Court Says Policies Exclude Floods; Justices Overturn Rulings, Back Insurer
The Louisiana Supreme Court on Tuesday rejected arguments that homeowner insurance policies should have covered damages caused by levee breaches during Hurricane Katrina, saying the disaster clearly involved a "flood" not covered by such policies.
The state's high court reversed decisions by state trial and appeals courts that said the definition of the word "flood" was ambiguous in New Orleans resident Joseph Sher's hazard insurance policy with Lafayette Insurance Co.
For policyholders and insurance companies, the court's decision was a matter of high stakes: the policy language Lafayette used was from a form followed by all but two insurers in Louisiana. Under state law, if the policy language used by the insurance industry is found to be ambiguous, the policyholders' interpretation must be followed.
The Sher case was being closely watched, as hundreds of policyholders with cases still pending in lower courts were hoping the Supreme Court would uphold the plaintiff's argument.
Insurance industry advocates argued, however, that a ruling against them could drive insurance companies out of the Louisiana market, further limiting the ability of homeowners to buy policies.
The high court ruled that Sher's homeowner policy was not ambiguous in excluding coverage for a flood. The court said the lower courts should have looked at the "plain, ordinary and generally prevailing definition" of the word "flood."
"Contrary to the court of appeal's reasoning, this definition (of 'flood') does not change or depend on whether the event is a natural disaster or a man-made one in either case, a large amount of water covers an area that is usually dry," the Supreme Court opinion said.
'A flood is a flood'
Justice Chet Traylor of Winnsboro, writing the majority decision, went a step further, saying the flooding in New Orleans after Hurricane Katrina was not caused by man, only aided by human errors.
"The flood was caused by Hurricane Katrina, not by man," Traylor wrote. "The levees did not cause the flood, they, whether through faulty design, faulty construction, or some other reason, failed to prevent the flood."
The reasoning was similar to a recent ruling by the 5th U.S. Circuit Court of Appeals in a different case, in which a panel of three Texas judges concluded that "a flood is a flood." But if the Louisiana Supreme Court had gone the other way, its decision would have trumped the federal finding because state law holds sway in insurance disputes.
All seven Supreme Court justices agreed that Lafayette was right to deny payments, under a homeowner's policy, for flood damage at the Uptown home of Sher, a 92-year-old Holocaust survivor. The court ruled in Sher's favor on some other issues of his case, such as whether Lafayette paid an appropriate amount for other damages that were covered by the policy.
Attorney John Houghtaling, who joined the lawsuit on behalf of the state of Louisiana, said, "This is the end of the road here. This is a very, very sad day for anyone who isn't an insurance executive."
The insurance industry cheered the court's decision. Former Montana Gov. Marc Racicot, president of the American Insurance Association, said the justices "showed great courage and understanding" in a tough political environment.
Houghtaling said he was "shocked by the ruling" and thought the insurance industry had "pulled the wool over the eyes of another court." In addition to 1,500 homeowners Houghtaling represented against insurers, he was also retained by former Attorney General Charles Foti to argue that the state's Road Home program, which uses federal taxpayer dollars to cover gaps in insurance payments, should be reimbursed for at least $1 billion it paid for water damage homeowner policies should have covered.
Houghtaling's firm noted that in 2004, the industry asked the state insurance commissioner to approve new policy language making it clear that water from levee breaches wasn't covered in homeowner policies. Houghtaling said that proved the industry knew that previous policy language which remained in use by all but two firms at the time of Hurricane Katrina was ambiguous. The Supreme Court didn't address that argument in its ruling.
Racicot repeated a popular industry argument that an unfavorable ruling would have kept insurers out of the Gulf Coast market and hurt the area's recovery. Houghtaling said that was a tactic meant to scare the justices.
"They say the reason premiums are so high is because of all the lawsuits," he said. "Well, now they can release billions they were holding in reserves to pay these claims, but I think they'll just add it to their record profits. If they actually drop their premiums, I'll eat my words."
Antitrust laws prevent industry groups from saying what will happen to premiums, but the AIA acknowledged that the Supreme Court ruling changes the landscape of an insurance market that has, by and large, been crippled by uncertainty over how Louisiana law would be applied to policies.
"Uncertainty about the sanctity of contracts has had an effect in Louisiana since Katrina," AIA spokesman Dennis Kelly said. "Now, we have something to improve the confidence of market participants."
The court did not rule Tuesday on another highly anticipated post-hurricane insurance case involving Louisiana's valued policy law. The court said it needed additional briefing in the case, Landry v. Louisiana Citizens Property Insurance Co. The policyholders in that case, victims of Hurricane Rita, claim the 108-year-old valued policy law should force their homeowners insurance to pay the full cost of a home when it's been destroyed by covered and uncovered forces, such as wind and storm surge, at roughly the same time.
Copyright 2008, The Times-Picayune