Judge Rules in Favor of Plaintiffs in New Orleans Canal Case

November 29, 2006

In a decision that could cost insurers many more billions of dollars than they have already paid out in Hurricane Katrina claims, a federal judge in New Orleans has ruled that ambiguities in certain homeowners policies leave open the possibility that flooding due to “man-made” acts could be covered, despite widespread water damage exclusions contained in most policies.

Late on Nov. 28, the United States District Court for the Eastern District of Louisiana, released an 85-page ruling by Judge Stanwood R. Duval Jr. in several consolidated cases in which plaintiffs argued that flood damage “arising out of all levee breaches which occurred in the aftermath of Hurricane Katrina” should be covered since such flooding is not specifically excluded in the policies. In denying insurers’ attempts to have the lawsuits dismissed, the judge cited ambiguous language in the water damage exclusions in some policies.

The ruling applies to several cases that were consolidated in “In re: Katrina Canal Breaches Consolidated Litigation.” (C.A. No. 05-4182) The consolidated case, while not a class action, “has become the umbrella for all cases which concern damages cause by flooding as a result of breaches or overtopping in the areas of the 17th Street Canal, the London Avenue Canal, the Industrial Canal, and the Mississippi Gulf river Outlet,” according to the judge’s order.

Expecting the decision to be appealed, Judge Duval forwarded it to the 5th U.S. Circuit Court of Appeals for review.

Plaintiffs’ attorney Joseph Bruno told the Associated Press that there is no timetable for the review.

“Right now, we’re on the verge of an opportunity to get a recovery for people who have lost everything and who didn’t have flood insurance or didn’t have enough flood insurance,” Bruno said.

Mike Siemienas, a spokesman for Allstate Insurance Co., one of the companies named in the suit, told the AP that the company plans to appeal Duval’s decision to the 5th Circuit, said

“Allstate disagrees with the judge’s conclusion that its policy exclusions do not apply to water damage resulting from the flooding in the New Orleans area,” he said.

According to the order, the “plaintiffs allege that the cause of the levee failures was ‘negligent design, negligent maintenance and/or inadequate materials,’ and that ‘any damages attributable to the levee failures are the result of improper and/or negligent design, construction, maintenance of the levees by various third parties and or third party negligence.'” (Id. ¶¶ 46-50). While acknowledging the water damage exclusions contained in their policies, the plaintiffs alleged that those exclusions did not apply to “‘the failing of virtually all man-made structures containing navigable Waters of the United States . . . due to negligent conduct’ beyond plaintiffs’ control.” (Id. ¶ 61)

While Judge Duval wrote that many insurers’ policies do not specifically exclude “man-made” water breaches, he found exceptions in the policies of State Farm and The Hartford, both of which exclude damage from flooding regardless of the cause.

In a separate action, the U.S. Supreme Court refused yesterday to consider motions to recuse Judge Duval from these cases.

A contrast

Duval’s ruling contrasts sharply with an August decision by a federal judge in Gulfport, Miss., who ruled that a couple could not collect from their insurer because their policy doesn’t cover damages from floodwaters or storm surges.

“Almost all the damage … is attributable to incursion of water,” U.S. District Judge L.T. Senter Jr. wrote in the Mississippi suit.

Senter, however, allowed that the policy the couple’s insurer used to deny coverage was ambiguous because it covers wind damage but not damage caused by wind and water.

At the time, Louisiana Insurance Commissioner said the decision probably would not affect Louisiana litigation because Senter sits in a different district.

But Allan Kanner, chairman of the Louisiana Trial Lawyers Association, said insurance companies probably would use it in litigation.

And, since Mississippi also is part of the 5th Circuit, any appellate court ruling in the Mississippi case would apply to Louisiana.

Associated Press reports contributed to this story.

Judge Duval’s order may be found online at http://www.laed.uscourts.gov/CanalCases/CanalCases.htm.

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