Katrina lawsuits: Are the winds of fortune changing for insurers?

In the immediate aftermath of Hurricane Katrina when it became apparent that property losses would total billions of dollars, the insurance industry was understandably concerned that courts in Mississippi and Louisiana might feel pressure to judicially eviscerate the flood exclusions in homeowners’ insurance policies and thereby significantly expand the scope of their coverage. The early rulings from cases pending in federal court in Mississippi, including the first Katrina claim to go to trial, favored insurers by upholding the validity and applicability of flood exclusions. However, these initial decisions have been followed by two recent Court rulings, one in Mississippi and another in Louisiana, which threaten to undermine these early victories.

Mississippi — wind v. water, slabs
Leonard v. Nationwide Mutual Ins. Co., 468 F. Supp. 2d 684 (S.D. Miss. 2006), was the first case to go to trial involving a claim under a homeowner’s insurance policy for damage sustained during Hurricane Katrina. The Leonards submitted a claim to Nationwide for damages totaling $130,253.49 caused by Hurricane Katrina to their Mississippi Gulf Coast home, the structure of which remained after the storm. Nationwide denied their claim on the basis that the damage was caused by the storm surge and fell within the policy’s flood exclusion. The court ruled that the flood exclusion in the Nationwide policy was valid and enforceable, but that the Leonards could recover for those losses which they proved were caused by wind, and Nationwide was not responsible for any losses it proved were caused by water. According to the court, the Leonards had proved that only $1,228.16 of damages was caused by wind and covered by the Nationwide homeowners policy.

Since the structure of the Leonard’s home remained after Hurricane Katrina, both sides have physical evidence available to examine to try to determine the cause of the damage. However, such physical evidence is not available in “slab” cases, i.e., nothing other than the foundation slab of the home remained after the hurricane. Thus, Leonard did not address how the allocation of the burden of proof might apply where there was no direct physical evidence of the cause of damage upon which either side could rely. However, this issue was squarely addressed in a ruling issued on Jan. 11, 2007, in Broussard v. State Farm Fire & Casualty Co. (1.), which was issued by the same judge who decided the Leonard case.

Broussard is a slab case. The Broussards submitted a claim to State Farm of $120,698 for the value of their home which was completely destroyed and washed away by Hurricane Katrina and $90,524 for their contents. State Farm denied the entirety of the Broussards’ claim on the basis that all of the damage to their home and contents was caused by the storm surge and therefore fell within the policy’s flood exclusion.

At trial, the parties stipulated that the Broussards sustained “an accidental direct physical loss of their dwelling as a result of Hurricane Katrina.” The court found that this stipulation established a prima facie loss under the policy, and, therefore, the entirety of the loss was covered, except for those specific losses which State Farm proved were caused by water. State Farm attempted to prove that 100 percent of the Broussards’ damages were caused by water, but State Farm’s own expert conceded that there was some damage done to roof of the home by the wind and admitted that he could not determine what amount of the damage was caused by the wind before the storm surge destroyed the entire home. Based on these admissions, the court entered judgment that, as a matter of law, State Farm had not and could not meet its burden of proving which portion of the losses were caused by water and therefore excluded from coverage.

The court went further and held that based on its expert’s admissions, State Farm should have unconditionally tendered the full amount of the Broussards’ claim. By failing to do so, the court ruled that State Farm acted unreasonably, and, in effect, shifted the burden to the Broussards to prove which losses were caused by wind. The court ordered State Farm to pay the entirety of the Broussards’ damage claim and submitted the issue of punitive damages to a jury. On Jan. 11, 2007, the jury awarded punitive damages of $2.5 million to the Broussards, which was subsequently reduced to $1 million.

While it is unknown how many slab claims exist, it is safe to assume that the value of such claims is significant, given the power and distance of the storm surge associated with Hurricane Katrina. With no physical structure to examine, insurers will have to establish, in effect, that the homes were able to withstand damage from the hurricane force winds to which they were exposed prior to the arrival of the storm surge. Given the incomplete nature of the data available, this burden of proof, as apparently articulated by the Broussard court, will be difficult, if not virtually impossible, to meet. Thus, Broussard raises the possibility that even if a relatively small percentage of the total damage was caused by wind, the insurer will have to pay the entire loss unless it can prove with some degree of specificity the extent of the damage caused by water.

Louisiana damage: caused by negligence?
The validity and applicability of flood exclusions for covered property in the Metropolitan New Orleans area presents a unique issue not present in Mississippi.

Much of the flooding in New Orleans was caused not by the storm surge per se, but by the failure and/or breach of the levees designed to protect against the storm surge. Numerous lawsuits allege that the breaches were due to negligent design and/or construction of the levees. In neighboring Jefferson Parish, the flooding was not caused by levee breaches, but, instead, the pumps designed to remove water as it accumulated were not be turned on for several hours after the hurricane had passed because the pump operators had been evacuated, and, as a result, the canals overflowed. Lawsuits have been filed alleging that Jefferson Parish was negligent in evacuating its pump operators too far from the pumping stations.

These allegations raise the question of whether flood exclusions in homeowners’ policies apply to flooding caused by negligence. This issue was recently addressed in a lengthy opinion issued on November 27, 2006 by a federal court in Louisiana in the In re: Katrina Canal Breaches Consolidated Litigation. (2.) The court defined the crucial question as whether “there are two interpretations of the term ‘flood’ — one which encompasses both a ‘flood’ which occurs solely because of natural causes and a ‘flood’ which occurs because of the negligent or intentional act of man and one which limits itself only to a flood which occurs solely because of natural causes.”

After undertaking a linguistic and legal review of the word, the court found that the term “flood” as used in policy exclusions is subject to two different reasonable interpretations: one which is caused only by natural events and one which is caused by either natural events or by a negligent or intentional act. It concluded that the term “flood” was ambiguous and must be interpreted against the insurers.

This was not the end of the decision. The consolidated cases involved numerous policies with different language. The court found that exclusions in policies containing the Insurance Service Office Inc.’s standardized policy language was ambiguous, and, therefore, did not exclude damage caused by flooding that was the result of negligence. The ISO policies insured against the risk of “direct, physical loss to covered property,” but excluded loss “caused directly or indirectly by” water damage “from flood, surface water, waves, tidal water, overflow or spray, whether or not driven by wind.”

By contrast, the court found that the policy issued by State Farm contained a “lead in” provision which “made it clear that regardless of the cause of the flooding, there is no coverage provided for any flooding.” The key “lead in” provision reads, in pertinent part, as follows:

“We do not insure under any coverage for loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; . . .

“c. (1) flood, surface water, waves, title water, overflow of a body of water or spray from any of these all weather driven by wind or not.”

Virtually every homeowner in the greater New Orleans metropolitan area can claim that any flood damage to their home as a result of Katrina was caused by negligence rather than a purely natural event. Thus, this ruling has the potential to bring significant losses within the coverage of homeowners’ polices. Recognizing this potential, the court certified its rulings on this issue for immediate appeal.

While the insurance industry breathed a sigh of relief in the early rounds of Katrina related litigation, more recent decisions cast a shadow over these initial rulings by limiting their scope and opening up homeowner insurers to significantly expanded coverage. It remains to be seen if these rulings are an aberration or the beginning of a trend which will unleash a “flood” of similar decisions.

1. Civil Action No. 1:06-CV-6, in the United States District Court for the Southern District of Mississippi.

2. Civil Action Nos. 05-4182 and 06-0169 (E.D. La. 2006), 4 cases.

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.