Anticipated Legal Wrath of Hurricanes Katrina and Rita
October 2005
We can anticipate a flood of lawsuits from
the recent hurricane events in Texas, Louisiana, and Mississippi. These suits
will obviously involve questions of insurance coverage under the homeowners
policy as many insureds expect coverage for damages caused by Hurricanes Katrina
and Rita.
by R. Brent
Cooper&Dana Harbin
Cooper & Scully
The prevalent question today is whether the homeowners policy will cover
flood damage that resulted from Hurricanes Katrina and Rita. Homeowners policies
generally cover damage or destruction of a home from fire, wind, hail, lightning,
vandalism, and theft. Most homeowners policies exclude flood damage, though
damages caused by rain are generally covered unless excessive rainfall is the
cause of a flood.
Proximate Cause
Mississippi Attorney General Jim Hood has filed suit on behalf of the state
against several major homeowners insurers, seeking a court ruling that these
insurers should pay homeowners for flood damages because Katrina's winds caused
flooding. The suit alleges that the standard exclusions for "water damage" and
"flood" are ambiguous in the context of homeowners policies.
In effect, a court's ruling in favor of coverage could nullify specific exclusions
for damages caused by flood, though wind damage is typically covered under the
homeowners policies. Homeowners argue that Katrina's winds caused the devastating
storm surge that ultimately caused the flooding. Wind being a covered peril
and flood being an excluded peril, the core of the dispute could be application
of the legal doctrine of "proximate cause". It is not uncommon for excluded
perils to play some role in an otherwise covered loss. The courts may be forced
to clearly articulate the standards of multiple causation between excluded and
covered perils. In Mississippi and elsewhere, courts frequently find coverage
where a covered peril such as wind contributes significantly to the loss, even
though an excluded cause also contributed to the loss.
That being the case, the Mississippi lawsuit and other lawsuits involving
homeowners policies could be extremely fact intensive depending upon the location
of the damaged homes. The contours of the proximate cause of damages may differ
from neighborhood to neighborhood, and certainly from state to state. Where
there is nothing left of the property, the question of whether the home was
destroyed by flood or wind could be speculative. Where homes remain, though
damaged, the homeowners may not be financially capable of securing the professional
advice necessary to prove causation. Even testimony from weather experts on
the severity and duration of the winds caused by the hurricanes may be relevant
in proving the proximate cause of damages. These questions of causation are
ultimately questions of fact to be resolved by jurors.
Still, the court could take a more general approach to the issue of policy
interpretation and deem the "water damage" and "flood" exclusions ambiguous.
In doing so, the court will construe the policies in favor of coverage. Certainly,
this approach may eliminate the stress and strain that questions of causation
could create.
Unfair Trade Practices
The Mississippi suit further alleges that insurers have engaged in unfair
trade practices by representing that the homeowners insurance policies provide
"full and comprehensive hurricane coverage" when, in fact, the policies contain
exclusions for water damage and flood that could limit liability. The Mississippi
lawsuit notes that as a result of these unfair practices, homeowners are being
pressured into accepting partial payments and signing away their rights to full
coverage. Accordingly, the Attorney General is asking a court to order the insurance
companies to stop paying less than full value on claims under the homeowners
policies and to hold that the water and flood exclusions are unenforceable.
In defense, insurers respond with arguments that the suit is nothing less
than an attempt to rewrite the homeowners policy after the loss, which ironically
was approved by the state insurance regulators. The insurers will likely seek
a very literal interpretation of the policies and strict application of the
causation theories.
Since Attorney General Hood filed suit, attorneys have threatened to file
thousands of lawsuits on behalf of homeowners to compel insurers to cover storm
damages, even if those damages were caused by flooding. Separate lawsuits have
already been filed in Louisiana by homeowners and businesses claiming that the
flooding was created by a windstorm and therefore should be covered under a
standard homeowners policy. Experts predict this surge of litigation could force
some homeowners insurers out of business, or at least out of those states that
were hit the hardest with hurricane damage.
Federal Assistance
The federal government created the National Flood Insurance Program in 1968
to offer insurance coverage in designated flood plains. The program was designed
to encourage homeowners to subsidize disaster relief with their insurance premiums.
However, it is unlikely that the federal government will be able to rescue the
insurers from this wave of litigation since only about one out of four homeowners
took advantage of the federal flood insurance.
Still, the federal government may ultimately bear the brunt of these insurance
disputes. Insurers are pushing for more federally funded programs to insure
natural disasters. Proposals range from providing assistance to insurers who
set aside funds to pay natural disaster claims to government commitments to
pay for damages where the disasters cause a certain level of destruction. There
are also proposals before the federal government to allow homeowners to purchase
"retroactive" federal flood insurance.
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