La. Supreme Court: Flood Exclusion in Insurance Policy is Not Ambiguous

Finding the flood exclusion in an insurance policy sold by Lafayette Insurance Company to a New Orleans policyholder is unambiguous, the Louisiana Supreme Court reversed, in part, a previous ruling by a state appeals court in a Hurricane Katrina coverage case.

In Joseph Sher v. Lafayette Insurance Company, the state’s 4th Circuit Court of Appeal had found that Lafayette should have paid for Katrina damage to Sher’s property because it was unclear what types of flood damage were excluded from coverage by the homeowners policy.

Sher owned and lived in an apartment building in New Orleans that was damaged by the August 2005 hurricane, four feet of water filled the basement and winds damaged upper portions of the building. Sher contested the insurer’s reliance on the policy’s flood exclusion to deny most of the claims of property damage.

The appeals court agreed with a state judge’s previous ruling that Lafayette’s policy failed to exclude all forms of flooding because its language was ambiguous.

But on April 8, the state Supreme Court said it agreed with Lafayette’s argument that the appeals court “erred in affirming the trial court’s granting of plaintiff’s partial motion for summary judgment by determining that the meaning of the word ‘flood,’ as used in the policy, was ambiguous.”

In a statement issued after the April 8 opinion was released, American Insurance Association President Marc Racicot said, “The AIA is encouraged by the Court’s reaffirmation of the sanctity of contracts between an insurance company and its policyholder. Given the current political environment throughout the entire Gulf Coast, the Louisiana Supreme Court has shown great courage and understanding in rendering its decision.

Racicot maintained that economic stability relies on “dependable agreements.” The court’s “decision reaffirms the path to economic recovery for the state of Louisiana,” Racicot said.

The Supreme Court’s ruling mirrors a decision last year by a federal appeals court in a separate but similar case. The 5th U.S. Circuit Court of Appeals in New Orleans also ruled that insurers aren’t obligated to cover water damage from a levee failure, the Associated Press reported.

Lafayette and other insurers say their policies cover damage from wind but not flooding, including water from a levee breach. In Katrina’s aftermath, levee failures were blamed for 80 percent of the flooding in New Orleans.

The Sher court found the definition of a flood in an insurance policy doesn’t depend on whether an event is a natural disaster or man-made one. In either case, Justice Chet Traylor wrote, in a flood, “a large amount of water covers an area that is usually dry.” He also dismissed the idea that “man” was responsible for flooding from the broken levees.

“The flood was caused by Hurricane Katrina, not by man,” he wrote. “The levees did not cause the flood; they, whether through faulty design, faulty construction, or some other reason, failed to prevent the flood.”

Four Supreme Court justices agreed with Traylor’s opinion. Two others concurred. One concurred in part and dissented in part.

The Award

Lafayette originally paid Sher about $2,700 for wind damage but Sher asserted his property sustained $223,488 in covered damages. A jury in March 2007 awarded Sher $369,077 for property damage and lost rent, plus $184,538 in penalties. The judge ordered Lafayette to pay $258,728 in attorney fees.

The 4th Circuit amended the award to $461,346 for property damage and lost rent but said the trial court erred in awarding attorney’s fees. The Supreme Court changed the final award to $247,001.10.

The trial, appeals and Supreme Court found in the course of the various proceedings that insured’s building had sustained covered damage over and above the amount that Lafayette initially paid. The courts also found that the plaintiff was owed under the policy for lost rents for the portion of the property was not flooded. The final award included penalties against the insurer for “vexatious,” or bad faith, actions by the insurer, including failure “to initiate loss adjustment within thirty days after receiving notice of the claim.” The Court called such actions “arbitrary, capricious, and without probable cause.”

In determining the final award, the Court made several clarifications that could benefit commercial insureds in disputes with insurers, according to Michael Raibman, an attorney with the law firm Reed Smith LLP, which represents policyholders.

Raibman explained that the Court clarified that an Aug. 16, 2006, state statute amendment that allows for penalties of up to 50 percent of a jury award against insurers who were found to have acted in bad faith, as well as requiring them to pay attorneys’ fees, is not retroactive for claims filed before that date. Previously, penalties could only be exacted at a 25 percent rate and attorneys’ fees were not covered.

The Court rejected, however, insurers’ claims that “their conduct once a policyholder filed a lawsuit cannot be used as evidence of bad faith.” Instead, it said an insurer has a duty of fair dealing, which extends “throughout the litigation period.”

The Court also clarified that a petition for damages filed after the amendment’s effective date could serve “as satisfactory proof, thereby triggering the time period set forth in the statute and” could subject the insurer “to the penalties contained in the amendment because the claim would have first arisen after the amendment.”

Raibman said the ruling may benefit commercial insureds since many claims under commercial policies from Hurricane Katrina are ongoing, including business interruption claims. If commercial policyholders that filed (and disputed) claims after Aug. 16, 2006, successfully prove bad faith on the part of their insurance companies, those insurers could be held to the 50 percent rule and attorney’s fees could be awarded.

Topics Carriers Claims Flood Louisiana Hurricane Property