La.’s Valued Policy Law: New Teeth for Hurricane Claims?

Property damage from hurricanes primarily comes from two sources: wind and water. Insurance coverage for property damaged by wind, and by rain water which enters the property as a result of wind damage, is generally provided through homeowner and business property insurance policies, while insurance coverage for flood related water damage is provided through flood insurance policies backed by the federal government.

While this division seems simple on the surface, hurricane property damage frequently results from a combination of wind and flood water, which can be difficult to segregate after the fact. This difficulty leads to thorny insurance issues related to the applicability of policy exclusions and allocation of the burden of proof, all of which have been magnified in the litigation following the massive destruction caused by Hurricanes Katrina and Rita.

In Louisiana, many insureds seek to circumvent these difficulties and recover the entirety of their damages under their homeowner or business policies — even though some portion of the damage may be flood related — through the Louisiana Valued Policy law (VPL). The Louisiana VPL, similar to valued policy statutes in other states, generally provides that if an insurer bases its premium on a pre-determined value of the property being insured, the insurer must pay that value when there is a total loss to the covered property.

In the aftermath of Hurricanes Katrina and Rita, there was doubt as to whether, and to what extent, the VPL was applicable to hurricane damage claims. Initial federal court decisions indicated that the VPL would apply in very limited circumstances. However, a recent state appellate court decision has applied the VPL broadly to hurricane damage claims, giving it real teeth against insurers.

The Law

The Louisiana VPL provides in pertinent part:

While the VPL clearly applies to “fire insurance” policies, it does not expressly reference any other type of insurance coverage, thus begging the question of whether it is applicable to policies covering wind or water damage resulting from hurricanes. Prior to Hurricanes Katrina and Rita, one Louisiana court had found the VPL applicable to a claim for wind damage caused by a hurricane. Real Asset Management, Inc. v. Lloyds of London, 61 F.3d 1223 (5th Cir. 1995)

Most courts addressing the VPL in connection with claims arising out of Hurricanes Katrina and Rita appear to assume the applicability of the VPL to those claims. One federal district court, however, squarely addressed the issue in detail in Caruso v. Allstate Ins. Co. [2007 WL 625830 (E.D. La. 2007)]. The Court in Caruso held that as long as the policy at issue provided coverage against fire, the VPL applied to all perils covered by that policy, including non-fire perils. The Court noted that this interpretation was consistent with Louisiana decisions reading the term “fire insurance policy” to include policies covering multiple risks and was also consistent with the purpose of the VPL.

The VPL issue which has garnered most of the attention in the Hurricane Katrina and Rita cases is whether the VPL requires payment of the full insured property value when the “total loss” is caused only in part by a covered peril. As noted, in most of the policies involved in the Hurricane Katrina and Rita cases, wind damage is covered, but flood damage is excluded. In seeking full payment under the VPL, insureds argue that if a covered peril contributed in any degree to the “total loss,” then the VPL mandates that the full insured value of the property be paid. Conversely, insurers argue that payment of the full insured property value is required by the VPL only if the “total loss” is caused solely by a covered peril.

Because many of the hurricane related cases were removed from state court, federal courts were first to address this issue. In Chauvin v. State Farm Fire and Casualty Co. [495 F.3d 232 (5th Cir. 2007)] the Fifth Circuit Court of Appeals held that “a total loss resulting from a non-covered peril does not trigger the VPL.” (Chauvin, 495 F.3d at 239 n.23)

In that case, the insured’s home sustained some wind damage, but the cause of the “total loss” was flooding, which was an excluded peril; therefore, the Fifth Circuit’s holding was in fact narrow and limited. Nonetheless, subsequent federal district courts read the opinion as precluding application of the VPL “when a total loss is not caused in whole by a covered peril (or perils).” Vincent v. All State Ins. Co., 2007 WL 2572305 (W.D. La. 2007). See also Caruso v. All State Ins. Co., 2007 WL 625830 (E.D. La. 2007).

However, in Landry v. Louisiana Citizens Property Ins. Co. [964 So. 2d 463, 480 (La. App. 3rd Cir. 2007)], a Louisiana state appellate court recently addressed this issue, and, in contrast to the federal district courts, held that as long as a covered peril was the “efficient or proximate cause” of the total loss, the VPL required payment of the full insured value even if an excluded peril contributed to the total loss, specifically rejecting the argument that the VPL was applicable only if the total loss was caused “solely” by a covered peril.

A dissent was filed in the case, in which the dissenting judge pointedly asked:

The dissent raises valid points. Time will tell whether the state and federal courts will chose to follow Landry or the prior federal district court decisions in deciding whether the VPL applies to hurricane damage caused in part by an excluded peril. Ultimately, the Louisiana Supreme Court may be compelled to address this apparent conflict between the state and federal courts.

If the Landry decision is upheld and followed, then homeowner and business property insurers face the real possibility that they will be required to, in effect, pay for non-covered damage.

Topics Catastrophe Carriers Natural Disasters Profit Loss Claims Louisiana Flood Property Hurricane