Cleaning Up After Hurricane Katrina

In both Mississippi and Louisiana, the principal argument in support of the alleged ambiguity was that the flood waters during Hurricane Katrina were pushed ashore by wind, a covered peril, and the flood exclusion did not clearly exclude this ‘storm surge’ from coverage.

One year after the storm – a house damaged by Hurricane Katrina.

For almost three years, insurance coverage litigation arising out of Hur-ricane Katrina has been winding through the state and federal court systems in Louisiana and Mississippi. While the litigation will undoubtedly continue for many years to come, the Louisiana Supreme Court has addressed two significant insurance issues that have arisen in the aftermath of Hurricane Katrina: (1) Whether flood exclusions typically found in homeowners’ liability policies are ambiguous and (2) Whether insureds can collect the face value of their homeowners or business insurance policies for wind damage caused by Hurricane Katrina pursuant to the Louisiana Valued Policy statute. Both opinions favored the insurer.

Ambiguity of Flood Exclusions

Because much of the property damaged by Katrina either had no or insufficient flood insurance coverage, numerous insureds filed suit seeking to recover for flood related damage under their homeowners or business policies on the basis that the flood exclusions in those policies were ambiguous. In both Mississippi and Louisiana, the principal argument in support of the alleged ambiguity was that the flood waters during Hurricane Katrina were pushed ashore by wind, a covered peril, and the flood exclusion did not clearly exclude this “storm surge” from coverage. This argument has been consistently rejected by the courts under both Mississippi and Louisiana law. [Bible v. Belsom, ___ F.3d. ____, 2008 WL 2332880 (5th Cir. 2008) (Louisiana law); Tuepker v. State Farm Fire & Casualty Co., 507 F.3d 346 (5th Cir. 2007) (Mississippi law)]

In Louisiana, an additional claim, unique to the metropolitan New Orleans area, was that the water damage in that area was not the result of natural flooding, but was caused by human negligence which led to levee breaches and the overflow of drainage canals. Insureds in that area argued that the flood exclusions in their policies were ambiguous because they failed to clearly exclude damage from man-made as op-posed to natural floods.

When this argument was first addressed, a Louisiana federal district court held that the term “flood” as used in policy exclusions was ambiguous because it was subject to two reasonable interpretations: one, a flood caused only by natural events and, two, a flood caused by either natural events or by negligent or intentional acts.

However, in a speedily issued opinion, the Fifth Circuit Court of Appeals reversed the district court and held that the flood exclusions were unambiguous and therefore excluded the damage caused by flooding that was the result of the levee breaches, regardless of the cause of the levee breaches. [In re: Katrina Canal Breaches Consolidated Litigation, 495 F.3d 191 (5th Cir.2007)]

Shortly after the Fifth Circuit issued its opinion reversing the district court, a Louisiana state appellate court addressing the very same issue ruled that under Louisiana law, the flood exclusion was ambiguous and did not exclude coverage for water flowing through levee breaches, thus creating a conflict between federal and state interpretations of the flood exclusion under Louisiana law. Not surprisingly, the case was appealed to the Louisiana Supreme Court, which agreed to hear the matter.

On April 8, 2008, the Louisiana Supreme Court released its opinion, reversing the appellate court and holding that the flood exclusion was not ambiguous and did exclude coverage for water flowing through levee breaches. Rebuking the appellate court, the Supreme Court stated:

“The term ‘flood’ is not defined in the policy. In such a case, the word should, as stated above, be given its plain, ordinary and generally prevailing meaning. Although the Court of Appeal recognized this rule of construction, it found that because there were varying causes of floods, the word ‘flood’ itself, was ambiguous.

“The plain, ordinary and generally prevailing meaning of the word ‘flood’ is the overflow of a body of water causing a large amount of water to cover an area that is usually dry. This definition is not dependent on locality, culture, or even national origin – the entire English speaking world recognizes that a flood is the overflow of a body of water causing a large amount of water to cover an area that is usually dry land. Contrary to the Court of Appeal’s reasoning, this definition does not change or depend on whether the event is a natural disaster or a man-made one – in either case, a large amount of water covers an area that is usually dry.” [Sher v. Lafayette Ins. Co., ___ So. 2d ____, 2008 WL 928486 (La. 2008)]

The courts in Louisiana and Mississippi appear to have made it clear they will not, in effect, throw out the typical flood exclusions found in almost all business and homeowner policies for ambiguity based on the cause of the flood waters resulting from Hurricane Katrina or, presumably, any future hurricane.

Valued Policy Statutes

Louisiana and Mississippi both have “Valued Policy” statutes. In general, Valued Policy laws (VPLs) require that at the time a policy is written, an insurer ascertain the value of property being insured and 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. VPLs are principally intended to apply to losses caused by fire.

The Mississippi VPL specifically applies “[w]hen buildings and structures are insured against loss by fire, and, situated within the state, are totally destroyed by fire.” [Miss. Code §83-13-5 (emphasis added)]

In contrast, the Louisiana VPL 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 … .” [L.R.S. 22:695(A)]

While the Louisiana VPL clearly applies to fire insurance policies, it is not expressly limited to fire insurance policies as is the Mississippi VPL. As a result, many insureds bringing Hurricane Katrina claims have argued that if their homeowner or business policies provided coverage against fire as well as against wind damage, the Louisiana VPL was applicable and required that the insurer pay the full policy value upon proof of any covered loss, such as wind damage, even if there was no fire damage. One result of requiring the insurer to pay the full policy value for wind damage caused by Hurricane Katrina is that the insured will effectively recover for flood damage, notwithstanding the flood exclusions typically contained in the homeowner and business policies.

In the post-Katrina cases seeking full policy limits under the VPL, the federal and state courts generally assumed without any detailed discussion the applicability of the Louisiana VPL to non-fire insurance policies. Those cases focused more on the extent to which the VPL applied if a peril excluded under the policy, such as flood, contributed to the loss. However, the Louisiana Supreme Court recently issued an opinion providing a detailed analysis of whether the Louisiana VPL applied to non-fire insurance policies. Ironically, the Court itself conceded that it did not need to decide the issue because, as allowed by the VPL, the insurer in the case before it had used a different method of loss computation, and, therefore, the VPL provision requiring payment of the full policy value was not applicable to the claim at issue.

Nonetheless, the Court included an opinion length footnote in its decision, which discussed, in detail, the applicability of the VPL to non-fire insurance policies, and concluding:

“It appears to us that the legislative history of L.R.S. 22:695, combined with the definitions provided in L.R.S. 22:6(10) and (15), and the contrast of the language used in related statutes, reveals that the [VPL] statute is intended to apply only to fire insurance policies, which may include coverage against other perils as allowed by L.R.S. 22:691 and is distinct from homeowners’ policies. However, it seems the insurance industry has always assumed that the use of the term ‘fire insurance policy,’ includes homeowners’ policies. We need not resolve this issue in this instant matter because the result is the same whether the statute applies or not. We urge the legislature to consider this issue and to make changes to the language of L.R.S. 22:695 if needed (emphasis added).” [Landry v. Louisiana Citizens Property Ins. Co., 2008 WL 2151827, n. 10 (La. 2008)]

Although the Court technically did not rule on the issue, it left no doubt about its conclusion that the Louisiana VPL was not intended to apply to homeowners insurance policies. The only apparent opening it left to the possible application of the VPL to such policies is a somewhat cryptic reference to an apparent assumption by the insurance industry that the term “fire insurance policy” included homeowners’ policies. Whether this assumption, if proven to exist, would cause the Court to conclude that the VPL is applicable to homeowners’ insurance policies is unclear. Nonetheless, the Court’s firm conclusion that the statute itself was only meant to cover fire insurance policies suggests that it will be difficult for an insured to convince the Court that the Louisiana VPL should apply to homeowners’ policies.

Greater Certainty

As the Hurricane Katrina cases wind through the judicial system, many factual issues remain to be resolved. However, more and more of the critical insurance issues are being decided, which will provide greater certainty to insurers and insureds alike in trying to determine potential exposure and thus help to resolve the remaining disputes.

Topics Catastrophe Natural Disasters Carriers Flood Louisiana Hurricane Homeowners Property Mississippi