The Early Katrina Coverage Decisions Has the Landscape Been Changed?
Having caused an estimated $81 billion in damages, Hurricane Katrina left in its wake the highly publicized and important question of whether and to what extent insurers would pay for the staggering losses suffered by Gulf Coast businesses and homeowners. Arcane insurance terminology previously known only to a small world of insurance professionals, including the meaning of phrases such as "concurrent causation" and "efficient proximate cause," became part of the public discourse about who would pay to put the Gulf Coast back together again. It has been over two years since Katrina. The courts are open again. They are now filled not with water and debris but with coverage litigation, some of which has been decided but much of which is still pending. This is a good time to consider whether Katrina insurance cases have actually altered the insurance landscape and, if so, just how.
As reflected by two of the most publicized and closely followed coverage cases that arose out of Katrina, Leonard v. Nationwide Mutual Insurance Co., 438 F. Supp. 2d 684 (S.D. Miss. 2006), aff=d but criticized, 499 F.3d 419 (5th Cir. 2007) ("Leonard"), and In re Katrina Canal Breaches Consolidated Litigation, 466 E Supp. 2d 729 (E.D. La. 2006), aff=d in part, 495 F.3d 191 (5th Cir. 2007) ("In re Katrina Canal Breaches"), Katrina has not yet worked any real change in existing coverage law. Indeed, in both Leonard and In re Katrina Canal Breaches, the district courts came down with decisions that were based on the determination that certain key policy terms were ambiguous. Yet, in both instances, the Fifth Circuit saw things the insurers' way and held that the relevant policy language was clear and must be interpreted to deny coverage.
Leonard involved Pascagoula, Mississippi, homeowners who sued Nationwide Mutual Insurance Company after it denied coverage for damage to their home caused by Katrina on the basis that the damage was caused by water or waterborne material that was not covered under the policy. The Nationwide homeowners policy covered windstorm damage but excluded water damage, which included flood and surface water, whether driven by wind or not. The policy also excluded coverage for losses caused by weather conditions, if they contributed in any way to water damage.
In resolving the dispute, the district court focused on the policy's anti-concurrent causation clause ("ACC clause"), which stated:
We do not cover loss to any property resulting directly or indirectly from any of the following. Such a loss is excluded even if another peril or event contributed concurrently or in any sequence to cause the loss.
The court found that the ACC clause, which purported to exclude coverage for damages caused by a combination bf the effects of water (an excluded loss) and wind (a covered loss), and the weather condition exclusion, were ambiguous when read in conjunction with the windstorm coverage.
The Fifth Circuit disagreed. It held that the ACC clause unambiguously excludes coverage for water damage even if another peril, such as wind, contributed concurrently or in any sequence to cause the loss. Based on that reading of the policy, the Fifth Circuit held that the Leonards would prevail only if they could demonstrate that the clause itself was prohibited by Mississippi case law, statutory law, or public policy, and it further concluded that the Leonards could not do so. An integral part of the Fifth Circuits analysis was its reasoning that the Mississippi Department of Insurance=s prior approval of the policy form including the ACC clause supported the ruling that the language was clear because, under the Mississippi Insurance Code, the Insurance Commissioner was required to reject any policy form that contains inconsistent, ambiguous, or misleading clauses.
The Fifth Circuit also rejected the Leonards' argument that the water damage was caused not by an excluded peril -- flooding -- but rather by "storm surge," which the Leonards characterized as a "separate, discrete peril unique to hurricanes" and a term commonly understood by residents of the Leonards' hometown as distinct from a flood. In rejecting this argument, the Fifth Circuit cited to its In re Katrina Canal Breaches decision, discussed below, which addressed the meaning of the term "flood."
The Eastern District of Louisiana=s late 2006 decision in In re Katrina Canal Breaches involved multiple lawsuits filed in that court seeking damages arising out of all levee breaches along three major canals that ruptured, permitting water from the flooded canals to inundate the city of New Orleans. The principal issues were whether the levee breaches constituted a "flood" and whether coverage should be provided under homeowners/all risk insurance policies for those breaches.
The defendant insurers contended that all water damage caused by the canal breaches was uncovered because the policies contained an exclusion for coverage for water damage resulting from a flood. They claimed that the inundation of water in the City of New Orleans caused by the failure of the levees was a flood. The insureds, on the other hand, maintained that the term "flood" is ambiguous and, thus, coverage was provided. In his extensive opinion for the district court, Judge Stanwood Duval agreed with the insureds' contentions, determining that the International Standards Organization (ISO) water damage exclusion was ambiguous because the term "flood" is susceptible to two reasonable definitions: (1) one that relates to floods resulting from natural causes only; and (2) one that relates to floods resulting from both natural causes and negligent or intentional acts. The district court ruled that homeowners insurance companies cannot deny claims for losses caused by water released from the failed New Orleans levees system unless their policies expressly excluded coverage for water-related losses caused by negligent acts or man-made causes of the waters release.
At the time of its issuance, the ruling was considered the most significant decision to date in Louisiana in connection with insurance-related litigation following Hurricane Katrina and thought to allow New Orleans metropolitan area homeowners the ability to pursue claims for insurance that had previously been denied or refused on an industry-wide basis.
As in Leonard, however, the Fifth Circuit ruled in favor of the insurers. It concluded that the flood exclusions at issue were unambiguous; that they applied whether the cause of the flooding was natural or man-made; and. thus, that the damages in question were inarguably caused by a "flood." Accordingly, there was no coverage
.At a minimum, Leonard and In re Katrina Canal Breaches show that, at least in the Fifth Circuit, insurer arguments that their flood-type exclusions are clear and unambiguous are being well received. However, if the recent jury decision in the first Katrina suit to go to trial in federal court in Louisiana, Kodrin v. State Farm Fire and Casualty Co., No. 06-8180 (E.D. La. Nov. 21, 2007), in which the jury awarded the plaintiffs recovery for their Katrina damages and reasonable attorney fees, is any indication, the general public is taking a position on Katrina cases different from that of the Fifth Circuit. Still, many cases are moving through the state and federal courts in Louisiana and Mississippi, and neither the Louisiana Supreme Court nor the Mississippi Supreme Court has been heard recently on the type of definitional issues raised by these Katrina coverage cases. Of course, the construction of insurance policies is a question of state law, and federal courts are required to apply that law when there is a final decision of the applicable states highest court.
Homeowners, businesses, insurers, and coverage lawyers may not have heard the last word on the full scope of coverage afforded by homeowners and commercial policies for the devastating damage caused by this (hopefully) once-in-a-century storm. At this point, however, it appears that although Hurricane Katrina left a lasting mark on the people and the landscape of the Gulf Coast, she has failed to dramatically affect the law.
Source: TortSource, Winter, 2008
