Hurricane Katrina, in addition to causing unprecedented damage and destruction, added significantly to the workload of state and federal courts in Louisiana and Mississippi. Almost four years after the fact, those courts remain flooded (pun intended) with lawsuits between insurers and their insureds, arguing over what damages are covered and what amounts are owed for those damages under potentially applicable insurance policies.
Many of the thornier overarching legal questions have been decided by the highest federal and state courts in those states, leaving the lower courts to apply those rulings to the particular factual circumstances of individual cases.
However, a possible showdown between the federal and state courts looms in connection with whether “anti-concurrent cause” (ACCs) clauses contained in many insurance policies are valid and enforceable.
The federal Fifth Circuit Court of Appeals has held in several cases, under both Louisiana and Mississippi law, that ACCs are valid and enforceable, and, further, that ACCs have the effect of excluding all damages caused by an excluded peril either concurrently or in sequence with a covered peril. But, in June 2009, the enforceability of ACCs was argued and submitted to the Mississippi Supreme Court in the case of Corban v. USAA.
In Corban, the insureds argued that the Fifth Circuit rulings enforcing ACCs are incorrect and inconsistent with Mississippi law. If the Mississippi Supreme Court agrees with the insureds and finds that the ACCs are not enforceable, the ruling would not only be binding in Mississippi, but could have a ripple effect across state lines, particularly in Louisiana where the Louisiana Supreme Court has not yet addressed the issue.
Anti-Concurent Cause Clauses
A typical ACC reads as follows:
“We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss results in wide spread damage or affects a substantial area.”
Prior to the inclusion of ACCs in insurance policies, many states, including Louisiana and Mississippi, applied the doctrine of “efficient proximate cause” to determine coverage under an insurance policy when damage was caused by a combination of excluded and covered perils.
Such a circumstance is fairly common in hurricanes, where the two forces primarily causing damage are wind and water. Property sitting in the path of a hurricane will certainly be exposed to, and possibly damaged by, wind, and, in many instances, may also be exposed to, and damaged by, flood waters as the hurricane passes over it.
The wind damage from a hurricane is usually covered by standard homeowner and other property insurance policies, but damage caused by flood or rising water, as opposed to rain water, in a hurricane is generally excluded from coverage under those same policies.
Such damage is instead covered under flood insurance policies underwritten by the United States government. Thus, for insurance purposes, it may be necessary to segregate the cause of specific damage between wind and water to determine which policy must respond for the damages.
However, as a practical matter, such segregation may be difficult or impossible, particularly since there are usually no eyewitnesses to the precise cause and sequence of damage during a hurricane.
As a consequence of this difficulty, the courts in Louisiana and Mississippi had allowed insureds to establish coverage for damage property under their homeowner policies by proving that wind was the proximate or “efficient” cause of damage, notwithstanding that other excluded perils, such as water, may have contributed to the damage. Once this showing was made, the insurer then had the burden of proving that the damage was in fact caused by an excluded peril in order to deny coverage.
Of course, as one dissenting Louisiana judge noted, the practical problem is:
“And just what, pray tell, is ‘efficient or proximate cause’? Though one may be legally versed in the understanding of proximate cause in a tort sense, what is its meaning in a contractual sense, such as the case at bar? Better yet, what is ‘efficient cause’? The majority remands this case for a trial on the merits with no guidance whatsoever as to the legal standard or definition of ‘efficient or proximate cause’ as it relates to this case. How will the trier of fact be able to determine whether or not plaintiffs have proven, presumably by a preponderance of the evidence, that a covered peril was the ‘efficient or proximate cause’ of the damage to their home which resulted in a total loss of their home?” [Landry v. Louisiana Citizens Property Ins. Co., 964 So. 2d 463, 487 (La. App. 3d Cir. 2007), aff’d in part, vacated in part, 983 So. 2d 66 (La. 2008)]
Largely to avoid applicability of the efficient proximate cause doctrine, insurers added ACCs to their property insurance policies.
Impact of Hurricane Katrina
Hurricane Katrina brought the question of the validity and applicability of ACCs to the forefront due to the fact that it caused widespread damage, much of which was caused by a combination of wind and water, and many people were without any flood insurance coverage or lacked an adequate amount of flood insurance coverage.
As a result, numerous lawsuits were filed in Louisiana and Mississippi seeking to recover additional money under homeowner and other property insurance policies and, among other grounds, the insurers asserted that coverage was not owed due to the ACCs where damage was caused in part or in sequence by flood water.
Because a great majority of the Katrina lawsuits were removed to federal court, the federal courts were the first to address the validity and enforceability of ACCs in the Katrina context. The Fifth Circuit Court of Appeals has issued several opinions which have been quite forceful in upholding and applying ACCs.
The first significant case to address ACCs was Leonard v. Nationwide Mutual Ins. Co. [499 F. 3d 419 (5th Cir. 2007)], a Mississippi case. In Leonard, the Court noted that Mississippi courts applied the efficient proximate cause as a “default” rule for determining coverage where damage was caused by covered and excluded perils, but they had not “conclusively resolved” whether the insurer could contract around application of the efficient proximate cause doctrine. After undertaking a lengthy analysis of the case law, the Fifth Circuit concluded that ACCs were “not forbidden by Mississippi case law, statutory law or public policy.”
In addition to concluding that ACCs were valid and enforceable under Mississippi law, the Leonard court also addressed how ACCs would apply to damage claims. The Court stated that in the face of an ACC, the “only species of damage covered under the policy is damage caused exclusively by wind.”
The Court stated that damage caused “synergistically” by wind and water was excluded. The Court then went further and suggested that property initially damaged by a covered peril, such as wind, would no longer be covered if subsequently impacted by an excluded peril, stating:
“If, for example, a policyholder’s roof is blown off in a storm, and rain enters through the opening, the damage is covered. Only if storm-surge flooding — an excluded peril — then inundates the same area that the rain damaged is the ensuing loss excluded because the loss was caused concurrently or in sequence by the action of a covered and an excluded peril.”
The Fifth Circuit subsequently affirmed this ruling in Tuepker v. State Farm Fire and Casualty Co., another Mississippi case. [Teupker v. State Farm Fire and Casualty Co., 507 F. 3d 346 (5th Cir. 2007)]
Then, in Bilbe v. Belsom [530 F. 3d 314 (5th Cir. 2008)], although not directly addressing the issue, the Fifth Circuit indicated that in reliance on its holding in Leonard, it would uphold ACCs as valid and enforceable under Louisiana law.
In the later cases of Kordin v State Farm Fire and Casualty Co. [314 F. Appx. 671 (5th Cir. 2009)] and Arctic Slope Regional Corp. v. Affiliated FM Insurance Co. [314 F. Appx. 671 (5th Cir. 2009)], the Fifth Circuit acknowledged “tension” between Louisiana state court rulings and its rulings upholding ACCs, but stated that it remained bound by its decision in Leonard.
Corban v. USAA
Corban is a Mississippi state court case. The Corbans owned a house just off of the beach in Long Beach, Miss., which was impacted by storm surge and wind from Hurricane Katrina.
The Corbans sought recovery under their homeowners policy for damage to the first floor of their home, arguing that it was damaged by wind before the arrival of the storm surge. The homeowners policy contained an ACC.
Shortly before trial was scheduled to begin, the trial court, based on the Fifth Circuit holdings in Leonard and Teupker, ruled that the ACC was valid and enforceable, and, therefore, the Corbans could only recover for damage caused solely by wind.
The Corbans filed an interlocutory appeal, which was argued and submitted to the Mississippi Supreme Court in June 2009. In the appeal, the Corbans argued that the Fifth Circuit decisions upholding and applying ACCs “effectively reverse decades of this Court’s precedent in hurricane cases and deprives Mississippi homeowners of essential insurance coverage.”
More specifically, the Corbans asserted that the ACC in their policy was ambiguous and contrary to public policy. The Corbans also expressly argued that the Fifth Circuit rulings in Leonard and Teupker were wrong and urged the Mississippi Supreme Court to “rectify these erroneous rulings.”
Interestingly, in oral argument before the Court, the attorney for USAA conceded that USAA would not deny coverage for property damaged first by wind and then subsequently inundated with water, as the Fifth Circuit had suggested was proper under the ACC. However, counsel for Nationwide Insurance Company, appearing as amicus, stated that Nationwide would deny coverage in that circumstance pursuant to the ACC.
In upholding the validity and enforceability of ACCs in Leonard and Teupker, the Fifth Circuit admitted it was anticipating how the Mississippi Supreme Court would rule on the issue.
Thus, if the Mississippi Supreme Court agrees with the Corbans that the Fifth Circuit was incorrect, it would represent a significant change in what had appeared to be settled landscape in Katrina litigation, not only under Mississippi law, but very possibly Louisiana law also.
It is a decision which will be anxiously awaited by insurers and insureds alike.
Robert Redfearn, Jr. (Redfearnjr@spsr-law.com) is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans, La., and Mississippi.
This article previously appeared in the July 20, 2009, edition of Insurance Journal – South Central Region.