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Court affirms flood exclusions in La. property policies

Two federal appeals court rulings in early August in class-action lawsuits stemming from Hurricane Katrina-related property damage in Louisiana underscored the validity of flood exclusions in property insurance policies.

In a highly anticipated decision, the U.S. 5th Circuit Court of Appeals in New Orleans ruled Aug. 2, 2007, in In re Katrina Canal Breaches Litigation, No. 07-30119, that property owners in New Orleans whose buildings were flooded as a result of levee breaches in the aftermath of the August 2005 hurricane have no standing to recoup their losses from their insurance companies because of the flood exclusions in their insurance policies.

On Aug. 6, the 5th Circuit Court released an opinion in Chauvin v. State Farm Fire & Casualty finding that Louisiana’s valued policy law (VPL) “does not apply when a total loss does not result from a covered peril.”

The rulings could affect thousands of residential and business policyholders in the New Orleans area while saving insurers an estimated $1 billion or more in payouts.

Jeff Albright, CEO of the Independent Insurance Agents & Brokers of Louisiana, hailed the rulings as a major step in Louisiana’s recovery process. “These critical Appeal Court rulings reaffirm the clear policy exclusions for water damages and lift the cloud of uncertainty that has been hanging over the industry since the district court judges ruled that flood damages must be paid by insurers,” Albright stated. “Insurers can now rest assured that flood exclusions will be held valid and that statutes such as the valued policy law will be interpreted fairly, and not used to find insurance coverage where none exists.”

Plaintiffs in the canal breaches case had contended that because their properties were flooded as a result of the levee failures — a “man-made act” — the flood exclusions in the policies were void. According to court filings, the plaintiffs argued that “the massive inundation of water into the city was the result of the negligent design, construction and maintenance of the levees” and that the policies’ flood exclusions in that context are ambiguous because they do not clearly exclude inundation of water induced by negligence.

The Court disagreed, concluding “that the plaintiffs are not entitled to recover under their policies.” The Court opinion, written by Circuit Judge Carolyn King, stated “that even if the plaintiffs can prove that the levees were negligently designed, constructed or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs’ policies unambiguously preclude their recovery. Regardless of what caused the failure of the flood-control structures that were put in place to prevent such a catastrophe, their failure resulted in a widespread flood that damaged the plaintiffs’ property. This event was excluded from coverage under the plaintiffs’ insurance policies, and under Louisiana law, we are bound to enforce the unambiguous terms of their insurance contracts as written.”

Insurer trade groups praised the decision. The American Insurance Association said the ruling “corrected an earlier, flawed decision by U.S. District Judge Stanwood Duval in which he constructed a manmade v. natural causation distinction not found in property insurance policies in order to defeat a clear exclusion applying to the flood losses at issue.”

Allstate, Encompass, State Farm and Unitrin were among the defendants in the suit.

The case was sent to the 5th Circuit after Judge Duval, with the U.S. District Court for the Eastern District of Louisiana, ruled in November 2006 that ambiguous language in the water damage exclusions in some insurance policies left open the possibility that the plaintiffs could have standing to recover losses under their policies. Duval refused insurers’ attempts to have the case dismissed. Instead, he sent it to the 5th Circuit Court for a review.

Although he had expected the district court’s opinion to be overruled, Robert Redfearn Jr., an attorney with New Orleans-based Simon, Peragine, Smith & Redfearn, LLP, expressed surprise that the 5th Circuit issued an opinion so quickly. He surmised that the “court wanted to get the opinion out before Aug. 29, 2007, the second anniversary of the hurricane” and the date by which Katrina-related claims lawsuits must be filed in Louisiana.

Redfearn said the plaintiffs can ask for a re-hearing, or en banc review, by the 5th Circuit and then appeal to the U.S. Supreme Court. He said the plaintiffs likely will ask for a re-hearing, but speculated that the court would refuse to look at the case again.

Valued property law

In Chauvin v. State Farm Fire & Casualty, the plaintiffs were homeowners whose property was severely damaged as a result of Hurricanes Katrina and/or Rita. The plaintiffs sued insurers when they “refused to reimburse them for the full value of their homes as stated in their policies.” The plaintiffs alleged that under Louisiana’s Valued Policy Law (La. Rev. Stat. Ann. § 22:695) they were entitled to the agreed upon face value of their homes.

The losses were the result of damage from wind, which is covered under the typical homeowners policy, and flooding, which is not. The district court previously concluded that Louisiana’s VPL does not apply when a total loss is not entirely the result of a covered peril and granted the defendants’ motions to dismiss and/or motions for judgment.

The 5th Circuit rejected the plaintiffs’ argument that the VPL applied to a total loss that was the result of both a covered peril and a non-covered peril.

The IIABL’s Albright noted that the Chauvin opinion supports the insurance industry’s interpretation of the VPL, which is that an insurer should not be forced to pay damages that result from a peril for which it did not collect a premium.

In addition to State Farm, Hartford, Allstate, USAA and Standard Fire were among the defendants in the Chauvin case.

Topics Carriers USA Louisiana Flood Property Hurricane