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.
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.
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.
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.
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.
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