DD 8/21/06 First Katrina insurance claim founders on tough policy language.

I’m a little early with this because it’s topical and you may want to talk about it at a weekend cocktail party, if you’re interested in clearing the room.  Ed.

Daily Development for Monday, August 21, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

INSURANCE; CASUALTY; FLOODING: Homeowner’s casualty policy does not cover water “storm surge” damage from Hurricane Katrina when the policy specifically excludes damage “directly or indirectly from . . . water . . .even if another peril [such as wind-which is covered by the policy] contributed concurrently or in any sequence to cause the loss.

Leonard v. Nationwide Mutual Ins. Co., 2006 Westlaw 2353961 (S.D.Miss. 8/15/06)

This is reported to be the first case of the numerous insurance disputes arising out the Hurricane Katrina calamity in the Gulf Coast.  Plaintiff’s residence was damaged extensively by water from the “storm surge” that washed over the Mississippi coast area.  Plaintiffs’ home was twelve feet above sea level and 515 feet from the shoreline.  Their property was not classified in “flood zone A” - the area deemed most susceptible to flooding by federal flood insurance standards.  Therefore, their lender did not require them to purchase flood insurance, and they did not purchase it.

It has frequently been reported in the media that the standard homeowner’s policies in this area excluded flood damage.  But, as this case reveals, the exclusions of this policy, and presumably other policies used  in the area, are more express than that. 

As the caption above indicates, the policy expressly excluded all damage from water or water-borne material, “even if other perils contributed, directly or indirectly, to cause the loss.  Water and water-borne material damage means: (1) flood, surface water, waves, tidal waves, overflow of a body of water, spray from these, whether or not driven by wind.”

The policy did cover accident caused loss to structures and, as to personal property,   “direct loss caused by rain, snow, sleet, sand or dust driven through roof or wall openings made by direct action of wind, hail or other insured peril,” but in plaintiffs’ case the primary damages they suffered did not result from wind driven rainwater passing through a hole.  Their roof remained intact and they had small wind damage to their upper story.  The real damages suffered resulted from water inundating the lower portion of their home.

The federal court judge apparently had little difficult concluding that the policy did not cover the water damages in question.  Because of the water damage exclusion language. The insurer had the burden of proof to demonstrate that the damages in question were caused by water within the meaning of the exclusion, but the circumstances of this case made that possible.

The court did note an ambiguity in the policy that it would have been inclined to interpret in favor of the plaintiffs if their claim was affected by that ambiguity.  The policy contained an exclusion of “loss to any property resulting directly or indirectly from the following if another excluded peril contributes to the loss: . . . ( c) Weather conditions, if contributing in any way with an exclusion listed in paragraph 1 [water is one of these exclusions].  The court noted that if a windstorm caused extensive damage, such as ripping off a roof, and then some water got into the house as a consequence, this language, read literally, would appear preclude coverage.  This is notwithstanding the language quoted above by which the insurer agreed to insure against “rain . . . driven through roof openings.”  The court said that such a broad preclusion of liability is inconsistent with the notion that there is coverage for wind damage, since wind damage almost always is caused by “!

 weathe
r.”  But the court indicated that the insurer here was not relying upon the weather related damage exclusion and in fact was not taking the position that it was not liable for such damage. 

Faced with such clear language in the policy, it is not surprising that the plaintiffs, represented by a famous trial lawyer who has made a very public cause out of these insurance claims in this region, argued that the policy language was voided by the activities of the company’s agent.  Apparently that agent had discussed flood insurance with plaintiffs prior to the hurricane and there was some evidence to suggest that he recommended against acquiring such insurance, both with them and with a number of other clients. 

The plaintiffs sought to draw the inference that the agent’s advice not to get flood insurance amounted to an assurance that their policy protected them against water damages caused by hurricane.  But, at least in this case, the plaintiffs were unable to make a convincing factual case for that position.  Now, advised by the outcome here, and going before some local juries in the future, the plaintiffs’ lawyer in other cases most likely will attempt to muster more evidence that the agents improperly assured their clients that their regular policy provided coverage.

Comment: There are a number of shoes that will be dropping in this litigation, but certainly the policy language here will make it very tough for homeowners’ to collect on the basis of the policy language alone.  Will Mississippi and Louisiana juries will conclude that insurance agents in those states routinely misrepresented the coverage of the homeowners’ policy in order to dissuade their customers from buying flood insurance?  The court points out here that the agent earned an additional 15% premium if the customer purchased such insurance, so it does seem that there would be little incentive to make such a misrepresentation.  But jury verdicts often don’t follow pure logic. 

In any event, it does appear that none of the issues considered here would have been susceptible to a class action, so it will be a long and expensive slog through the muck for both plaintiffs’ and insurers’ counsel down there. 

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