The Litigation Aftermath of Hurricane Katrina: Are the Flood Gates Opening?
July 2006
Everyone in the insurance industry knows that
the key litigation battleground for Hurricane Katrina claims is the wind versus
flood dispute. In the commercial context, it is likely that this dispute will
be a series of virtually unique cases addressing different policy language in
different commercial forms, including numerous manuscript forms.
by Jay M.
Levin
Reed Smith
Commercial policies are likely to have idiosyncratic language for wind and
flood exclusions, different sublimits, and even different coverages. On the
homeowner's side, however, most policies have standard flood exclusions with
anti-concurrent causation language which purportedly eliminates coverage for
all "flood" damage—no matter what caused the flood.
Because only a small percentage of homeowners in Mississippi and Louisiana
had flood coverage through the National Flood Insurance Program (NFIP), their
ability to rebuild after Katrina hinges on whether courts will enforce those
exclusions or will find a legal basis to avoid flood exclusions and force insurers
to pay billions of dollars to repair "flood" damage. From the perspective of
homeowners, such a result would be consistent with the reasonable expectations
of the insureds, most of whom expected full hurricane coverage. From the prospective
of the insurers, this would be social engineering of the highest order, transmogrifying
insurers from profit-making, private corporations into charities.
The first two cases addressing flood exclusions have been decided by the
U.S. District Court for the Southern District of Mississippi. One of the two
district judges in that district has recused himself because of his own Hurricane
Katrina claim. Therefore, the only remaining judge, the Honorable LT Senter,
Jr., is going to decide all the hurricane cases filed in Mississippi federal
court. His first two rulings give something to each side, but provide a strong
indication that he is going to decide these cases based on the facts and law,
and not social policy.
Buente v. Allstate
Judge Senter's first opinion was in Buente v. Allstate
Prop. & Cas. Ins. Co., 2006 WL 980784 (S.D. Miss.). In Buente, the plaintiffs' home was severely damaged
during Hurricane Katrina, primarily through "tidal" water from the Mississippi
Sound. The Allstate policy contained the following exclusion:
We do not cover loss to the [insured] property consisting of or caused
by:
1. Flood, including, but not limited to surface
water, waves, tidal water or overflow of any body of water, or spray
from any of these, whether or not driven by wind …
4. Water or any other substance on … the surface
of the ground regardless of its source.
Judge Senter found the flood exclusion was clear and unambiguous, and applied
to the inundation of plaintiffs' home by tidal water. He rejected plaintiffs'
contention that the damage should be covered because it was "storm surge," which
was not a specifically excluded peril. Instead, he found that "storm surge"
fell within the policy definition of "flood," the exclusion applied, and granted
summary judgment on that issue.
Tuepker v. State Farm Fire & Cas. Co.
Judge Senter addressed a much more complex set of issues in his May 24, 2006,
opinion in Tuepker v. State Farm Fire & Cas. Co.,
2006 WL 1442489 (S.D. Miss.). In Tuepker, the
plaintiffs were insured under a State Farm homeowner's policy in effect when
the hurricane hit. The policy was sold through a State Farm agent, and plaintiffs
alleged that State Farm and the agent:
- expressly and/or impliedly represented to Plaintiffs that they would
have full and comprehensive coverage for any and all hurricane damage, including
any and all damage proximately, efficiently, and typically, caused by hurricane
wind and "storm surge" proximately caused by hurricanes.
The policy appears to have been a named peril policy specifically covering
windstorm or hail and had the following flood exclusion:
2. We do not insure under any coverage for any
loss which would not have occurred in the absence of one or more of the
following events. We do not insure for such loss regardless of: (a) the
cause of the excluded event; or (b) other causes of the excluded event;
or (c) whether other causes acted concurrently or in any sequence with the
excluded event to produce the loss; or (d) whether the event occurs suddenly
or gradually involves isolated or widespread damage, arises from natural
or external forces, or occurs as a result of any combination of these:
* * *
c. Water Damage, meaning:
(1) flood, surface water, waves, tidal water, tsunami, seiche, overflow of
a body of water, or spray from any of these, all whether driven by wind
or not.
Judge Senter was addressing a Motion to Dismiss the Complaint, and the applicable
standard of review required him to accept as true all facts pleaded in the Complaint.
He accepted plaintiffs' allegation that the damage to their house was caused
in part by wind and in part by storm surge, and held that it was very clear
that there was coverage for all of the damage caused by wind, objects propelled
by wind, and rain that entered plaintiffs' home through breaches in walls or
in the roof caused by the hurricane. However, as in Buente,
Judge Senter also held that losses directly attributed to storm surge were excluded
by the water damage exclusion, which he found to be unambiguous, valid, and
enforceable.
Perhaps most important for future cases, Judge Senter also held that, because
State Farm sought to enforce an exclusion, it was going to bear the burden of
proving that the exclusion applied to the claimed damages. Allocating damages
between covered wind and rain and excluded flood was a question of fact to be
decided by the jury. Under Mississippi law, where there is damage caused by
both wind and rain (covered losses) and flood (an excluded loss), the amount
due under the policy depends on determining the proximate cause of loss. Thus,
the jury will be asked to determine whether wind and rain were the proximate
cause of all or any part of the claimed loss. If so, and to that extent, the
loss is covered, and State Farm will be required to pay.
State Farm sought to enforce the anti-concurrent causation language in the
policy. Judge Senter held that anti-concurrent causation language was contrary
to the settled Mississippi law which looks to the proximate cause of loss to
determine coverage, and was, therefore, invalid and unenforceable. Judge Senter
also determined that the anti-concurrent causation language was ambiguous in
the context of hurricane damage. He found that comparing the anti-concurrent
causation language with the specific named peril coverage for wind created an
ambiguity and, therefore, would not enforce the anti-concurrent causation language.
The policy also contained an exclusion for "weather conditions." Given the
specific coverage for wind, Judge Senter found that exclusion unenforceable
in the context of losses attributable to wind and rain that occur during a hurricane.
Finally, Judge Senter also held that, if the finder of fact determined that
State Farm's agent represented to plaintiffs that they were covered for all
hurricane damage, including storm surge, State Farm could be liable for all
hurricane related damages, including "flood," despite unambiguous policy language
to the contrary.
Conclusion
The "take-away" from these two opinions is that Judge Senter is going to
enforce flood exclusions to the extent that damage was caused by flood, not
wind and rain. He will not deviate from established law requiring ambiguities
in insurance policies to be construed in favor of expanding coverage, and will
determine ambiguities in a very common-sense manner.
Of particular importance to all sides, Judge Senter will not enforce anti-concurrent
causation language where it would eliminate coverage for otherwise covered hurricane
damage, and he will construe all ambiguities against insurers. Thus, insureds
can expect to be paid for wind and rain damage. They should also expect that,
because insurers must prove which damage was caused by excluded flood, the insurer
will pay for all Hurricane Katrina damage for which the cause of loss cannot
be definitely established.
This evisceration of anti-concurrent causation language makes virtually every
disputed case unique because allocation of the loss between wind/rain (covered)
and flood (excluded) is dependent on the facts of each case. This benefits policyholders
because fact issues must be submitted to a jury, which is likely to favor the
policyholder. In addition, as the insurer bears the burden of proving allocation,
which will be difficult in many, if not most, cases, elimination of the anti-concurrent
causation language will likely significantly increase the payout on homeowners'
claims.
However, insurers still have the ability to prove allocation. Thus, even
though insurers may end up paying significantly more than the amounts for which
they have heretofore acknowledged liability, it seems that the world as insurers
now know it will not end, and they can rest secure in knowing that their policies
will be construed fairly, at least in Mississippi.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.