After Katrina, a deluge of denials: in the wake of a catastrophic storm, homeowners and insurers are grappling over what caused the most damage - and who has to pay. Litigation may untangle the knotty question of wind versus water.

Hurricane Katrina was one of the worst natural disasters in U.S. history, leaving behind a wrecked coastline, ruined cities, and economic losses that have been estimated at anywhere from $100 billion to $300 billion. And now, surviving Gulf Coast residents say they're up against a new hardship: Insurance companies that refuse to compensate them for their losses.

In early October, Paul Leonard of Pascagoula, Mississippi, filed a lawsuit against Nationwide and other insurers, alleging that they acted in bad faith in refusing to pay for damage to his house. Leonard's lawyer is Richard Scruggs, whose own Pascagoula home was demolished by Katrina, and who has set up a plaintiffs' hotline for homeowners who believe that their insurers have jilted them just when the going got rough.

In September, Jerry and Cynthia Wilson of Moss Point, Mississippi, filed suit against Allstate, after the insurer told them their home had been damaged by flooding, which their policy didn't cover. In Louisiana, several homeowners and businesses have filed lawsuits seeking a declaratory judgment that damages in New Orleans were caused by waters entering the city through breaches in the levee system, rather than an "act of God"--meaning insurers must pay for them.

These are the early skirmishes in what promises to be a legal battle with no quick or easy resolution. The opening salvo came in September, when Mississippi Attorney General Jim Hood filed a lawsuit against Allstate, State Farm, Nationwide, Mississippi Farm Bureau Insurance, and other companies, saying that certain exclusionary provisions in their insurance contracts are "void and unenforceable" because they are unconscionable, ambiguous, and contrary to public policy. The complaint also alleges that the provisions violate state consumer-protection laws.

Hood's complaint says the exclusions "violate and/or expressly contradict Mississippi common law, which mandates that full coverage be provided if the proximate and efficient cause of the damage (that is, hurricane wind) is covered under the subject policy, even if other 'non'-covered causes also contributed to the loss." The lawsuit also notes that payments for storm-surge damage could reach $4 billion.

Hood included a motion for a restraining order against the same companies, alleging that they were deceiving policyholders by offering cash payments in exchange for the homeowners' signing a waiver stating that the damage to the home was caused by flooding.

These waivers are evidence that "the defendants, through their agents and adjusters, are at present utilizing forms and other documents requiring policyholders to acknowledge and concede disputed factual issues," Hood said in his complaint.

A copy of Nationwide's waiver attached to Hood's motion for a temporary restraining order states that the insurance company will advance $250,000 against final payment for the homeowner's loss and "acknowledges you have sustained a flood loss on the above date at the above address." The waiver notes that "issuance of an advance payment by us is not an admission of liability on our part. Acceptance by you does not represent a satisfaction or release of all claims."

A simple question

All these legal actions hinge on the "wind versus water" controversy, which boils down to a deceptively simple question: What part of the hurricane actually caused the damage? Was it the 150-mph winds, the wall of water formed by the storm surge, or flooding?

The question is crucial because most homeowners' insurance policies cover only wind damage, not flood damage. Most private insurers don't even offer flood insurance, which is sold almost exclusively through the Federal Emergency Management Agency (FEMA) at subsidized rates. FEMA's insurance program defines a flood as "a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties." According to the Hurricane Insurance Information Center, about 49 percent of single-family homes located in high-flood-risk zones have flood insurance.

The wind-or-water question "comes up in every hurricane," said Martin Grace, a professor of risk management at Georgia State University, in Atlanta. "Sometimes it is resolved, and sometimes it has to go to litigation, because it has to be decided in some way."

"Wind and water have always fought it out, in every hurricane situation," said Sagi Shaked, a Coral Gables, Florida, lawyer who has represented both plaintiffs and defendants in insurance cases. "Every homeowners' policy will have an exclusion for water damage, and every flood policy will have an exclusion for wind damage."

But Hood and the homeowners say Katrina was different, because most of its devastation was caused not by floods but by storm surge which is generated by wind.

"This wasn't 'Flood Katrina,' it was 'Hurricane Katrina,'" said Jacob Ray, special assistant attorney general of Mississippi. "'Flood' is the insurance companies' favorite word. These companies are acting as if the attorney general is somehow trying to get something 'extra' for their policyholders. He's not. This is money these people are already owed."

Ray described Katrina's powerful storm surge as a "giant straw" that sucked water up 30 feet into the air, before slamming it onto the ground. "That's completely different from flooding," he said.

J. Robert Hunter, director of insurance for the Consumer Federation of America and cofounder of Americans for Insurance Reform, which is monitoring insurance companies' treatment of Katrina victims, said some policyholders mistakenly thought they were getting full coverage, including flood-damage coverage, when they purchased their policies. Historically, he noted, courts have decided in favor of homeowners when a contract's language was ambiguous or unfair. (See, e.g., McMaster v. New York Life Ins. Co., 183 U.S. 25 (1901); Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1 (W. Va. 1998).)

"Hood has some precedent to go on," Hunter said. "Maybe not on all the counts of his complaint, but that particular one has potential legs."

Grace disagreed. "Hood's lawsuit says the exclusion is ambiguous and in fine print. It's actually not: It's in bold type in a separate section clearly labeled 'exclusions.' So that would be one affirmative defense. And from the public policy aspect, you can say we want everyone to be covered, and we can pay claimants by expanding coverage, but by doing so we might be harming future claimants."

Shaked said most plaintiffs will probably try to apply valued-policy law, which plaintiffs in Florida have used to force balky insurers to pay up. A valued-policy statute mandates that if a home has been completely destroyed by fire, flood, or other causes, the insurance company must pay the face value of the policy, rather than the actual market value of the building. Louisiana and Mississippi have similar statutes.

"Valued-policy law will really apply now," Shaked said, because "obviously we're talking about 'total loss' in many of these cases." He has called it "a tool that has been in existence for quite some time but is often overlooked," and said the law is fair to both insurers and policyholders. But Americans for Insurance Reform notes that insurance companies have fought valued-policy statutes after other hurricanes.

Beyond wind and water

Bob Peck, president of the Center for Constitutional Litigation in Washington, D.C., said there are hidden, long-term issues beyond the wind-water controversy--for instance, ensuring that hurricane victims don't suffer poor credit ratings from an inability to pay their bills and that insurance guarantees cover payments for impaired or insolvent insurance companies. "We are looking at long-term resolution of these issues," he said.

Peck chairs the Katrina Task Force of the American Bar Association's Tort, Trial, and Insurance Practice Section. The task force was set up to help insurance commissioners in Alabama, Florida, Louisiana, and Mississippi and deal with the aftermath of the storm.

And while the wind-versus-water fight continues to take center stage, Gulf Coast lawyers on both the plaintiff and defense sides are gearing up for a slew of other cases, including chemical and oil spill cases, toxic-tort claims, interruption-of-business suits, and more.

One of the biggest is a federal class action filed by Val Exnicios of New Orleans, representing "all victims" harmed by the hurricane, against Exxon Mobil, Chevron, Shell Oil, British Petroleum, and other companies engaged in pipeline installation and oil exploration. The lawsuit claims that when these companies tapped into mineral deposits under the Louisiana coastline, they destroyed wetlands and caused coastal erosion--two factors that environmentalists say were responsible for much of Katrina's devastation, because they left the coastline with no natural barrier to slow the hurricane down.

The defendants' "years of negligence and callous indifference to the marshland ecology led to Katrina's disastrous consequence," Exnicios said in a statement. "These companies together destroyed over 100 miles of terra firma between the mouth of the Mississippi River and the city of New Orleans, and it's time now for a just reckoning of the devastating outcome of their quest for profits over the safety of the people and destruction of property in New Orleans."

Gary Bezet, managing partner of Baton Rouge-based Kean Miller, represents several of the defendants. He said this lawsuit is one of the biggest post-Katrina actions because it involves a massive number of plaintiffs and many years' history of the companies' actions. "It is asking us to deal with decades of development along the coastline," he said. "Also, much of the development took place on privately owned land."

Another lawsuit was filed by the United Commercial Fisherman's Association against Shell Pipeline, Chevron, Bass Enterprises Production, and Sundown Energy. The fishermen say an oil spill destroyed the oyster beds that they were harvesting.

Media case

One Katrina-related lawsuit didn't involve torts, but rather the First Amendment. In September, cable news station CNN filed a lawsuit against FEMA when the agency issued a "zero access" policy blocking all media coverage of recovery efforts. According to the lawsuit, FEMA representatives told CNN that it took this step to protect the privacy rights of victims' families; CNN countered that the move was prior restraint. CNN obtained a temporary restraining order to maintain access to storm-ravaged areas, but before the case went to court, the government retracted its policy.

As the legal battles continue, one thing all sides agree on is that recovering from Hurricane Katrina will be costly.

The Wall Street Journal online publication RealEstateJournal.com estimated that the insurance industry will have to shell out between $15 billion and $35 billion in Katrina-related payments--but also that the industry has over $400 billion in assets.

Grace said the effects will go beyond money. "If Jim Hood and Richard Scruggs win, insurance companies will go crazy," he said. "They won't want to provide insurance in Mississippi, and they'll have to add flood insurance to policies they do sell, which will cost more for everyone. That's a medium-case scenario. In a worst-case scenario, they'll all pack up and go home, leaving Mississippi high and dry--or rather, wet and with no place to turn."

Jacob Ray, the Mississippi assistant attorney general, dismissed such ominous predictions.

"The insurance industry always says that: 'Oh, the sky is falling, the sky is falling!' Well, they are in the business of being insurers, they are in the business of issuing hurricane policies, and they should be in the business of compensating their policyholders for their losses. Believe me," he concluded, "if there is a nickel to be picked up in Mississippi, they'll be here to pick it up."

Insurance Law Section has lawyers' needs covered

Insurance law is intertwined with almost every practice area, and the Insurance Law Section provides services that can benefit almost every trial lawyer.

Insurance "affects everyone's practice in one way or another," said section Chair Joseph Kravec Jr., "and our goal is to make everything that we do in the Insurance Law Section relevant to everyone."

The section's education programs have broad appeal. For example, an upcoming session will focus on the relevance of insurance law to personal injury practitioners and teach plaintiff attorneys how to spot insurance issues in their cases. Other programs in the works will address long-term health care, annuities for seniors, and insurance issues related to mass disasters.

"We invite anyone who is not a member of the Insurance Law Section to come and attend our educational programs to see what we're about and to see if they might want to join us," Kravec said.

The section's periodic newsletter also touches on practical topics. Recent articles examined personal-injury protection clauses and analyzed insurers' claims-handling practices. The newsletter is available in print and online.

Other membership perks include the opportunity to network with fellow members via the section's list server, free access to sample pleadings and papers that are stored in the section's online document library, and discounts on ATLA Education programs.

Section leaders maintain an "open-door policy," Kravec said. Members are encouraged to offer any ideas that might enhance the section's education programs, newsletter, and other benefits and services.

The other section leaders are Chair-Elect Alice Wolfson of San Francisco; Vice Chair John Murray of Coconut Grove, Florida; and Secretary and Newsletter Editor Mark Knutson of San Diego.

Annual membership dues are $45. To join or for more information, contact ATLA Sections at [phone], ext. 290, or visit the Insurance Law Section's home page at www.atla.org/sections/insurance/index.aspx.

CARMEL SILEO is an associate of TRIAL.