La. Independent Agents Group CEO Lauds Flood Limitation Rulings

August 8, 2007

The CEO of a major insurance agent trade group in Louisiana says two recent federal appeals court decisions affirming flood limitations in property policies will enhance the state’s recovery from Hurricane Katrina.

Jeff Albright, CEO of the Independent Insurance Agents & Brokers of Louisiana, says the decisions by the U.S. Fifth Circuit Court of Appeal in New Orleans reaffirming flood limitations in wind vs. water claim disputes arising from claims in Louisiana from Hurricanes Katrina and Rita are a clear victory for insurance companies.

In a news release, Albright hailed the rulings as a major step in the recovery of Louisiana.

“These critical Appeal Court rulings reaffirm the clear policy exclusions for water damages, and lift the cloud of uncertainty which 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.”

Valued Policy Law Applies to Covered Perils Only

In an unanimous decision, the Fifth Circuit overturned the district court decision in Chauvin v. State Farm Fire & Casualty, ruling that the valued policy law only applies if the total loss was caused by a covered peril. The Court rejected the argument that the valued policy statute applied to a total loss caused in part by a covered peril, along with substantial damage by a peril not covered by the policy.

The opinion provides strong support for the insurance industry’s interpretation of the Valued Policy Law (VPL) as evidenced by the following excerpt from the decision summary:

“After considering the purposes of the VPL, we are convinced that the insurers’ construction of the VPL best conforms with its legislative purpose and thus, the VPL only requires an insurer to pay the agreed face value of the insured property if the property is rendered a total loss from a covered peril. As the district court observed, the homeowners’ interpretation does nothing to further the purpose of the VPL. In particular, a finding that the statute requires insurers to pay the agreed face value of the property, even if an excluded peril (flooding) causes the total loss, runs counter to the VPL’s effort to link insurance recoveries to premiums paid. Such an interpretation of the statute would force the insurer to pay for damage resulting from a noncovered peril for which it did not charge a premium.”

Flood Exclusions Apply to Manmade as Well as Natural Disasters

In another unanimous decision, Fifth U.S. Circuit Court of Appeals vacated a November ruling by U.S. District Judge Stanwood Duval that opened the door for insurance companies to be held liable for flood damage that policyholders claimed was caused by negligent design, construction and maintenance of the levees.

In the Katrina Canal Breaches Litigation case, the Fifth Circuit ruled that Duval was incorrect when he held that the flood exclusion language of insurers’ policies is ambiguous, and that ambiguity must be interpreted in favor of covering the damage done by floodwaters that flowed through the levee breaches.

The plaintiffs’ policies clearly exclude coverage for flooding, regardless of its cause, 5th Circuit Judges Carolyn D. King, Harold R. DeMoss Jr. and Priscilla R. Owen ruled. “Under Louisiana law, we are bound to enforce the unambiguous terms of their insurance contracts as written,” the panel said. “What occurred here fits squarely within the generally prevailing meaning of the term ‘flood.’ ”

The court ruled that the flooding associated with Katrina had a “sizable natural component: a catastrophic hurricane and the excess water associated with it.”

However, they also made it very clear that flooding caused by manmade disasters would also be excluded under the unambiguous water damages exclusion found in most property insurance policies.

“If man’s failure to adequately prepare for a natural disaster could alone transform the disaster into a non-natural event outside the scope of the policy’s exclusion, it is difficult to conceive how an insurer could ever exclude the resulting loss. When a body of water overflows its normal boundaries and inundates an area of land that is normally dry, the event is a flood. This is precisely what occurred in New Orleans in the aftermath of Hurricane Katrina. That a levee’s failure is due to its negligent design, construction or maintenance does not change the character of the water escaping through the levee’s breach; the waters are still floodwaters and the result is a flood,” the panel said.

Source: Independent Insurance Agents and Brokers of Louisiana,

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