Hurricane Katrina: Coverage Disputes Begin Making Landfall

Even after a few months, the pictures of destruction and despair caused by Hurricane Katrina remain incomprehensible. The tragic human suffering and loss of life and property that Katrina left behind will not soon be forgotten. The Gulf Coast will rebuild — history is full of seemingly impossible comebacks after natural disasters, and the ravaged region will eventually make its way to that list.

It will take a lot of time, will and money to make that happen. It is much too soon to say with any accuracy what Katrina’s ultimate price tag will be, but some early estimates have placed the number at $200 billion. While much of the money needed to rebuild Louisiana, Mississippi and Alabama will come from government sources, insurance companies will also contribute a significant amount. One early projection of “insured losses” runs as high as $55 billion.

The insurance industry has substantial experience handling property losses from hurricanes. Last year alone the industry was required to respond to a Florida hurricane trifecta — Charley, Frances and Jeanne — as well as Ivan in Alabama. But Katrina is like no other hurricane. All hurricanes involve damage caused by wind and rain, but in
Katrina’s case, that was just the opening act. Many of the claims that are made for property damage caused by Katrina’s destruction will involve a confluence of some of the following additional factors such as flooding, looting, vandalism, pollution, fire (arson and other causes), power failure, governmental action, and mold. Properties deteriorated due to inaccessibility for weeks and months. The list could surely go on. Katrina will also likely cause far more claims for business interruption than prior hurricanes.

While each Katrina insurance claim will have unique features, one common issue has emerged: the inter-play between damage caused by wind and rain versus flooding. Private insurance typically covers damage caused by wind and rain, but not damage caused by flooding. Instead, flood damage is covered by policies issued by the National Flood Insurance Program — a government subsidized insurance program that is administered by FEMA.

However, it has been reported that only one-fifth of homes and businesses in Mississippi in the areas most at risk for flooding were covered by flood insurance policies. In the case of Louisiana, just less than half of such properties were covered. Thus, many people that purchased homeowners and business property policies are nonetheless uninsured for their flood losses. Given the prospect of significant uninsured losses, no time was wasted in bringing litigation to preclude insurers from relying on their policies’ flood exclusions to disclaim coverage. The most well-publicized of these several suits has been the one brought by the Attorney General of Mississippi. For several reasons, this suit, and similar others, are likely to fail.

In the first-party property context, some courts have adopted the doctrine of “efficient proximate cause,” which provides that if a covered peril causes an excluded peril, coverage is available even for the damage caused by the excluded peril. Those seeking to preclude the applicability of flood exclusions rely on this doctrine. For example, in the Mississippi Attorney General’s suit, he alleges that the flood exclusion contradicts Mississippi common law, “which mandates that full coverage be provided if the proximate and efficient cause of the damage (i.e., hurricane wind) is covered … even if other ‘non’ covered causes also contributed to the loss.” In another suit it is alleged that the flood exclusion is inapplicable because the dominant and efficient cause of the loss was the breach of the levees in New Orleans. There has even been a suit filed in federal court in Mississippi against several major oil companies, alleging that such companies are responsible for global warming, which allegedly created the conditions to enable Hurricane Katrina to form. Therefore, the suit alleges that the oil companies are responsible for the Katrina damage. In December Mississippi Senator Trent Lott and his wife sued their homeowner’s insurer seeking coverage for the destruction of their Pascagoula home, notwithstanding a policy exclusion for “storm surge.” The suit argues that “Mississippi insurance law … mandates full insurance coverage if the hurricane winds were the efficient proximate cause of the loss.”

The flaw in these various “efficient proximate cause” arguments is that homeowners and business property policies very likely contain language stating that flood damage is excluded, regardless of how the damage was caused. This is referred to as an “anticoncurrent causation” clause. One common example of such language is as follows: “We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”

So while there are various theories that can be advanced as to what caused Katrina’s flood damage, such arguments will not obviate the flood exclusion under a policy that states that flood damage is excluded, regardless of the cause. The Washington Supreme Court so held in Kish, et al. v. The Insurance Company of North America (1994). At issue in Kish was coverage for flooding caused by water that overflowed protective dikes following a record-setting rainfall. The Washington Supreme Court ruled that rain and flood are not distinct perils. The court stated, “We believe the average purchaser of insurance would expect that the term ‘flood’ would encompass rain-induced flood. Rain is a well-recognized and common part of a flood.”

Even when flood damage is excluded, disputes will still arise over how to apportion uncovered flood damage from that which was caused by wind, and typically covered. Consider how one Louisiana court recently resolved this issue. In Urrate v. Argonaut Great Central Insurance Company (2004), the Louisiana Court of Appeals addressed coverage for damage to a restaurant caused by Hurricane Georges in 1998. Brunings Seafood Restaurant was doing business in a wood frame building on pilings over Lake Pontchartrain in Jefferson Parrish, Louisiana. Hurricane Georges made landfall near Biloxi, Mississippi and the restaurant was severely damaged, with part of the building being swept away. Brunings was insured by a flood policy issued by Omaha Property and Casualty — which covered damages from flooding and tidal waves — and a property insurance policy issued by Argonaut, which excluded such damage. Each insurer calculated the damage that it believed to be caused by the peril that it insured. Not satisfied with Argonaut’s determination, Brunings filed suit.

Following a bench trial, the judge concluded that the glass damage, in excess of $35,000, was caused solely by wind and, thus, covered only by the Argonaut policy. The trial judge also disagreed with Argonaut’s determination that loss of business due to wind damage was limited to $9,500, for three days while electricity in the area was out. Instead, the judge determined that the restaurant suffered a business loss for the last quarter of 1998 of $80,000 and attributed 25% of that loss to wind damage. The judge also determined that the restaurant suffered a business loss for 1999 in the amount of $70,000 and attributed 15% of that loss to wind damage.

The Court of Appeals of Louisiana affirmed the apportionment made by the trial judge.

Notwithstanding that Urrate involved a situation in which there was a flood policy, this recent decision from the Court of Appeals of Louisiana demonstrates that allocation of property damage and lost business income between that which was caused by wind versus flood is highly fact-intensive and far from a scientific certainty. It is also a time consuming process — the apportionment process took nearly six years from the time it stopped raining (or seven and a half when you consider that the court’s decision was appealed — by both sides — to the Louisiana Supreme Court, which denied both Writs of Certiorari).

While the initial Katrina coverage suits focused primarily on homeowner’s policies, Hard Rock Hotel & Casino in Biloxi filed suit in January against two of its property insurers for their share of approximately $175 million in damages.

There is no doubt that disputes concerning coverage for damage caused by Hurricane Katrina are about to make landfall and another flood may be on its way — this one involving paper.