On August 2 the Fifth U.S. Circuit of Appeals ruled that Allstate Corp. and other insurance companies do not have to cover flood damage that resulted from levee breaches in New Orleans during Hurricane Katrina.
“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,” Judge Carolyn D. King wrote for a three-judge panel of the 5th U.S. Circuit Court of Appeals. The appellate court overturned a decision by U.S. District Judge Stanwood Duval Jr., who sided in November with policyholders who sued claiming that flood damage exclusions in their policies were ambiguous and should therefore be resolved in the homeowners’ favor. It is unclear whether the plaintiffs will appeal to the U.S. Supreme Court. More than a dozen insurance companies were defendants.
Levees along three major canals in the city ruptured during the storm causing flooding of 80 percent of the city and causing significant damage. The plaintiffs in the lawsuit argued that the water damage was caused by negligent design, construction and maintenance of the levees and that flood exclusions in insurance policies were ambiguous and did not clearly exclude coverage for water caused by negligence. The appeals court overturned a November ruling by a U.S. district judge in Louisiana who agreed with the plaintiff’s contention that the exclusions were ambiguous.
What It Means to Agents: While some residents and homeowners affected by Hurricane Katrina will now not be able to recover flood losses, an important legal principle has been upheld: the validity of policy exclusions for flood. It had been estimated that if the industry had lost this decision, it could have suffered a loss of $1 billion. Of more lasting danger would have been an erosion of the sanctity of insurance contracts. Resolution of similar lawsuits in this manner may ultimately lead to greater availability and affordability of insurance in the Gulf Coast states.
Big Insurers Win Ruling on Katrina Levee Break (Washington Post 8/3/07)
August 6, 2007