Because of the coverage disputes presented by the hurricanes, it is uncertain what impact the hurricanes will have on the industry in the future. This series examines the effect the 2005 hurricanes have had on the insurance industry. Part 1 dealt with rating and underwriting, and Part 2 discusses the effect on claims handling procedures.
As of January 1, 2006, there were over 14 different lawsuits filed in Texas, Louisiana, and Mississippi relating to one or several of the coverage disputes discussed herein.
The Flood versus Wind Dispute
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.
The water damage exclusion may read:
We do not insure for loss caused directly or indirectly by [water damage] … regardless of any other cause or event contributing concurrently [and] whether or not the loss event results in widespread damage …
"Water damage" means:
a. Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind … caused by or resulting from human or animal forces or any act of nature.
The interpretation of these provisions in the wake of the hurricanes is the subject of dispute. For example, some would argue that because the terms "caused by" or "resulting from human…forces" are not defined, they are ambiguous and to be construed against the insurer, finding coverage where the flooding was caused by break in levees due to inadequate design and construction.
Also, many homeowners policies in the storm-afflicted areas included deductibles for hurricane damage. The deductibles were determined by the amount of premium (higher premium/lower deductible). This type of deductible creates the expectation that all damage from a hurricane is covered, except the amount of the deductible. However, insurers rely on the water damage exclusion to exclude damages caused by the hurricanes, despite the existence of a hurricane deductible.
Ultimately, it is the insurer's burden to prove whether the water damage exclusion, or any other exclusion, applies to the claims presented by Hurricanes Rita and Katrina. This is true for Louisiana, Texas, and Mississippi.1
Mississippi Chimes in
Mississippi Attorney General Jim Hood has filed suit on behalf of the state against several major homeowners insurers,2 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.3
That being the case, the Mississippi lawsuit and other lawsuits involving homeowners policies could be extremely fact-intensive depending on 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.
Some insurers have taken the position that only damage that occurred over the waterline in the home is covered because damage below the waterline is the result of flooding.4 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, especially in situations where homeowners policies include "hurricane deductibles," while at the same time, flood damage connected to hurricanes is purportedly excluded elsewhere in the policy. In doing so, courts are likely to construe the policies in favor of coverage. Certainly, this approach may eliminate the stress and strain that fact questions of causation could create.
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 Mississippi Attorney General is asking a court to order the insurance companies to stop paying less than full value on claims under 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, which ironically was approved by the state insurance regulators, after the loss. 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 and Mississippi 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.
At least one Mississippi court has ruled on the coverage issues prevalent in Hurricane Katrina claims. Judge LT Senter of the District Court for the Southern District of Mississippi issued a memorandum opinion on May 24, 2006, addressing coverage under State Farm homeowner's policy for damage to a home caused by Hurricane Katrina. In Tuepker v. State Farm Fire & Cas. Co., Civil Action No. 1:05CV559, the court held that losses directly attributable to water, even in the form of "storm surge," are excluded because the damage was caused by tidal water driven ashore during Hurricane Katrina. The court dismissed the Tuepkers' argument that "storm surge" is not flooding under well-settled meteorological principles. However, the court held there is coverage for damage caused by wind, including damage to personal property inside a dwelling that was damaged by rain that entered through breaches in the walls or roofs caused by hurricane winds.
Of course, the Tuepker court's decision relating to wind versus flood damage is not so easily applied in each claim. The damages caused by Katrina may not have been caused solely by wind or solely by flooding, but instead by both. The court in Tuepker held that the proximate cause, wind or flood, is a question of fact under Mississippi law. If the evidence shows that damage occurred over time, and wind damage preceded the storm surge, then wind damage would be covered, even if storm surge damage subsequently occurred. One commentator says that Judge Senter "took his initial decision that coverage is available under the State Farm policy for damage caused by wind, but not flooding, and applied them to damage caused by both."5
Ultimately, Judge Senter applied what is known as the doctrine of "efficient proximate cause," which provides that if a covered peril (wind) causes an excluded peril (tidal waters by storm surge), coverage is available even for the damage caused by the excluded peril.6 As argued in Tuepker, most flood/water exclusions in homeowners policies exclude flood regardless of how it was caused. The State Farm policy included this "anti-concurrent causation" clause. Still, Judge Senter found the clause ambiguous in light of other provisions granting coverage for wind and rain damage and in light of the hurricane deductible.
Obviously, causation is the prevalent issue in Hurricane Katrina claims. Given that fact, resolution of claims will involve extensive evidence on causation and hotly contested legal doctrines in light of policy language. The battle is anything but over as another hurricane season approaches.
Additional Living Expenses
One significant issue that has had immediate impact on the welfare of hurricane victims is the availability of "additional living expenses" (ALE) coverage. ALE coverage in homeowners policies falls under "loss of use" coverage and reimburses the insured the cost of temporary living conditions until the insured can return to the home.7 ALE can include items such as food and housing costs, and telephone or utility installation costs in a temporary residence. Also, extra transportation costs to and from work or school, relocation and storage expenses, and furniture rental for temporary residence may be eligible under ALE coverage. ALE coverage may even pay for the loss of rental income if the insured rented out a room in the insured premises.
Given its breadth, ALE coverage is extremely beneficial to the insured in the wake of Hurricanes Katrina and Rita, especially in light of the fact that flood insurance usually does not include any type of ALE benefits. However, ALE coverage has been denied on the basis that the evacuation was due to flooding, which, as previously noted, is arguably an excluded peril.
The Texas Attorney General and the Texas Department of Insurance filed a petition against Allstate concerning ALE coverage. On October 7, 2005, the Texas court ordered that Allstate pay ALE expenses to families displaced by Hurricane Rita.8 Allstate appealed that order and, ultimately, the same court ruled that Allstate is not required to pay temporary living expenses for Texas policyholders who could not return to their homes after Hurricane Rita because of power outages, impassable roads, and other conditions.9 The court specifically held that the homeowners policies were not responsible for expenses stemming from loss of use of a home unless the structure was damaged. "The mere existence of a hurricane which tangentially causes policyholders to be either without power or access to their home is not a peril insured against," wrote Judge Lora J. Livingston.10
It should be noted that some insurers have paid ALE without question. For example, State Farm issued 90, 000 checks of $2,500 each to policyholders in Louisiana following Hurricane Katrina without requiring the insureds to report how they spent the money or refund any amounts not spent on living expenses.11 This was based on the civil authority clause in their policies that allows policyholders to collect up to 14 days of living expenses because local officials ordered them out of their homes. Still, State Farm has taken the position that any more living expenses will be denied if flood damage, not wind, made the home uninhabitable.
The insurance industry will remain under the public's watchful eye as a result of the various coverage disputes raised by Hurricanes Katrina and Rita. Though it is unlikely that the courts will rewrite the policies and construe them in favor of coverage, the courts may be more inclined to address the uninsured losses by other remedies, such as extracontractual liability for alleged unfair underwriting and claims handling efforts on the part of the insurance industry. Undoubtedly, the impact of Hurricanes Katrina and Rita could be not only catastrophic in loss of lives and property, but equally forceful in changing the insurance industry.
Part 1 of this series examines the effect of the hurricanes on rating and underwriting. Part 2 discusses insurers facing unique obstacles in investigating and settling claims in 2005.
Dana Harbin is an attorney in the Dallas office of Cooper & Scully, P.C. where she specializes in insurance coverage and bad faith involving all types of insurance policies, both first and third party. Ms. Harbin earned her BA degree from the University of Texas in Arlington and her JD degree from the University of Texas at Austin. She can be reached at
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.
1 See Louisiana Maint. Servs., Inc. v. Certain Underwriters at Lloyd's of London, 616 So.2d 1250, 1252 (La. 1993); Lunday v. Lititz Mut. Ins. Co., 276 So. 2d 696, 698 (Miss. 1973); Altivia Corp. v. Greenwich Ins. Co., 161 S.W.3d 52, 54 (Tex. App.—Houston [14th Dist.] 2004, pet. grt'd Oct. 2004).
2 See Jim Hood, Attorney General for the State of Miss. v. Mississippi Farm Bureau Ins., et al., Chancery Court of Hinds County, Mississippi, First Judicial District, No G2005-1642. The Attorney General sued State Farm, Allstate, USAA, and Nationwide.
3 See Grace v. Littitz Mut. Ins. Co., 257 So. 2d 217, 224 (Miss. 1972) (in multiple causation situations, the question will turn to which peril was the "dominant" or "efficient" cause of the damage).
4 Patrick Buckley, Joanne Doroshow, Basel Hamden, and J. Robert Hunter, The Insurance Industry's Troubling Response to Hurricane Katrina, p. 5 (Americans for Insurance Reform 2006) www.insurance-reform.org; but see Commercial Union Ins. Co. v. Byrne, 248 So. 2d 777 (Miss. 1971) (even though there were watermarks on the walls, jury found that prior to the tidal waters rising, the damage had been sustained by wind-driven rains which entered the house through openings created by the wind).
5 Randy J. Maniloff, Hurricane Katrina and Insurance Coverage: First Words from the Bench, Mealey's Litigation Report: Catastrophic Loss (June 2006) (p. 4).
7Buckley et al., supra, p. 5; but see Commercial Union Ins. Co. v. Byrne, 248 So. 2d 777 (Miss. 1971) (even though there were water marks on the walls, jury found that prior to the tidal waters rising, the damage had been sustained by wind-driven rains which entered the house through openings created by the wind).
8State of Texas v. Allstate Insurance Co., Cause No. GN503652, 200th Judicial District Court of Travis County, Texas. Terrence Stutz, "Allstate Ordered to Cover Expenses of Rita Evacuees; Insurer Promises to Oppose Judge's Ruling at October 20 Hearing," Dallas Morning News, Oct. 8, 2005.
9 Id., "Allstate Gets Reprieve in Rita Expenses Case; Judge Rules Temporary Living Costs Covered Only If Home Badly Damaged," Dallas Morning News, Jan. 26, 2006.