What does a ‘Valued Policy’ cover in Louisiana and Mississippi?

In general, “Valued Policy” statutes require an insurer to ascertain the value of the property being insured at the time a policy is written and to pay that value to the insured when there is a total loss.

As is obvious from a perusal of newspaper articles and legal journals, the devastating damage throughout the entire Gulf Coast Region from the recent hurricane season has raised numerous legal issues regarding insurance coverage and recovery. Most issues arise from the intersection of damage caused by wind and damage caused by water, as people seek to be made whole through flood insurance, homeowners insurance or some combination of both, depending on each person’s particular insurance coverage.

One prominent issue raised in Louisiana and Mississippi is whether the “Valued Policy” statues in those states require insurers issuing homeowners insurance policies to pay the full policy limits for property deemed to be a total loss if the total loss is caused in part by an excluded peril, such as flooding.

In general, “Valued Policy” statutes require an insurer to ascertain the value of the property being insured at the time a policy is written and to pay that value to the insured when there is a total loss; the insured is not required to prove the value of the damaged property. Typically, Valued Policy statutes are applied when the total loss is caused by a covered peril. However, because much of the damage from Hurricanes Katrina and Rita was caused by a combination of wind and water, insureds seek to apply the Louisiana and Mississippi Valued Policy statutes if their property is deemed a total loss. For support, the insureds rely on the recent Florida case of Mierzwa v. Florida Windstorm Underwriting Association, 877 So. 2d 774 (Fla.App. 4th Dist. 2004).

The Mierzwa decision

Mierzwa involved the amount of a wind insurer’s liability for damage to an insured building during Hurricane Irene under the Florida Valued Policy statute, which provides in pertinent part:

“In the event of the total loss of any building . . . located in this state and insured by any insurer as to a covered peril . . . the insurer’s liability, if any, under the policy for such total loss shall be in the amount of money for which such property was so insured as specified in the policy . . .” [Fla. Stat. §627.702(1)]

The building at issue was deemed a total loss because the necessary repair costs were more than 50 percent of the value of the building. However, of the total repair cost, approximately 57 percent was attributed to wind damage while 43 percent was attributed to flood damage.

The policy in question provided coverage for wind damage, but excluded flood damage. The insured argued that the Valued Policy statute required payment of the full policy limits. The insurer, not surprisingly, asserted that it was not required to pay the policy limits under Valued Policy statute because the total loss was caused in part by a peril excluded under the policy.

The Court held that the Florida Valued Policy statute required the insurer to pay the full value of the building as long as any covered peril contributed to the total loss; the covered peril did not need to be the sole cause of the total loss.

The Mierzwa decision was subsequently overruled by an amendment to the Florida Valued Policy law. However, the statutory amendment will not preclude insureds in Louisiana and Mississippi from arguing that a similar interpretation should be applied to the Valued Policy statutes in those states.

Louisiana and Mississippi statutes

The Louisiana Valued Policy statute provides in pertinent part:

“Under any fire insurance policy insuring inanimate, immovable property in this state, if the insurer places a valuation upon the covered property and uses such valuation for purposes of determining the premium charge to be made under the policy, in the case of total loss the insurer shall compute and indemnify or compensate any covered loss of, or damage to, such property which occurs during the term of the policy at such valuation without deduction or offset, unless a different method is to be used in the computation of loss, in which latter case, the policy, and any application therefore, shall set forth in type of equal size, the actual method of such loss computation by the insurer.” [L.R.S. 22:695(A)]

The Mississippi Valued Policy statute provides in pertinent part:

“No insurance company shall knowingly issue any fire insurance policy upon property within this state for an amount which, taken with any existing insurance thereon, exceeds a fair value of the property, nor for a longer term than five years. When buildings and structures are insured against loss by fire and, situated within the state, are totally destroyed by fire, the company shall not be permitted to deny that the building or structures in-sured were worth at the time of the issuance of the policy the full value upon which the insurance is calculated and the measure of damages shall be the amount for which the buildings and structures were insured.” (MS Code §83-13-5)

Before addressing whether Mierzwa should be adopted, the courts in Louisiana and Mississippi must first decide whether their respective Valued Policy statutes are applicable to insurance policies covering damage caused by windstorms. Both statutes clearly reference and apply to fire insurance, but do not explicitly apply to other forms of property insurance. However, the Louisiana statute appears to be broader than the Mississippi statute.

The Louisiana statute reads, “the insurer shall compute and indemnify or compensate any covered loss of, or damage to, such property which occurs during the term of the policy at such valuation without deduction or offset” (emphasis added). The reference to “any covered loss” could be interpreted to mean that the statute applies so long as any covered peril contributes, at least in part, to the total loss, in which instance, “such valuation,” i.e., the valuation placed on the property when the policy is issued, “shall” be paid to compensate for “any covered loss.”

At least one court has apparently found the Louisiana Valued Policy statute to be applicable to insurance covering damage caused by wind from a hurricane. [Real Asset Management, Inc. v. Lloyds of London, 61 F. 3d 1223 (5th Cir. 1995)]

However, for the statute to apply, the insurer must calculate its premium based on the value placed on the insured property at the time the policy is issued.

By contrast, the Mississippi Valued Policy statute appears to be restricted to damage caused by fire. The statute provides that the insurer must pay the amount at which the destroyed property was valued when the policy was issued when the insured property is “totally destroyed by fire.” This language would seem to preclude the statute’s applicability to hurricane related wind damage. In fact, the Mississippi Insurance Code contains a chapter creating the Mississippi Windstorm Underwriting Association. (Miss. Code §83-34-1, et seq.)

Arguably, this chapter would contain a Valued Policy statute if the Mississippi legislature intended such a statute to apply to hurricane related wind damage.

Assuming the Louisiana statute does apply to hurricane related wind damage, its language seems to be broad enough to allow a Court to reach a decision similar to that reached in Mierzwa. Louisiana courts have stated that the Louisiana Valued Policy statute is intended to be interpreted broadly in favor of the insured. [Farmers-Merchants Bank & Trust Co. v. St. Katherine Ins. Co., 693 So. 2d 876 (La. App. 3rd Cir.), writ denied, 703 So. 2d 25 (La. 1997)]

As noted, the Louisiana statute provides that “in the case of total loss,” the insurer shall compensate “any covered loss … at such valuation,” referring to the valuation placed on the insured property by the insurer when the policy is issued. Similar to the Florida Valued Policy statute considered in Mierzwa, the Louisiana statute does not explicitly state that the “total loss” must be caused solely by a covered peril. Thus, an interpretation that the Valued Policy statute applies as long as a covered period contributes to the total loss would be consistent with the Louisiana policy of interpreting the statute liberally in favor of the insured. Such an interpretation leaves open numerous related questions, such as to what extent the covered peril must contribute to the total loss. (In Mierzwa, the covered wind damage accounted for more than half of the total damage.)

Testing the statutes

While neither the Louisiana or Mississippi legislatures or courts have articulated how, or if, their respective Valued Policy statutes apply in the context of hurricane related wind damage coupled with hurricane related flood damage, those issues have been raised in numerous lawsuits filed in the wake of Hurricanes Katrina and Rita. Therefore, these questions may very well be answered in one form or another, possibly before or during the next hurricane season.

Topics Florida Catastrophe Carriers Profit Loss Flood Louisiana Hurricane Property Mississippi