Expert Commentary

Anticipated Legal Wrath of Hurricanes Katrina and Rita

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.

Courts and Coverage
October 2005

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.

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.

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