face potential liability for not recommending obtaining additional coverage or recommending against obtaining such coverage.
Robert Redfearn, Jr. (Redfearnjr@spsr-law.com) is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans, La., and Mississippi.
[1.] Civil Action No.: 1:05CV712, in the United States District Court for the Southern District of Mississippi.
[2.] Complaint, para. 18.
[3.] In general, the cases were removed to federal court on the basis of “diversity” jurisdiction, which requires, in part, that all of the plaintiffs reside in different states from all of the defendants. Typically, the insurance agent resides in the same state as one or more of the plaintiff homeowners. Therefore, complete diversity does not exist if the residence of the insurance agent is taken into account.
[4.] Cause No. 1:05CV675, in the United States District Court for the Southern District of Mississippi.
[5.] Cause No. 06-181, in the United States District Court for the Eastern District of Louisiana.
[6.] Cause No. 05-6885, in the United States District Court for the Eastern District of Louisiana.
[7.] L.R.S. §9:5606(A).
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