Coverage disputes inevitable after Katrina.

It's a hot-button issue that Louisiana's property insurers likely don't even want to think about, but it's bound to happen in the aftermath of the widespread destruction of Hurricane Katrina. The inevitable, say industry experts and attorneys, is that disputes and lawsuits are certain to erupt over whether policyholders whose homes were destroyed should be paid the full face value of their homeowners policies when hurricane damage was caused by flooding.

"In an event of this magnitude, it's inevitable that there will be some disputes" on damage that was water-related but associated with wind-driven rain, for example, Robert Hartwig, senior vice president and chief economist for the Insurance Information Institute, told BestWire. Adjusters are trained in distinguishing flood from wind-related losses, he added.

A potentially big issue in Louisiana after Katrina is the Florida Fourth District Court of Appeal's 2004 ruling in a Broward County case, Mierzwa vs. Florida Windstorm Underwriting Association. In a blow to Florida's property insurers, that court, interpreting that state's long-standing "valued policy law," allowed the insured to recover policy limits trader wind coverage, even though the insured received a substantial payment for flood damage under the National Flood Insurance Program (BestWire, June 2, 2005).

In many cases, after Katrina, there will be a combination of losses, said Hartwig. "And in those cases ... there will be some sort of apportionment of the losses, and an insurer will look at the structure and try to ascertain ... OK, yes, there was flood damage but there was also some wind-related damage."

However, simply because there was structural damage "does not mean that the insurer is going to be paying limits on every policy," Hartwig said. The structural damage produces, in most cases, some kind of limited amount of loss below the policy limits. If the reason for the home being considered a constructive total loss is essentially because of the flood damage, "then there's a major role to be played by the flood insurer, if there is one," he said.

W. Shelby McKenzie, partner in the law firm Taylor, Porter, Brooks & Phillips based in Baton Rouge, La., said Louisiana's "valued policy law" is similar to Florida's. Under Louisiana's valued policy law, an insurer must pay the full value of the loss, without deduction or offset, if a valuation was placed on the property and such valuation was used to calculate the premiums, McKenzie said, citing the statute. He added, however, that if an insurer provided clear notice in the policy of a different method of calculating the loss, then the insurer would not be required to pay the full value of the loss.

McKenzie, co-author of the treatise, "Louisiana Insurance Law & Practice," noted that since Louisiana's valued policy law was re-enacted in 1992, "there's been no reported decision" interpreting its language. If wind vs. flood coverage disputes erupt following Katrina, Louisiana courts "would certainly have access to the Florida decision," McKenzie said. "They could either follow that decision or make their own determination of the meaning of the Louisiana statute."

Don Griffin, vice president of personal lines for the Property Casualty Insurers Association of America, said there "certainly will be some development on whether some of this is related to flood losses or whether it's related to windstorm losses."

Top 5 Writers, Homeowners
Multiperil, 2004

Group market shares (%) are based on direct
premiums written.

Alabama

State Farm Group           30.0
Alfa Insurance Group       20.8
Allstate Insurance Group   11.0
Farmers Insurance Group     5.6
St. Paul Travelers Cos.     3.8

Note: Table made from bar graph.

Louisiana

State Farm Group             34.7
Allstate Insurance Group     20.8
Southern Farm Bureau Group    7.1
Farmers Insurance Group       4.1
St. Paul Travelers Cos.       3.9

Note: Table made from bar graph.

Mississippi

State Farm Group             30.4
Southern FArm Bureau Group   21.0
Allstate Insurance Group      9.9
Nationwide Group              7.0
Farmers Insurance Group       5.7

Source: Best's State/Line Reports

Note: Table made from bar graph.