First post-Katrina court decision a victory for insurers

On Aug. 15, 2006, a decision was handed down in the first post-Katrina insurance lawsuit to go to trial. Because there are thousands of lawsuits raising the same claims with millions, if not billions, of dollars at stake, this lawsuit has been closely watched by the insurance industry and lawyers across the country. Overall, the ruling in Leonard v. Nationwide broke no new legal ground, which is the reason it largely represents a victory for the insurance company. However, the ruling should not be interpreted to mean that insurance companies do not continue to have significant exposure in pending lawsuits, many of which raise legal issues not addressed in the Leonard case and also present different factual circumstance.

No flood coverage

Prior to Hurricane Katrina, Paul and Julie Leonard owned a home on the Mississippi Gulf Coast in Pascagoula, Miss. Their home was covered by a homeowner’s insurance policy issued by Nationwide Mutual Insurance Company, but it was not covered by flood insurance.

When Hurricane Katrina made landfall on Aug. 29, 2005, the Leonards’ home was severely damaged by both wind and water from the hurricane’s storm surge. The Nationwide policy excluded damage caused by water or water-borne material “even if other perils contributed, directly or indirectly to cause the loss.” Water and water-borne material were defined to mean “flood, surface water, waves, tidal waves, overflow of a body of water, spray from these, whether or not driven by wind.”

The policy also excluded damage caused, directly or indirectly, by any weather conditions which contributed to the damage in any way with an excluded peril.

The Leonards suffered more than $130,000 in damages to their home. Based primarily on the flood exclusion, Nationwide denied coverage for almost all of the damage and tendered a check for $1,667 after taking into account the $500 deductible.

The Leonards sued Nationwide, arguing that its homeowners policy was ambiguous and should be construed as providing coverage for all damage incurred during a hurricane, even that caused by water driven by the force of the hurricane winds. In addition, the Leonards alleged that Nationwide’s local insurance agent had advised them that they did not need a separate policy of flood insurance, leading them to believe that the homeowner’s policy would cover all damage resulting from a hurricane and they argued that Nationwide was liable for its agent’s negligent misrepresentations.

Misrepresentation by the agent

The Court first addressed the claim of misrepresentation by Nationwide’s local insurance agent. Paul Leonard testified that he discussed whether he should purchase flood insurance with Nationwide’s local agent in 1999 following Hurricane Georges, which struck the Gulf Coast area in 1998. The Court found that following Hurricane Georges, there were public discussions about the fact that standard homeowner’s insurance policies did not cover flood damage and that separate flood policies were necessary to protect against flood losses associated with hurricanes.

When Paul Leonard asked Nationwide’s agent if he should purchase flood insurance, the agent told him that it was not necessary. The Court noted that while there was no discussion of the reason for this advice, Leonard inferred that the reason was that the homeowner’s policy would cover any water damage that might occur during a hurricane. However, the Court found that the Nationwide billing statements sent when the Leonards’ policies were renewed notified the Leonards that the homeowner’s policy did not cover flood loss and that flood insurance was available through the National Flood Insurance Program.

Based on these facts, the Court concluded that Nationwide’s agent did not materially misrepresent the terms of the Nationwide homeowner’s policy and did not make any statements to the Leonards which could be reasonably understood to alter the terms of the Nationwide policy with respect to coverage of flooding during a hurricane.

Citing Paul Leonard’s testimony that he read his homeowner’s policy, the Court concluded that the exclusion for water damage should have put him on notice that further inquiry was necessary concerning his understanding that the policy would cover damage from flooding during a hurricane.

The Court also held that there was no evidence in the record to establish the standard of care applicable to an insurance agent asked about the advisability of purchasing flood insurance or applicable to the training of agents authorized to sell and interpret flood policies. Absent such proof, the Court concluded that there was insufficient evidence to support a finding that the agent’s advice not to purchase flood insurance breached the agent’s standard of care.

Coverage under homeowner’s policy

Turning to the terms of the homeowner’s policy, the Court began by declaring that the policy’s exclusions for damage caused by water were “valid and enforceable terms of the insurance contract” and cited numerous Mississippi cases in support. With this single statement, the Court rejected, without discussion, any argument that “storm surge” was not covered by the flood exclusion and that a flood exclusion covering storm surge was misleading, ambiguous and against public policy. (1.)

However, the Court did find that the specific provisions which purported to exclude coverage in its entirety whenever damage was caused by the combination of a non-covered peril, such as water, and a covered peril, such as wind, was ambiguous. Interestingly, the Court noted that Nationwide appeared to agree with this interpretation because it did not seek to deny coverage based on the provisions excluding coverage for damage caused by a combination of a covered and non-covered peril. As a result, the Court held that, consistent with Mississippi law, where the insured property sustained damage from both wind, as a covered loss, and water, as an excluded loss, the insured could recover that portion of the loss which he proved was caused by the wind.

Based on the foregoing, the Court held that the Leonards had the burden of proving that their property was damaged by a peril covered by the Nationwide policy. Nationwide, on the other hand, had the burden of proving what portion of the total loss was excluded, in this case, by the water damage exclusion. Applying these burdens to the evidence presented by the parties, the Court found that the Leonards had proved that only $1,228.16 out of their total alleged damages of $130,253.49 was covered by the Nationwide homeowner’s policy.

No surprise legal rulings

As noted, the Court did not make any surprising legal rulings with respect to the flood exclusion in the homeowner’s policy, but followed fairly long standing caselaw in Mississippi. However, this fact by itself represented a victory for Nationwide, and the insurance industry, given the attempts and pressure to find a rationale to negate the flood exclusion, which would impose additional millions of dollars of damages on homeowner insurers.

Nonetheless, the ruling does not let the insurers off scot-free. Rather, it makes it clear that homeowner insurance policies must still pay for wind related damage. Indeed, it remains to be seen how insurers will fair in those situations where the home was totally destroyed or washed away and it is much more difficult to factually determine the amount of damage caused by wind versus water.

(1.) In response to contentions by the Leonards that the policy was ambiguous, Nationwide argued that its policy terms should be conclusively deemed to be clear and unambiguous since they were approved by the Mississippi Department of Insurance. The Court rejected this argument, noting that the approval of insurance policies constituted a human endeavor, which is subject to error. Further, the Court pointed out that under Mississippi law, interpretation of an insurance policy is subject to judicial review, notwithstanding the fact that its terms may have been approved by the Mississippi Department of Insurance.

Topics Catastrophe Carriers Agencies Flood Mississippi Hurricane Homeowners