Exclusions; Flood, Property

In re Katrina Canal Breaches Litig.

No. 07-30119

5th Circuit

August 2, 2007

Inundation caused by levee breach following Hurricane Katrina constitutes flood damage.

The Fifth U.S. Circuit Court of Appeals affirmed district court rulings in favor of property insurers whose New Orleans-residents insureds sought coverage of damages for losses experienced in the aftermath of Hurricane Katrina. Policy exclusions for flood damage applied where the inundation resulted from the breaching of man-made levees as a secondary effect of a catastrophic hurricane.

Richard Vanderbrook and numerous other individuals (collectively, the plaintiffs) owned or rented residential properties in New Orleans that were destroyed when levees ruptured in the aftermath of Hurricane Katrina. The plaintiffs maintained homeowners, renters or commercial property insurance with State Farm Fire and Casualty Co., Allstate Insurance Co., Standard Fire Insurance Co. and numerous other insurers. In all cases, the relevant policies excluded coverage for damage caused by "flood," and the insurers disclaimed coverage of the plaintiffs' Katrina-related damages based on these exclusions.

The plaintiffs sued the insurers, contending that the inundation of water into the city was the result of the negligent design, construction and maintenance of the levees. The plaintiffs contended that the policies' flood exclusions were ambiguous in this context because they did not clearly exclude coverage for an inundation of water induced by negligence. Because such ambiguity must be construed in favor of the insureds, the plaintiffs argued that the policies must be interpreted to provide coverage for their losses.

The insurers contended that the policies were unambiguous and moved for summary judgment. A district court denied in part and granted in part the insurers' motions, and numerous parties appealed.

The Fifth Circuit concluded that, even if the plaintiffs could prove that the levees were negligently designed, constructed or maintained, resulting in the breaches, the flood exclusions contained in their policies precluded their recovery. While noting that no ruling of the Louisiana Supreme Court existed interpreting a flood exclusion in the context of breached levees, the Fifth Circuit made an "Erie guess" and determined that the supreme court would enforce the exclusions in that context.

Term "flood" encompasses inundations caused by breaking of manmade structures. The Fifth Circuit noted that, in general usage, the term "flood" is used to encompass inundations caused by the breaking of manmade structures. Moreover, courts outside Louisiana that addressed the issue concluded uniformly that a flood exclusion precluded coverage for water damage resulting from the failure of a structure such as a dam or dyke.

The Fifth Circuit further noted that, while the levee breaches were non-natural events, the inundation involved a sizable natural component in the catastrophic hurricane that overcame the levees. If man's failure to adequately prepare for a natural disaster could alone transform the disaster into a non-natural event outside the scope of the policy exclusion, the court reasoned, it would be difficult to conceive of how an insurer could ever exclude the resulting loss, and any event could be characterized as non-natural based on the inadequacy of preventative measures.

Accordingly, the district court's rulings in favor of the insurers were affirmed, and its partial rulings in favor of the plaintiffs were reversed and remanded for further consistent proceedings.

Texas Insurance Law and Litigation Alert

September 5, 2007