Louisiana Judge Rules on Katrina Insurance Coverage Cases
Spring 2007
Published in Property Insurance Law Committee Newsletter, Spring 2007. Copyright © 2007 by the American Bar Association. Reprinted with permission.
On November 27, 2006, Judge Stanwood R. Duval Jr. issued his long awaited decision as to insurance coverage for water damage and flooding following the levee breaches during Hurricane Katrina.[1] The insurers argued that there was no coverage for the damage because the policies excluded coverage for water damage, including flood. The insurers contended the inundation of water in the City of New Orleans caused by the failure of the levees excluded water damage. The insureds, on the other hand, maintained that the term “flood” was ambiguous and, therefore, coverage should be provided. The insureds further argued that because the third-party negligence of the Orleans Levee District was the efficient, proximate cause of the subsequent flooding of plaintiffs’ homes, their policies should provide coverage. In an eighty-four page decision, Judge Duval found it depends on the specific policy language as to whether unnatural flood is excluded.
Several different policies of insurance were involved in this case. The court examined each policy separately and found that coverage was afforded under some, but not all, depending on the language of the flood exclusion. In summary, the court found that the policies issued by insurers that contained the ISO water damage exclusion provided coverage for the losses sustained by the insureds, but that the policies issued by State Farm and the Hartford did not.
A. The Policies At Issue
The ISO Policy excluded water damage, including flood, but did not define flood anywhere in the policy stating:
(1) We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss:
***
(c) Water Damage, meaning:
Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind;[2]
The court referred to this exclusion as the “ISO exclusion.”
The State Farm Policy also contained an anti-concurrent preamble and excluded flood as follows:
SECTION I – LOSSES NOT INSURED
2. We do not insure under any coverage for loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:
c. (1) flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these all whether driven by wind or not[3]
Finally, the Hartford Policy defined the term “flood” and specifically included the release of water held by a levee or a flood control device:
Even if any of the terms of this policy might be construed otherwise, the following Perils, as described in Paragraphs A. and B. below, are SPECIFICALLY EXCEPTED FROM THIS POLICY. WE DO NOT INSURE AGAINST LOSS OR DAMAGE DIRECTLY OR INDIRECTLY CAUSED BY, RESULTING FROM, CONTRIBUTED TO OR AGGRAVATED BY, OR WHICH WOULD NOT HAVE OCCURRED BUT FOR, EITHER OF THESE PERILS:
2. Flood:
***
6. flood means:
a. Flood, surface water, waves, tides, tidal water, high water, and overflow of any body of water, or their spray, all whether driven by wind or not;
b. Release of water held by a dam, levy (sic) or dike or by a water or flood control device...[4]
B. The Arguments For And Against Coverage
The insurers contended that all water damage caused by Katrina was precluded from coverage and pointed to case law from various jurisdictions (Colorado, Montana, and New York) that found the term “flood” in an insurance policy to include both naturally and artificially (e.g., failure of levees) caused floods.[5]
The plaintiff insureds, on the other hand, maintained that in the context of the flood exclusions, “flooding” is limited to natural events and that the failure of the levees was not a “natural event.” In support of their argument, the insureds pointed to the Louisiana case Riche v. State Farm and Casualty Co., 356 So.2d 101 (La. App. 1st Cir. 1978), writ denied, 358 So.2d 639 (La. 1978) where the plaintiff sought to recover under his homeowner’s policy for the loss of his fishing gear which was on the bass boat of a third-party which sank during a windstorm.[6] In Riche, the insured maintained that his damage was caused by a windstorm which was a covered peril under the policy whereas the insurer contended that the loss was not caused by a windstorm but by the sinking of a boat and precluded from coverage because the policy excluded “flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not ...” The appellate court found that this exclusion was not applicable to the damage because it contemplated only damage caused by “water which has risen over and covered areas not ordinarily covered by water.”
In relying on this decision, the Katrina policyholders argued that Riche demonstrates that Louisiana courts have construed the water damage exclusion in policies as requiring the “rising over” of water which was not in the manner in which the water at issue is alleged to have inundated the insureds’ homes.[7] Rather, the insureds argued, it was the negligence of the Orleans Levee District that caused the canals to flood.
C. The Court’s Ruling
After a lengthy discussion regarding the definitions and usage of the word “flood,” Judge Duval found that “it is clear to this Court that implicit in the ‘overtopping’ definitions, a natural event caused by rain or tide is contemplated” and thus, “the term ‘flood’ would be inundation caused by a natural event.”[8]
In support of his findings, Judge Duval pointed to case law from several jurisdictions that held that the term “flood” did not contemplate water damage sustained as the result of a broken water main.[9] The judge further distinguished the cases relied upon by defendants primarily on the basis that the decisions mostly discussed the efficient proximate cause doctrine and not the issue as to whether “flood” concerned only naturally occurring events (although, the court in those matters ultimately found the claims not to be covered under the policies).[10] Judge Duval also relied on the minority opinion in a Colorado case, Kane v. Roby Ins. Co., 768 P.2d 678, 681 (Colo. 1989), rather than the majority opinion relied on by the insurers. The minority opinion stated that the term “flood” as used in the policy was ambiguous and that the “all risk policies in question cover[ed] damage caused by the negligent acts of a third party or any other source not specifically excepted from coverage by the exclusionary clauses of the policies.”[11] Finally, Judge Duval cited instances where courts held that earth movement exclusions in policies were limited to natural occurring incidents as opposed to those caused by the negligent or intentional acts of man as additional support for his finding.[12]
D. Application Of Ruling To Policies At Issue
In denying the defendants who utilized the ISO form motions for summary judgment, the court found the ISO exclusion to be ambiguous for the reasons stated above and construed it in favor of the insured and against the insurer. As the court stated, “defendants’ seeking to employ the broadest possible definition of ‘flood’ in the context of the ISO Water Exclusion would result in the evisceration of what an ‘all-risk’ policy is meant to cover” and reasoned that “[i]f the insurers, who wrote every word of the respective policies, wanted to make the language clear, that ‘flood’ means water damage caused by negligent acts or omissions, it could have so drafted in the policy language.”[13]
The court also rejected the ISO defendants’ argument that the acts or decisions and/or the faulty workmanship exclusion operated to exclude the loss.[14] The court stated that because there was coverage for the flood damage under the ISO Policies, the acts or decisions and faulty workmanship exclusions would not be applicable because the losses would be considered covered “ensuing” losses under the ensuing loss provisions. Finally, the court found the anti-concurrent cause clause in the ISO Policies to be inapplicable as there was no “separate” or other cause of damage.[15]
Conversely to the ISO Policies, the Court granted summary judgment in favor of State Farm finding that its policy language (cited above) contained a specific lead-in that stated flood damage was excluded “regardless of the cause of the excluded event” that removed the ambiguity with regard to causation of flood that is natural versus man-made. As viewed by the court:
The State Farm policy does precisely what the ISO Water Exclusion Policy fails to do. It makes it clear that regardless of the cause of the flooding, there is no coverage provided for any flooding “regardless of the cause.” Such language is clear to the Court and as such, the Court must find that the State Farm policy as written excludes coverage for all flooding.[16]
The Court also found that the Hartford’s policy containing the “Amendatory Endorsement Specifically Excluded Perils” (cited above) specifically excluded the flood damage caused by negligently maintained levees. As the court pointed out, the endorsement, “leaves nothing to the imagination” as it “states unequivocally that ‘[e]ven if any of the terms of this policy might be construed otherwise,’ the Acts, Errors or Omissions of the insured or others are specifically excepted from the policy.”[17] The court further found that such a clear statement of exclusion for “loss or damage directly or indirectly caused by acts, errors or omissions by others in the design specifications, workmanship, repair, construction renovation, of levees, dams or other facilities or the maintenance of any such property” must be enforced and accordingly, granted Hartford summary judgment.[18]
E. Certified For Appeal
The judge certified his decision for appeal to the Fifth Circuit U.S. Court of Appeals noting that “pursuant to 28 U.S.C. § 1292(b), all orders entered herein involve a controlling question of law as to which there is a substantial ground for a difference of opinion and an immediate appeal from these orders may materially advance the ultimate termination of the litigation.”
[1] In re Katrina Canal Breaches, No. 05-6323, 2006 U.S. Dist. LEXIS 85777 (E.D. La. Nov. 27, 2006).
[2] Id. at *25 – 27 (emphasis in original).
[5] Id. at *32 — 39. Cases cited by the defendant insurers include Kane v. Royal Ins. Co., 768 P.2d 678, 681 (Colo. 1989); Koncilja v. Trinity Universal Ins. Co., 35 Colo. App. 27, 528 .2d 939 (Colo. App. 1974); TNT Speed & Sport Ctr., Inc. v. American States Ins. Co., 114 F.3d 731 (8th Cir. 1997); Pakmark Corp. v. Liberty Mut. Ins. Co., 943 S.W. 2d 256 (Mo. Ct. App. 1997); and E.B. Metal & Rubber Indus. Inc. v. Fed. Ins. Co., 84 A.D.2d 662, 444 N.Y.S. 2d 321 (N.Y. App. Div. 1981).
[6] In re Katrina, 2006 U.S. Dist. LEXIS 85777 at *39
[9] Id. at *48-51, citing to, Popkin v. Security Mut. Ins. Co., 48 A.D.2d 46, 367 N.Y.S.2d 492 (N.Y.S.Ct. App. Div. 1975); Ebbing v. State Farm Fire & Cas. Co., 67 Ark. App. 381, 1 S.W.3d 459 (Ct. App. Ark. Div. III 1999); and Mellon v. Hingham Mut. Fire Ins. Co., 19 Mass. App. Ct. 933, 472 N.E.2d 674 (Mass. App. Ct. 1984).
[10] In re Katrina, 2006 U.S. Dist. LEXUS 85777 at *51 – 53.
[12] Id. at *60 – 66, citing to, Murray v. State Farm Fire & Cas., 203 W. Va. 477, 509 S.E.2d 1 (W. Va. 1998); Change, Inc. v. Westfield Ins. Co., 208 W. Va. 654, 542 S.E.2d 475, 479 (W. Va. 2000); Fayad v. Clarendon Nat’l Ins. Co., 899 So.2d 1082 (Fla. 2005); and Peach State Uniform Serv. Inc. v. American Ins. Co., 507 F.2d 996 (5th Cir. 1975).
[15] Id. at *86 – 87. The Court, however, did leave open the possibility that the anti-current cause language could play a role as the litigation proceeded. As the court stated, “if it is shown that an insured premises sustained damage from a covered peril, i.e., naturally occurring flooding such as overtopping of a levee, then the Court must determine the applicability and enforceability of the anti-current cause clause.” Id. at *59.
[16] Id. at *88 – 89 (emphasis in decision).
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