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.
Conclusion
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