Hurricane Katrina Case: LA Supreme Court Upholds Flood Exclusion

In a case the insurance industry has been closely monitoring, the Louisiana Supreme Court unanimously ruled that insurance policies with flood exclusions do not cover flood damage from the failure of man-made levees. Sher v. Lafayette Ins. Co., Nos. 07-C-2441, 07-C-2443, 2008 WL 928486 (La. April 8, 2008).

Plaintiff's case stemmed from losses sustained as a result of wind and flood damage caused by Hurricane Katrina. At the time of the storm, plaintiff owned and lived in a five-unit apartment complex in New Orleans. After the levees were breached, plaintiff's building was flooded with approximately four feet of water. According to plaintiff's own architectural expert, the damage to the basement and lower level of the building was caused entirely by flood damage.

Although plaintiff's insurance policy with Lafayette Insurance Company stated it would not cover damage caused by, among other things, 'flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not,' plaintiff argued that the word 'flood' was ambiguous and only applied to flooding from natural as opposed to man-made causes. This theory was premised on the contention that the U.S. Army Corps of Engineers had improperly designed and maintained the levees, resulting in 80% of the city being inundated with water when the levee system failed.

Procedural History

Plaintiff sued Lafayette in August 2006. On a motion for summary judgment, the trial court ruled that Lafayette's flood exclusion was ambiguous and therefore failed to exclude flooding resulting from 'man-made events.' At the conclusion of the trial, the jury awarded plaintiff more than $550,000 in damages, including $144,000 for flood damage to the basement. The trial court also awarded plaintiff $317,000 in attorneys' fees and costs for a total award of $870,652.

On appeal, the Louisiana Fourth Circuit Court of Appeal reduced the total award to $514,000, but allowed the $144,000 award for flood damage to the basement. In upholding the policyholder's interpretation of the contract, the appellate court found that the policy's use of the word 'flood' was ambiguous because it failed to specifically exclude flooding from man-made causes.

The LA Supreme Court's Decision

The Supreme Court's decision reversed the court of appeal. The court held that the Fourth Circuit's restrictive definition of the term 'flood' in an insurance policy 'is without justification,' and chastised the appellate court for a decision that appeared 'to be more result determinative than legally warranted.' The Supreme Court ultimately reduced the total award to $247,001 for wind damage, lost rent, penalties, and other costs.

In finding the term to be unambiguous, the court agreed with arguments made by the insurers' counsel, Ralph Hubbard of Lugenbuhl Whea-ton Peck Rankin & Hubbard, and a member of this newsletter's Board of Editors, that '[t]he plain, ordinary and generally prevailing meaning of the word 'flood' is the overflow of a body of water causing a large amount of water to cover an area that is usually dry.' The court pointed out that the definition of the word 'does not change or depend on whether the event is a natural disaster or a man-made one … '

Moreover, the court reasoned that use of a more restrictive meaning of the word 'flood” would lead to 'absurd' results. 'Using the court of appeal's definition, a homeowner whose house is located outside a protective levee would be excluded from recovering flood damages to his property, while a homeowner whose house is located inside the levee system would be able to recover under the same policy for the same flood water simply because it flowed through a breach in the levee.'

The court then noted that, even if the exclusion in Lafayette's policy referred only to natural rather than man-made floods, the flooding that followed Hurricane Katrina 'was caused by Hurricane Katrina, not by man. The levees did not cause the flood, they, whether through faulty design, faulty construction, or some other reason, failed to prevent the flood.'

The Louisiana Supreme Court's decision mirrors that of a recent decision by the U.S. Court of Appeals for the Fifth Circuit in a separate but similar case. In re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007). In that case, the Fifth Circuit panel unanimously held that 'flood exclusions are unambiguous' and a deluge caused by a levee break met the prevailing meaning of the term 'flood.' The Fifth Circuit went on to note that the man-made failure of the levees did not change the basic fact that a flood 'is precisely what occurred in New Orleans in the aftermath of Hurricane Katrina.' The U.S. Supreme Court decided in February not to review that decision.

Prior to the decision, insurers warned that a ruling against the insurance industry on the flood exclusion issue would have a chilling effect on insurers' willingness to remain in the state, particularly in flood-prone areas. In an amicus brief, the American Insurance Association ('AIA') suggested that several billion dollars were at stake. Following the decision, the AIA issued a statement praising the Louisiana Supreme Court: 'Economic recovery following a catastrophic loss requires a stable insurance market. Insurers underwrite and make possible the many types of business investments that must occur for effective recovery to take place. If the sanctity of contracts was not preserved then the economy and recovery of the entire Gulf Coast area could have been called into question,' said Gov. Marc Racicot, president of the AIA. 'The Court's conclusion that the water damage or flood exclusion is unambiguous and applicable to the terrible flooding Louisiana suffered after Hurricane Katrina is, of course, the correct result and consistent with the decision of the U.S. Fifth Circuit on the same issue.'

The decision was also notable for finally settling several other issues that have been plaguing insurance litigants since the storm. Following Hurricane Katrina, the Louisiana legislature increased penalties against insurers who failed to adjust claims within 30 days after receipt of satisfactory proof of loss. Although plaintiff's claim for penalties had arisen prior to the enactment of the revised statute, plaintiff argued that the revised statute should be applied retroactively to his case. The Supreme Court's decision put this issue to rest, holding that the revisions to the statute providing for increased penalties were unquestionably substantive in nature and therefore cannot be applied retroactively. The court also found that plaintiff was not entitled to attorneys' fees because neither Louisiana statutory law nor the insurance policy specifically provide for such fees. Next, the court ruled for the insurer on plaintiff's claim for mental anguish, holding that although damages for mental anguish may be recovered for breach of contract when the object of the contract is intended to gratify a non-pecuniary interest, the commercial policy at issue in this case covered strictly pecuniary interests. In addition, the court also held that plaintiff was only entitled to judicial interest on penalties from the date of judgment rather than from the date of judicial demand. The court then found for the insurer on plaintiff's claim for business personal property, holding that the policy unambiguously excluded this coverage and that Lafayette did not waive use of this policy exclusion as an affirmative defense when it merely pleaded 'all … exclusions … under the policy.'

Justice Chet D. Traylor authored the majority opinion. Justices Catherine D. Kimball and Bernette J. Johnson and Ad Hoc Justice Lemmie Hightower, who sat for recused Chief Justice Pascal F. Calogero, signed on to the majority opinion. Justices Jeffrey P. Victory and John L. Weimer concurred in the result. Justice Jeannette Theriot Knoll concurred in part and dissented in part.

Brad E. Harrigan practices with Lugenbuhl Wheaton Peck Rankin & Hubbard, in New Orleans. His firm represented the defendant insurance company in this litigation.

In a case the insurance industry has been closely monitoring, the Louisiana Supreme Court unanimously ruled that insurance policies with flood exclusions do not cover flood damage from the failure of man-made levees. Sher v. Lafayette Ins. Co., Nos. 07-C-2441, 07-C-2443, 2008 WL 928486 (La. April 8, 2008).

Plaintiff's case stemmed from losses sustained as a result of wind and flood damage caused by Hurricane Katrina. At the time of the storm, plaintiff owned and lived in a five-unit apartment complex in New Orleans. After the levees were breached, plaintiff's building was flooded with approximately four feet of water. According to plaintiff's own architectural expert, the damage to the basement and lower level of the building was caused entirely by flood damage.

Although plaintiff's insurance policy with Lafayette Insurance Company stated it would not cover damage caused by, among other things, 'flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not,' plaintiff argued that the word 'flood' was ambiguous and only applied to flooding from natural as opposed to man-made causes. This theory was premised on the contention that the U.S. Army Corps of Engineers had improperly designed and maintained the levees, resulting in 80% of the city being inundated with water when the levee system failed.

Procedural History

Plaintiff sued Lafayette in August 2006. On a motion for summary judgment, the trial court ruled that Lafayette's flood exclusion was ambiguous and therefore failed to exclude flooding resulting from 'man-made events.' At the conclusion of the trial, the jury awarded plaintiff more than $550,000 in damages, including $144,000 for flood damage to the basement. The trial court also awarded plaintiff $317,000 in attorneys' fees and costs for a total award of $870,652.

On appeal, the Louisiana Fourth Circuit Court of Appeal reduced the total award to $514,000, but allowed the $144,000 award for flood damage to the basement. In upholding the policyholder's interpretation of the contract, the appellate court found that the policy's use of the word 'flood' was ambiguous because it failed to specifically exclude flooding from man-made causes.

The LA Supreme Court's Decision

The Supreme Court's decision reversed the court of appeal. The court held that the Fourth Circuit's restrictive definition of the term 'flood' in an insurance policy 'is without justification,' and chastised the appellate court for a decision that appeared 'to be more result determinative than legally warranted.' The Supreme Court ultimately reduced the total award to $247,001 for wind damage, lost rent, penalties, and other costs.

In finding the term to be unambiguous, the court agreed with arguments made by the insurers' counsel, Ralph Hubbard of Lugenbuhl Whea-ton Peck Rankin & Hubbard, and a member of this newsletter's Board of Editors, that '[t]he plain, ordinary and generally prevailing meaning of the word 'flood' is the overflow of a body of water causing a large amount of water to cover an area that is usually dry.' The court pointed out that the definition of the word 'does not change or depend on whether the event is a natural disaster or a man-made one … '

Moreover, the court reasoned that use of a more restrictive meaning of the word 'flood” would lead to 'absurd' results. 'Using the court of appeal's definition, a homeowner whose house is located outside a protective levee would be excluded from recovering flood damages to his property, while a homeowner whose house is located inside the levee system would be able to recover under the same policy for the same flood water simply because it flowed through a breach in the levee.'

The court then noted that, even if the exclusion in Lafayette's policy referred only to natural rather than man-made floods, the flooding that followed Hurricane Katrina 'was caused by Hurricane Katrina, not by man. The levees did not cause the flood, they, whether through faulty design, faulty construction, or some other reason, failed to prevent the flood.'

The Louisiana Supreme Court's decision mirrors that of a recent decision by the U.S. Court of Appeals for the Fifth Circuit in a separate but similar case. In re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007). In that case, the Fifth Circuit panel unanimously held that 'flood exclusions are unambiguous' and a deluge caused by a levee break met the prevailing meaning of the term 'flood.' The Fifth Circuit went on to note that the man-made failure of the levees did not change the basic fact that a flood 'is precisely what occurred in New Orleans in the aftermath of Hurricane Katrina.' The U.S. Supreme Court decided in February not to review that decision.

Prior to the decision, insurers warned that a ruling against the insurance industry on the flood exclusion issue would have a chilling effect on insurers' willingness to remain in the state, particularly in flood-prone areas. In an amicus brief, the American Insurance Association ('AIA') suggested that several billion dollars were at stake. Following the decision, the AIA issued a statement praising the Louisiana Supreme Court: 'Economic recovery following a catastrophic loss requires a stable insurance market. Insurers underwrite and make possible the many types of business investments that must occur for effective recovery to take place. If the sanctity of contracts was not preserved then the economy and recovery of the entire Gulf Coast area could have been called into question,' said Gov. Marc Racicot, president of the AIA. 'The Court's conclusion that the water damage or flood exclusion is unambiguous and applicable to the terrible flooding Louisiana suffered after Hurricane Katrina is, of course, the correct result and consistent with the decision of the U.S. Fifth Circuit on the same issue.'

The decision was also notable for finally settling several other issues that have been plaguing insurance litigants since the storm. Following Hurricane Katrina, the Louisiana legislature increased penalties against insurers who failed to adjust claims within 30 days after receipt of satisfactory proof of loss. Although plaintiff's claim for penalties had arisen prior to the enactment of the revised statute, plaintiff argued that the revised statute should be applied retroactively to his case. The Supreme Court's decision put this issue to rest, holding that the revisions to the statute providing for increased penalties were unquestionably substantive in nature and therefore cannot be applied retroactively. The court also found that plaintiff was not entitled to attorneys' fees because neither Louisiana statutory law nor the insurance policy specifically provide for such fees. Next, the court ruled for the insurer on plaintiff's claim for mental anguish, holding that although damages for mental anguish may be recovered for breach of contract when the object of the contract is intended to gratify a non-pecuniary interest, the commercial policy at issue in this case covered strictly pecuniary interests. In addition, the court also held that plaintiff was only entitled to judicial interest on penalties from the date of judgment rather than from the date of judicial demand. The court then found for the insurer on plaintiff's claim for business personal property, holding that the policy unambiguously excluded this coverage and that Lafayette did not waive use of this policy exclusion as an affirmative defense when it merely pleaded 'all … exclusions … under the policy.'

Justice Chet D. Traylor authored the majority opinion. Justices Catherine D. Kimball and Bernette J. Johnson and Ad Hoc Justice Lemmie Hightower, who sat for recused Chief Justice Pascal F. Calogero, signed on to the majority opinion. Justices Jeffrey P. Victory and John L. Weimer concurred in the result. Justice Jeannette Theriot Knoll concurred in part and dissented in part.

Brad E. Harrigan practices with Lugenbuhl Wheaton Peck Rankin & Hubbard, in New Orleans. His firm represented the defendant insurance company in this litigation.