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Insurance Implications of Hurricane Katrina Lawsuits
Disclaimer This paper represents an analysis of two lawsuits filed against the insurance industry shortly after Hurricane Katrina made landfall on the Gulf Coast in September 2005. The intent is to make an objective examination of the issues inherent in the suits from an educational perspective. While various court cases and legal principles are discussed within the context of policy coverages, nothing in this paper should be construed as legal advice or commentary. The opinions expressed below are solely those of the author and do not necessarily reflect IIABA's position on this issue nor any litigation currently underway, and IIABA has not taken an official position on this subject. IntroductionThe waters had not even begun to recede from Hurricane Katrina when the first of what will almost certainly prove to be a flood of lawsuits was filed in Mississippi by the attorney general. This lawsuit and a class action suit from Louisiana, also against the insurance industry, are the subject of this paper, though several other lawsuits have since been filed, with undoubtedly more to come. One reason for the anticipated proliferation of lawsuits is the unprecedented amount of uninsured flood losses. Census reports indicate that approximately 70% of Americans live along coastal areas, resulting in a tremendous exposure to potentially catastrophic losses from hurricanes. It has been estimated that a homeowner is twenty-six times more likely to have a flood loss than a fire loss, with this remarkable figure due largely to coastal exposures and properties along major waterways such as the Mississippi River. About one-third of all flood claims occur outside of special flood hazard areas where, according to the Rand Corporation, only about 1% of property owners purchase flood insurance from the National Flood Insurance program. Even within such flood zones, only about one-fourth to one-half of property owners purchase flood insurance, and even then largely because of mortgage requirements. The Wall Street Journal reported that up to 80% of properties damaged by Hurricane Katrina in Mississippi were uninsured for flood (with no more than 45,000 dwelling flood policies in force statewide). It is estimated that up to 60% of properties in New Orleans were without flood insurance, despite the knowledge of the property owners that their buildings were situated below sea level and numerous stories had been published or broadcast about the inadequacies of the city's flood control systems to handle a Category 4 or worse hurricane. According to one commentator, "Every year, a large percentage of those eligible to buy federally subsidized flood insurance do not. Like public officials who knowingly choose to invest only enough money in flood control to survive a Cat III hurricane but not a Cat IV hurricane, homeowners gamble their property on the theory that 'flood insurance is too expensive.' After every major disaster involving extensive flooding, we see politicians and class action attorneys taking aim at the flood exclusion in homeowners policies, looking for ways to overcome decades of legal precedent behind that part of the insurance contract. Sometimes they succeed, after which insurance companies examine their policies and make adjustments that their policies are as clear and unambiguous as possible that damage due to flood is not covered. They then file those policy contract forms with state insurance regulators and negotiate the terms until they can obtain approval from the state and issue them to policyholders." Now, once again, tens of thousands of property owners find themselves with buildings that are constructive total losses or which have suffered at least serious damage largely as a result of flooding from Hurricane Katrina. Local, regional, and state governments in affected areas now find themselves without property, sales, or other taxes. Katrina has created thousands of refugees that have become an increased burden on the infrastructures of areas outside the devastation. Since so much of these losses are uninsured, it is a seemingly natural progression that legions of trial lawyers will seek public assistance from the deep pockets of businesses and industries that might have even a remote causal connection to these losses. An immediate target, as evidenced by several quickly filed lawsuits, is the insurance industry. No doubt, many of these lawsuits will plod their way through the court system to final resolution, whatever that might be. For example, in Urrate v. Argonaut Great Central Ins. Co., 881 So.2d 787 (La. App. 2004), the contestants litigated over what percentage of losses were due to windstorm vs. flood during 1998's Hurricane Georges. To make a long story short, after six years (seven and a half counting the unsuccessful appeal to the Louisianan Supreme Court), the insured received the grand total of an additional $29,000 in damages. The purpose of this paper is to explore the basis for two of the earliest lawsuits against the insurance industry. One was filed by the Mississippi attorney general and the other as part of a class action lawsuit in Louisiana. For more information on what we might expect in the area of future litigation, check out these articles:
Mississippi Attorney General LawsuitThe attorney general's lawsuit seeks to declare flood exclusions "void and unenforceable" because insurers would be "unjustly enriched" at the expense of Mississippi citizens, claiming that the insurers are "purposely and intentionally" denying claims "knowing full well that the State's citizens would be injured thereby." He further claims that their "refusal to meet their contractual obligations to their policyholders will impose unnecessary and excessive costs upon the state and local governments and ultimately the taxpayers of the State of Mississippi." According to the attorney general, the defendant insurers issued policies "purporting to insure against property loss and damage from wind storms and hurricanes, but which contain substantially similar provisions attempting to exclude coverage for hurricane loss and damage if the loss and/or damage included, directly or indirectly, loss or damage resulting from water, whether driven by wind. Defendants have realized millions of dollars in premiums from their sale of these policies." The attorney general, as reported in news accounts, claimed, "Is it right to write in the fine print a provision that takes away the reason for the contract in the first place? You can't put this stuff in fine print and bankrupt half the coast and say, `Oh well, they should have known.'" This is just another example of inflammatory language used in an attempt to change something from a purely contractual issue to an emotional one. Modern filed insurance policies do not contain "fine print." Also, while insurers may have realized millions of dollars in premiums from these policies, none of these premium dollars were collected to pay for flood damage. It's clear that local and state governments stand to lose millions in taxes of all types, yet the insurance industry is expected to bear the brunt of those losses. As for being aware of the exposure, as published in The Washington Examiner, the "Insurance Consumer's Hurricane Checklist," distributed by the Mississippi insurance department, has for years warned consumers about flood exclusions: "Remember that homeowners' policies do not cover flood damage caused by rising water…If you live in a flood-prone area, contact your agent about obtaining flood insurance." The fact remains that an estimated 70% of Mississippi property owners in or near the Gulf Coast elected not to purchase flood insurance that has been widely publicized as needed and available in such areas. Reasonable ExpectationsAccording to the suit, Gulf Coast residents and property owners purchased policies "for the primary purpose of insuring against ANY damage that could POSSIBLY result from hurricanes originating from the Gulf of Mexico. Based on these purported policy coverages, the residents and/or property owners of the Mississippi Gulf Coast purchased these policies for the primary purpose of insuring against ANY AND ALL hurricane damage and with the REASONABLE EXPECTATION that these policies would provide such coverage." [emphasis added] Virtually all insurance policies contain exclusions, so it is grossly inaccurate to aver that policies should protect against "any and all" damage that could "possibly" occur. For example, the "ISO standard" homeowners policy excludes damage arising out of off-premises power failure, something that invariably accompanies widespread damage such as a hurricane. However, the suit does not appear to seek recovery for such damages. In "Concurrent Causation: The Coverage Trap," Best's Review, 1985, pp. 50, 58, Friedman states that:
So, from a practical and financial standpoint, no policy will cover "any and all" damages, regardless of the post-loss desperate desires of the policyholder. This was spelled out in Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704, 708 (Cal. 1989):
In other words, private insurers don't offer coverage for potentially catastrophic flood exposures because: (1) most at-risk consumers couldn't afford the coverage if premiums were actuarially apportioned, and (2) few, if any, insurers could survive an unpredictably high seasonal incidence of hurricanes and storms. This is not the first time that flood exclusions have been applied following hurricanes along the Gulf Coast, including Mississippi, although it is the first time in recent memory that such widespread devastation has occurred. In the past, flooding claims were denied by most insurers under standard homeowners and commercial property policies and were extensively reported in the media for claims exactly like those suffered at the hands of Katrina. One would think that no "reasonable expectations" of coverage would arise given past claim denials and the resulting publicity in local media outlets. As opined in Serradell v. Hartford Accident & Indemnity Co., 843 P.2d 639, 641 (Alaska, 1992):
In Bering Strait School District v. RLI Ins. Co., 873 P.2d 1292, 1294 (Alaska, 1994), the court established that, in order to determine the reasonable expectations of the parties, "...we look to 1) the language of the disputed policy provisions; 2) the language of the other policy provisions; 3) relevant extrinsic evidence; and 4) case law interpreting similar provisions." Based on these criteria, numerous courts have found that the flood, earthquake, and similar catastrophe-based exclusions in most policies are clear, unambiguous, and not in conflict with the reasonable expectations of insureds. (Many of these court cases are referenced later in this paper within the context of the discussions on the efficient proximate cause and concurrent causation doctrines that underlie the two lawsuits addressed herein.) Similarly, in Wilkie v. Auto Owners Ins. Co., 469 Mich. 41, 62; 664 N.W.2d 776 (2003), the Michigan Supreme Court held that an insured's reasonable expectation, "clearly has no application when interpreting an unambiguous contract because a policyholder cannot be said to have reasonably expected something different from the clear language of the contract." Therefore, if it can be demonstrated that the flood exclusion in most policies today is clear and unambiguous, the issue of "reasonable expectations" is moot. As discussed later in this paper, we intend to demonstrate that a clear majority of jurisdictions have found that the flood exclusion and/or anti-concurrent causation wording in most "ISO standard" property policies is clear and unambiguous. Against Public PolicyThe suit goes on to say that claim denials will "deprive thousands of Mississippi Gulf Coast residents and/or property owners of the insurance protection they purchased and upon which they relied." The counterpoint is that none of their premium dollars went to pay for flood damage since it's expressly excluded by most property policies. The suit specifies five counts: Count One: Violation of the Public Policy of the State of Mississippi This count claims that the flood exclusions are void and unenforceable as violations of the public policy of the state with regard to their attempt to override state legal and judicial precedents involving the issue of proximate cause. The fact is that the vast majority of states (including Mississippi) that have opined on this subject have concluded that willing parties can contract away such rights. These court cases are outlined below in the discussions of efficient proximate cause and concurrent causation. As a practical matter, policy language is routinely modified to override judicial precedents. All one has to do is review a typical large ISO coverage filing to see the citation of court cases as the basis for changing policy language, and such revisions are routinely acknowledged or approved by state insurance regulators across the country, including Mississippi. The court is also asked to declare the exclusions against public policy because they violate state common law which allegedly mandates that "full coverage" be provided if the proximate and efficient cause of the damage (i.e., hurricane wind) is covered, even if other excluded causes also contribute to the loss. Many modern policies exclude some causes of loss by including anti-concurrent causation wording. For example, most property policies cover "explosion," yet exclude "war." Following the logic above, policies would have to cover war risks because the proximate and efficient cause of most damage (i.e., explosions) would be covered. Anti-concurrent causation wording enables insurers to exclude potentially catastrophic exposures such as flooding and war, thus maintaining premium affordability while covering most losses such as windstorm and explosions that otherwise would have to be excluded as well since they are subsets of the larger perils of flooding and war, respectively. Note that courts generally will not vacate an unambiguous exclusion simply to provide relief to catastrophe victims. In Florida Windstorm Underwriting v. Gajwani, 2005 Fla. App. LEXIS 6782 (Fla. Dist. Ct. App. 2005), the court ruled that neither a homeowners policy nor a windstorm policy covered wind-driven rain damage resulting from water seeping through window and door openings during Hurricane Irene in 1999. Since windstorm exclusions are not uncommon in coastal areas where the coverage often must be purchased through a residual market mechanism, this could be an important decision in Katrina claims since it implies that there is no coverage for wind-driven water (rain or perhaps "storm surge" as discussed later in this paper) in the absence of a flood insurance policy. In its decision, the Gajwani court cautioned against voiding a policy exclusion on the premise that it violates public policy. Specifically, the court ruled:
Again, the majority of jurisdictions recognize the right of contracting parties to waive the efficient proximate cause and concurrent causation doctrines where permitted by law. In fact, most recently, the Mississippi Court of Appeals itself upheld such anti-concurrent causation wording in Boteler v. State Farm Casualty Insurance Company, 876 So. 2d 1067 (Miss. App. 2004). This case is discussed in more detail later in this paper. Two notable exceptions to the majority opinion are California and North Dakota where the efficient proximate cause doctrine is established by statute and contract provisions cannot be more restrictive than permitted by statute. In response to numerous court cases such as Sabella v. Wisler, 59 Cal. 2d 21, 377 P.2d 889 (California, 1963), State Farm v. Partridge, 10 Cal. 3d 94, 514 P.2d 123 (California, 1973), and Safeco Ins. Co. v. Guyton, 692 F.2d 551 (9th Cir., 1982), insurers and ISO have introduced contract wording designed to override the efficient proximate cause and concurrent causation doctrines around the country where permitted by law. For example, below is the current wording in the ISO HO 00 03 10 00 homeowners policy [emphasis added] relative to Katrina flood losses. The language in ISO's commercial Causes of Loss form CP 10 30 04 02 is essentially the same as that in their homeowners HO-3 form so that the discussion henceforth applies, for the most part, to both home and business property losses.
Notice that the lead-in language for the exclusions under provision A. of the policy clarifies that these exclusions apply even if they contribute directly or indirectly to the loss, and regardless of any other cause that might also contribute concurrently or in any sequence to the loss, thus making moot the efficient proximate cause and concurrent causation doctrines as outlined below. Note too that the exclusions apply to localized losses that are not catastrophic by nature. For example, flooding of a single property is excluded whether it is in the generally widespread nature of losses covered by an NFIP policy or not. The anti-concurrent causation wording is further clarified by provision B. of the general exclusions section of the policy. Item B.1. clarifies that flooding, for example, is excluded even if it arises out of weather conditions such as hurricanes, windstorms, rain, etc. In particular, provision B.3. is applicable to the flooding in New Orleans where the failed levees have been pointed to as the efficient proximate cause (or even a concurrent cause) of the flooding due to negligent design, construction, or maintenance. This is discussed later in this paper. So, how does this policy language tie into the lawsuits being addressed herein? To establish the connection, we must first look to the efficient proximate cause and concurrent causation doctrines and related court cases. In particular, we'll focus on the court cases that have addressed the anti-concurrent causation language cited above that is found in most current property insurance policies, as well as "public policy" issues cited in the Mississippi AG lawsuit. Efficient Proximate Cause DoctrineIn Bartholomew v. Cameron County Mutual Ins. Co., 882 S.W.2d 173 (Mo. App. 1994), the court, citing 5 Appleman, Ins. Law and Practice, 3083 at 309-11 (1970), explained that:
The concept that the efficient proximate cause is the risk that sets other causes in motion has also been noted in Toumayan v. State Farm Gen. Ins. Co., 970 S.W.2d 822 (Mo. Ct. App. 1998), Bowers v. Farmers Ins. Exch., 991 P.2d 734, 738 (Wash. Ct. App. 2000), and other jurisdictions. However, in cases such as Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704, 708 (Cal. 1989), Pioneer Chlor Alkali v. National Union Fire Ins. Co., 863 F. Supp. 1226, 1231 (D. Nev. 1994), and Lorio v. Aetna Ins. Co., 232 So.2d 490, 494 (La. 1970), courts have ruled that efficient causation depends on whether a particular cause or event is a "substantial factor" or a "predominant cause" of loss. In general, as explained in Finn v. Continental Ins. Co., 267 Cal. Rptr. 22, 24 (Ct. App. 1990), the efficient proximate cause doctrine applies only when there are at least two distinct perils which "could each, under some circumstances have occurred independently of the other and caused damage." Courts have generally found that an occurrence cannot be a proximate cause of an event if the event would have take place without the occurrence (Milton v. Main Mutual Ins. Co., 261 So.2d 723 (La. Ct. App. 1972)). As for an insurer's ability to override efficient proximate cause, in Pioneer, for example, the court stated that, "[T]he efficient proximate cause doctrine is a default rule that gives way to the language of the contract. In State Farm Fire & Cas. Co. v. Bongen, 925 P.2d 1042, 1045 (Alaska 1996), the court reasoned, "We therefore align ourselves with those courts holding that an insurer may expressly preclude coverage when damage to an insured's property is caused by both a covered and an excluded risk." In Toumayan, the court stated, "The parties to an insurance contract can contract out of the efficient proximate cause doctrine by exclusionary language." The Indiana Court of Appeals, in 1995, agreed with this position in Ramirez v. American Family Mutual Ins. Co., 652 N.E. 2d 511. Similar conclusions were reached in Contardi v. American Family Mutual Ins. Co., 680 N.W.2d 828 (Wis. Ct. App 2004), Paglarini v. Owners Insurance Co., 2001 Minn. App. Lexis 834 (2001), Preferred Mut. Ins. Co. v. Travelers Cos., 955 F. Supp. 9, 11-13 (D. Mass. 1997), Preferred Mut. Ins. Co. v. Meggison, 53 F.Supp.2d 139, 142 (D. Mass. 1999), Assurance Co. Am., Inc. v. Jay-Mary, Inc., 38 F.Supp.2d 349, 354 (D. N.J. 1999), and many others. In Kane v. Royal Ins. Co. of America, 768 P.2d 678, 685 (Colo. 1989), the court opined, "[The] efficient moving cause rule must yield to qualifying or enlarging words agreed to by the parties and included in the insurance policy." In Lexington Ins. Co. v. Unity/Waterford-Fair Oaks, Ltd., 2002 U.S. Dist. Lexis 3594 (N.D. Tex. 2002), the court also agreed that the anti-concurrent language was valid. The Utah court, in Alf v. State Farm Fire and Casualty Ins. Co., 650 P.2d 1272 (1993), decided that, while the efficient proximate cause doctrine applied, it could be disregarded when the parties agree to freely contract out of it. Based on the wording of the policy in question, the court ruled that the parties had, indeed, agreed to waive the doctrine:
In Front Row Theater, Inc. v. American Mfrs. Mut. Ins. Co., 18 F.3d 1343, 1347 (6th Cir. 1991), the court stated, "When damage to an insured's property is caused by both a covered and an excluded event, coverage may be expressly precluded by language in the policy." In Schroeder v. State Farm Fire & Cas. Co., 770 F. Supp. 558, 561 (D. Nev. 1991), the court ruled that, "[T]he parties could, as they did, contract out of the efficient proximate cause doctrine without violating public policy." In State Farm Fire & Casualty Co. v. Slade, 747 So.2d 293 (Ala. 1999), the Alabama Supreme Court noted that, under Alabama law, insurance companies and their insureds, "...are free to agree to any terms in a contract 'so long as they do not offend some rule of law or contravene public policy.'" The court determined that the efficient proximate cause doctrine was not a principle of public policy because, if the court elevated the rule to a principle of public policy, it would invade the province of the legislature. In other words, public policy is best established by legislative edict, typically via statute or at least regulation. In a case strikingly similar to recent events in New Orleans, TNT Speed & Sport Center, Inc. v. American States Insurance Company, 114 F3d 731, 732 (8th Cir. 1997), flooding damage was caused when vandals removed sandbags and dirt from a levee protecting West Quincy, MO from rising Mississippi River waters. The levee subsequently flooded TNT's property. The policy excluded the peril of flood, but covered vandalism. However, the flood exclusion was preceded by anti-concurrent causation language comparable to that in current ISO policies. Specifically, the TNT policy said:
The district court determined that the express language of the flooding exclusion was clear and unambiguous and that "the plain meaning of the exclusionary language was to directly address, and contract out of, the efficient proximate cause doctrine and exclude coverage for losses caused by water, regardless of the existence of any other contributing causes in any sequence." Just as plaintiffs in the Louisiana class action suit discussed later in this paper argue that the proximate cause of flooding in New Orleans was negligent design, construction, or maintenance of the levees, the plaintiff in TNT argued that the district court improperly applied Missouri law regarding the efficient proximate cause doctrine and that the proximate cause of TNT's loss was the act of vandalism, a covered loss. The court, unable to find any controlling Missouri case, reviewed decisions from other state's highest courts and concluded that "the most analogous and more persuasive cases from other states recognize that parties may contract out of application of the efficient proximate cause doctrine." Cited were many of the cases noted above, along with Millar v. State Farm Fire & Cas. Co., 804 P.2d 822 (Ariz. App. 1990), Kula v. State Farm Fire & Cas. Co., 628 N.Y.S.2d 988, 991 (N.Y. App. 1995), and State Farm Fire Cas. Co. v. Paulson, 756 P.2d 764 (Wyo. 1988). As far as we can tell, no more than three states have invalidated anti-concurrent causation language with regard to the efficient proximate cause doctrine. California, as established in the state court case of Howell v. State Farm Fire & Casualty Co., 267 Cal. Rptr. 708 (Cal. Ct. App. 1990), does not permit this because of Section 530 of the California Insurance Code which says, "An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss, but he is not liable for a loss of which the peril insured against was only a remote cause." However, as noted in State Farm Fire & Casualty Co. v. Martin (see below), the federal court in California ruled that an insurer may contractually limit coverage for concurrent causes of loss. In addition to California, North Dakota, as established in Western National Mutual Ins. Co. v. University of North Dakota, 643 N.W.2d 4, 13 (N.D. 2002), also has statutorily adopted (N.D.C.C. 26.1-32-01 and N.D.C.C. 26.1-32-03) the efficient proximate cause doctrine and invalidated anti-concurrency contract language. Even so, in North Dakota v. NDSU, 694 NW 2d 225 (N.D. 2005), the Supreme Court of North Dakota (relying on Kish) concluded in a flood situation that, if there are not two causes of loss at issue, then the efficient proximate cause doctrine never comes into play. Of the three known states that don't permit anti-concurrency contract language, only West Virginia, in Murray v. State Farm Fire and Cas. Co., 509 S.E.2d 1, 15 (W.Va. 1998), does so by judicial, rather than statutory, decree, on the basis that it would interfere with the reasonable expectations of the parties. At one time, according to Safeco Ins. Co. v. Hirschmann, 773 P.2d 413, 414, 416 (Wash. 1989), Washington state judicially prohibited contracting away the efficient proximate cause doctrine. However, in Findlay v. United Pacific Ins. Co., 129 Wn.2d 368, 917 P.2d 116 (Wash. 1996), the Supreme Court of Washington ruled that the doctrine of efficient proximate cause was a question of fact, not law. In a dissenting opinion, Judge Talmadge cited the court's prior position as one of public policy, but concluded that, "The majority's decision today ends the doctrine of efficient proximate causation as a rule of public policy and permits insurance carriers to write policy language on causation as they see fit." For an analysis critical of the original Hirschmann decision, reference "Washington's Judicial Invalidation of Unambiguous Exclusion Clauses in Multiple Causation Insurance Cases" by Lawrence Alan Wans, 67 Wash. L. Rev. 215, 231-32 (1992). In addition, in Hirschmann, Judges J. Dolliver and C.J. Callow included strong dissenting opinions when Hirschmann was published. Judge Callow cited State Farm Gen. Ins. Co. v. Emerson, 102 Wn2d 477, 480, 687 P.2d 1139 (Wash. 1984) which said:
Concurrent Causation DoctrineWhereas the efficient proximate cause doctrine applies when perils are dependent, the concurrent causation doctrine applies when multiple causes are independent. As discussed in the preceding section, the vast majority of courts have upheld the anti-concurrent causation wording in property policies. In fact, most recently, the Mississippi Court of Appeals itself upheld such wording in Boteler v. State Farm Casualty Insurance Company, 876 So. 2d 1067 (Miss. App. 2004). Citing Rhoden v. State Farm Fire and Cas. Ins. Co., 32 F. Supp. 2d 907, 913 (S.D. Miss. 1998), the court upheld the insurer's anti-concurrent causation wording with regard to an earth movement exclusion. In Rhoden, "The qualifying clause made it clear that the insurance company would not insure for damages resulting from earth movement, whether the movement was the result of natural causes...or from any other causes." Likewise, in the Gulf Coast flooding claims, the anti-concurrent causation wording of most policies should preclude recovery regardless of any other clauses such as "hurricanes," "windstorm," or "poorly designed and/or maintained levees or flood control systems." Even in jurisdictions such as California where the efficient proximate cause doctrine cannot be contractually waived since it is granted by statute, the California Court of Appeals, in State Farm Fire & Casualty Co. v. Martin, 668 F. Supp. 1379 (C.D. Cal. 1987) and affirmed, 872 F.2d 319 (9th Cir. 1989), opining on Howell v. State Farm Fire & Casualty Co., 267 Cal. Rptr. 708 (Cal. Ct. App. 1990), ruled that an insurer may contractually limit coverage when a covered peril is a concurrent cause of loss. More recently, this principle was confirmed by the California Supreme Court in Julian v. Hartford Underwriters Insurance Co., 110 P.3d 903, 27 Cal. Rptr.3d 648 (Cal. May 5, 2005) (No. S109735) where the court upheld the "weather conditions" anti-concurrent causation wording with regard to a rain-induced landslide. In an unpublished opinion, Dahlke v. Home Owners Insurance Company, 2003 Mich. App. LEXIS 3424, the court found, under anti-concurrent causation wording identical to that in the current ISO homeowners policy, that such wording unambiguously excluded coverage for mold damage. In reaching its decision, it cited Sunshine Motors, Inc. v. New Hampshire Ins. Co., 209 Mich. App. 58, 59-60; 530 N.W.2d 120 (1995), Wilkie v. Auto Owners Ins. Co., 469 Mich. 41, 62; 664 N.W.2d 776 (2003), and other decisions upholding such wording. UnconscionabilityCount Two: Unconscionability According to this count, the policies in question are contracts of adhesion that are unreasonably complex and difficult to understand by the average consumer, which resulted in a lack of knowledge and a lack of understanding on the part of policyholders. The fact is that these forms were largely approved by the state department of insurance and this question, to our knowledge, has never been raised before...not until a loss of this magnitude and economic impact. In addition, the fact that these policies do not cover flooding is something that has been widely publicized in the past by the media and, in many cases, by individual agents. As stated earlier, the "Insurance Consumer's Hurricane Checklist," distributed by the Mississippi insurance department, has for years warned consumers about flood exclusions: "Remember that homeowners' policies do not cover flood damage caused by rising water…If you live in a flood-prone area, contact your agent about obtaining flood insurance." Again, the fact remains that an estimated 70% of Mississippi property owners in or near the Gulf Coast elected not to purchase flood insurance that has been widely publicized as needed and available in such areas. This allegation goes on to claim that the policies at issue were "nonnegotiable" and contained "substantially identical exclusion provisions," so that they deprived the policyholders of meaningful choice of coverage. This assertion fails to recognize that the insurers are under no legal obligation to offer coverage for all possible sources of loss and that, in fact, a market for flood insurance was readily available through the National Flood Insurance Program and, in some cases, through excess flood policies. Finally, this count claims that the exclusions are unreasonably favorable to the insurer defendants and "oppressive" to the policyholder and bear no reasonable relationship to the risks and needs of the business of the Defendants, thereby rendering such exclusion provisions substantially and procedurally unconscionable and void." The fact is that, historically, it has proven impossible to write flood insurance profitably. Therefore, it is certainly reasonable that private businesses would seek to avoid the assumption of risks inherently unprofitable and, again, the fact remains that such coverage is available through the government-subsidized National Flood Insurance Program. Ambiguous Policy ProvisionsCount Three: "Water Damage" and/or "Flood" Exclusions in the Subject Policies are Ambiguous According to this count, "These exclusions expressly contradict other policy provisions in these policies which provide FULL COVERAGE for ALL damage proximately caused by Hurricane Katrina." [emphasis added] The suit, therefore, concludes that the exclusions are ambiguous on their face and when read in logical conjunction with other provisions in the policy. Courts across the country do not share this opinion given that the flood exclusion in most property policies has been almost universally upheld, as discussed in several court cases above. Apparently the premise of this complaint is that, even if the flood exclusion itself is unambiguous, as many courts have concluded, if there are other provisions in the policy that could seen as contradicting it, then the clear and unambiguous flood exclusion gives way to the ambiguity. While that's unlikely in the ISO and comparably worded policies, that's most likely the argument being made. Thus, the question becomes, have the courts that have concluded that the flood exclusion is unambiguous been asked to compare the exclusion to other parts of the policy that allegedly provide coverage for flood? That seems to be the issue. Other CountsCount Four: Violation of the Mississippi Consumer Protection Act This count does not directly address the policy language and, therefore, we do not feel qualified to comment. Count Five: Irreparable Injury This count claims that "for many years," insurers have provided insurance coverage for the type of damage caused by Hurricane Katrina, yet now are attempting to deny such coverage. The fact of the matter is that insurers for decades have denied claims involving flooding. They are not denying claims for damage caused by Katrina that have not been denied before. The only difference is the magnitude of the losses and the resulting potential loss of tax revenue to state and local governments. Also claimed is that insurers were "forcing, attempting to force, or otherwise inducing their policyholders to accept substantially reduced payments on claims in exchange for a release from further liability." This was evidenced by Exhibit A (see attachment, last page) which appears to be a reservation of rights letter from "Nationwide Flood Ins. Co." Nationwide Insurance Company quickly issued a press release which stated, in part, that, "The allegations made by the Mississippi attorney general are unfounded. Our company is absolutely not asking policyholders to acknowledge damage is flood related in order to receive a check for living expenses. No such form or activity is sanctioned by Nationwide, nor does Nationwide own any company called Nationwide Flood Insurance Company as noted in the legal action." Louisiana Class Action LawsuitThis is a class action lawsuit seeking a declaratory judgment involving all immovable property in the Louisiana Parishes of Orleans and Jefferson that asks the court to direct the Louisiana Insurance Commissioner to interpret the defendant insurers' homeowners insurance policies so as to cover losses due to water entering the City of New Orleans from breaches in designated flood walls. The lawsuit seeks a declaration of the court that is "applicable to all defendants and indeed to all homeowner insurers in the New Orleans area." This is interesting in that the request for coverage is based on interpreting numerous homeowners policies, each a unique contract. One must question how the insurance commissioner can be directed to find coverage, via interpretation, under a contract without considering the express provisions of that contract. Specifically, the claim in the lawsuit is that the flood damage from the levee failures "does not fall within the exclusion of 'rising water,' or an 'act of God,' standard excluded perils in the defendants’ homeowner’s insurance policies; and: The dominant and efficient cause of the losses...was from breaches in the flood walls...resulting from acts of negligence and 'windstorm,' standard covered perils in the defendants’ homeowners insurance policies. These declarations are common to all insurers because the excluded perils of 'rising water' and 'act of God' are standard in the insurance industry and written in the policy exclusions of almost all homeowners insurance policies in almost 'boilerplate' language. [emphasis added] The comments above make one wonder if the plaintiff's representatives have ever actually read an insurance policy. In particular, how many standard property insurance policies explicitly exclude "acts of God"? First of all, one would be hard pressed to find a modern policy referencing "acts of God." Secondly, the terms mentioned are certainly not "standard" in the insurance industry nor included in "almost all" homeowners policies in "almost 'boilerplate'" language. Thirdly, as a matter of fact, such policies typically DO cover many so-called "acts of God" such as lightning, windstorm, and others. As for the efficient proximate cause argument, according to one expert, citing Pieper v. Commercial Underwriters Ins. Co., 69 Cal. Rptr. 2d 551, 557 (Cal. Cr. App. 1997) and Finn v. Continental Ins. Co., 267 Cal. Rptr. 22, 24 (Cal. Cr. App. 1990):
Thus, the court found that when 'the loss was in fact occasioned by only a single cause, albeit one susceptible to various characterizations, the efficient proximate cause analysis has no application. The court reasoned that "[i]f every possible characterization of an action or event were counted an additional peril, the exclusions in all-risk insurance contracts would be largely meaningless." Other courts have found similarly when parties have attempted to override exclusions by pointing to defective design, construction, maintenance, etc., that permitting such alternative characterizations of losses could conceivably permit claimants to go all the way back to the Big Bang and declare that to be the proximate cause and, thus, a covered loss since it (the Big Bang) and every event that arose out of it is conceivably an efficient proximate or concurrent cause of loss. Two court cases somewhat similar to the New Orleans levee break situation are TNT Speed & Sport Center, Inc. v. American States Insurance Company, 114 F3d 731, 732 (8th Cir. 1997) which was discussed earlier in this paper, and Kish v. Insurance Co. of North America, 883 P.2d 308 (Wash. 1994). Kish involved homes that were damaged when river basin dikes failed. The insureds' homeowners policies excluded damage caused directly or indirectly by flood and surface waters; however, they sought coverage on the basis that the efficient proximate cause of their loss was rain, a peril not excluded under the policies. This is similar to the claim in the subject class action lawsuit citing "windstorm" as a cause of loss. In Kish, the Washington Supreme Court had to determine if rain and flood constituted two separate perils, thereby triggering the efficient proximate cause doctrine. The court ruled that the "plain, ordinary, and popular" meaning of the term "flood" included loss induced by rain. The court found that there was effectively only one cause of loss — rain-induced flooding — and upheld the coverage declination. In its decision, the court opined:
Almost precisely the same logic can be applied to the Katrina coastal flooding due to "storm surge." The National Oceanic and Atmospheric Administration (NOAA) defines a storm surge as:
The NOAA definition clearly refers to a type of "flooding" which is little more than a subset of how the National Flood Insurance Program (NFIP) defines "flood" itself:
As defined by the NFIP, "storm surge" is simply the "overflow of tidal waters." And, as for the contention that the surge is largely the result of covered "windstorm" blowing water onto the surface, the "ISO standard" policy explicitly and unambiguously excludes "Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind...." [emphasis added] Likewise, logic similar to that in Kish can be applied to the contention that improper design, construction, or maintenance of the New Orleans levees and flood control system were the efficient proximate causes of the flooding of the city. When you couple this logic with the fact that the vast majority of jurisdictions permit anti-concurrent causation wording in a policy to limit coverage, coupled with the "ISO standard" policy wording outlined earlier in this paper, the unavoidable conclusion is that the flooding in New Orleans, whether due to rain, "flood" per se, storm surge, windblown rain, or defective design/construction/maintenance, is not covered. Interestingly, the suit itself also includes the following commentary:
Note that, while an estimated 60% of property owners did not purchase flood insurance, conversely about 40% did. The commentary goes on to say:
This implies that there was some reason to rely on New Orleans' "extensive flood protections" rather than purchase flood insurance. The inadequacy of this system of levees, flood walls, canals, and pumps is well documented and publicized: There is virtually complete agreement among experts that the New Orleans' flood control system was incapable of handling the potential flooding accompanying a Class 4 hurricane. These inadequacies have been well publicized in the mainstream media over the years and any New Orleans property owner should have been aware of them. The bottom line is that many property owners, just like in Kish v. INA, elected not to carry flood insurance with the full understanding that their property insurance would not cover flood losses. Just because a loss, in any given hurricane season, is unlikely, doesn't mean that it should go uninsured. Major fire losses in sprinklered buildings are rare, yet the owners of sprinklered buildings invariably elect to purchase fire insurance. Katrina clearly was a gamble for many New Orleans property owners that didn't pay off. ConclusionsThere is enormous political and humanitarian pressure to find some way to compensate for the loss of life and property that resulted from Hurricane Katrina. Placing the burden of such loss, though, on a specific private industry based on the tenuous connection with a contract of insurance is not an equitable solution. Unless the policies clearly and unambiguously cover flood damage, it is not Constitutionally justified to force insurers to assume these losses simply as a matter of public policy or need. It is not fair to policyholders not exposed to flood hazards nor to stockholders in these companies. Nor is it fair to the thousands of responsible property owners who purchased flood insurance and are now being told their money was wasted since their existing non-flood policies should cover the exposures anyway. How this litigation will be resolved is anyone's guess. The object of this paper was to present the insurance coverage aspects of these cases within the context of past judicial interpretation. As these and other lawsuits proceed, we'll continue to update this paper. References and Additional Readings
Special thanks to Randy Maniloff, JD, for his initial critique of the first draft of this article. All of his suggestions were incorporated into the above document. Comments?Do you have an opinion on these issues? If so, then email Bill.Wilson@iiaba.net and we'll consider posting them here. If you would like to be acknowledged, please include your name, employer, city, and state.
Windstorm insurers are denying coverage without explanation of their conclusion that water rather than wind caused destruction. It would seem that scientific evidence would establish: (i) whether wind caused damage independent of flood; (ii) the sequence of wind vs. flood; and (iii) the sequence of resulting damage. This information could guide the La Dept of Insurance and windstorm insurers and would seem to be a better way of handling claims than unscientific blanket denial. There is a risk of differing response by different insurers that will exacerbate the perception that denial is arbitrary and capricious (sorry to use a legal phrase here).
Originally published in December 2005 |
