Louisiana's high court upholds flood exclusion
Commercial all-risks policy ruled unambiguous
as posted at www.businessinsurance.com
By Mark A. Hofmann
April 14, 2008
NEW ORLEANS-A Louisiana Supreme Court decision last week upholding the flood exclusion in a commercial all-risks insurance policy draws a clear line restricting flood-related claims in the state, legal experts say.
But how many commercial policyholders in the state will be affected and whether the decision will influence disputes over flood claims outside of Louisiana remains unclear.
The case, Joseph Sher vs. Lafayette Insurance Co. et al., stemmed from damage caused by Hurricane Katrina in 2005. Mr. Sher owned and lived in a five-unit apartment building in New Orleans, which was covered by an all-risks commercial insurance policy he first obtained in 1989.
After his building sustained damage as a result of the hurricane, Mr. Sher filed a claim with Lafayette Insurance Co., a New Orleans-based unit of United Fire & Casualty Co. in Cedar Rapids, Iowa, but the insurer blamed much of the damage on flooding and poor maintenance and refused to pay Mr. Sher the amount he sought. He sued the insurer and others in state court. Two lower courts agreed with his argument that the policy covered flood damage. The lower courts held that the term flood-which was not defined in the policy-was subject of multiple definitions and therefore ambiguous.Louisiana's Supreme Court found the lower courts' reasoning flawed in its April 8 ruling. "The 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," according to the opinion.
"This definition 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 plain, ordinary and generally prevailing meaning is all-inclusive," the opinion stated.
The high court did, however, find that lower courts had not erred in finding that Lafayette had committed a breach of good faith in its handling of Mr. Sher's claim, and awarded Mr. Sher $247,001.
Among other things, the Supreme Court said that the trial court had not erred in concluding that the insurer had failed to initiate loss adjustment within 30 days of receiving notice of the claims and that it had misrepresented its own engineer's findings in a letter to Mr. Sher.
Not all policyholders will be affected equally by the flood ruling, say attorneys.
"It's going to depend a lot on who you are," said Mike Raibman, a counsel in the Washington office of Reed Smith L.L.P. "For individual policyholders, it's now been read in a way that most restricts coverage," said Mr. Raibman, who represents policyholders.
"Anybody who had a flood-only claim and didn't purchase flood insurance is going to be totally out of luck," he said.
But "for commercial policyholders the flood vs. wind issue tends to be a non-issue," he said. "Most of them have flood coverage."
That's true up to an extent, said Doug Mills, vp and chief operating officer of New Orleans-based independent agent Gillis, Ellis & Baker Inc. Virtually anyone can purchase at least limited flood coverage through the National Flood Insurance Program, he said.
Mortgage lenders have required homeowners to buy NFIP, Mr. Mills said. And "on the commercial side, before the storm, we had quite a few clients that were able to purchase excess flood insurance through their property coverage, so they would buy the NFIP coverage to be the primary coverage and then have an excess layer over that."
But since Katrina, "the availability of excess over NFIP has been pretty much non-existent," said Mr. Mills. "Our joke is if you need it, it's not available. Most of the availability is in areas that are less prone to flooding."
The decision should have an effect on both homeowners and commercial policyholders seeking cover for flood damage, said an attorney who represents insurers.
"I think it's a very significant opinion because insurance companies relied on their flood exclusions and marketed their products and charged premiums based on the belief that those exclusions were going to be enforceable," said Joseph A. Ziemianski, office managing partner in Cozen O'Connor P.C.'s Houston office. "The Louisiana Supreme Court reversed the lower court and agreed with the insurers that the term `flood,' even when undefined in a policy, clearly includes the flood-related damage caused by Katrina."
"In terms of dollars, I can't tell you, but I suspect to the insurance industry there were hundreds of millions of dollars that were at issue," he said.
Patrick A. Long, a partner in the Santa Ana, Calif., law firm Long Williamson & Delis and immediate past president of the Defense Research Institute, noted that "it is a Louisiana decision-it is not a federal court decision."
He called the decision "kind of a vote in favor of common sense and plain meaning."
Mr. Long added, though, that the decision may have an indirect effect outside Louisiana because it is related to Katrina.
"Because it's getting a lot of play, people in other states, courts in other states and juries in other states may be generally aware of the decision. Whether that will have any impact on what juries and courts and judges do, who knows-but at least they will be aware that the Louisiana Supreme Court has made this decision."
The court's handling of the bad faith issue could prove very important, said Mr. Raibman. "In our view, the bad faith issue is a huge one," he said. Despite insurers' victory on the flood exclusion, they could face "tens of millions, if not hundreds of millions," in exposure to bad faith claims in Louisiana, he said.
"I think the message from the Louisiana Supreme Court is that insurance companies have to act timely and responsively when claims are presented," said Mr. Ziemianski. "It's potentially significant to say that an insurance company can be responsible for penalties to the extent there's no coverage."
He said he doesn't "think the opinion is entirely crystal clear on that point but I can see how policyholders are going to try to construe it that way."
Joseph Sher vs. Lafayette Insurance Co. et al. Louisiana Supreme Court, No. 2007-C -2441 C/W 2007-C -2443, Decided April 8, 2008.
United Policyholders is a non-profit organization founded in 1991 and dedicated to educating the public on insurance issues and consumer rights. UP publishes educational materials and serves as a resource for individual and business policyholders and residents of communities with insurance problems. UP’s Amicus Project provides information to courts of law to support policyholders’ legal rights. UP unites policyholders and their advocates by sharing information. Write to UP at 110 Pacific Ave., PMB 262, San Francisco, CA. 94111, call us at (510) 763-9740, or visit our website at www.unitedpolicyholders.org.
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