Insurers must cover Katrina water damage, federal judge holds.

Insurance companies must pay for Katrina-related water damage to their policyholders' homes, regardless of water-damage exemptions in the insurance contracts, a federal judge in New Orleans has held.

In granting partial summary judgment to the plaintiffs, Judge Stanwood Duval Jr. concluded that because language in the policies was ambiguous, he had to decide in the policyholders' favor. But he also certified the case for immediate appeal, noting that "there is a substantial ground for a difference of opinion." (In re Katrina Canal Breaches Consol. Litig., 2006 WL 3421012 (E.D. La. Nov. 27, 2006).)

The insurance companies included Allstate, Great Northern Insurance, and Travelers Property. The plaintiffs included roughly a dozen homeowners and Xavier University, located in New Orleans. An estimated 200,000 homes in Louisiana were destroyed by the hurricane in August 2005.

At the heart of the ruling was a distinction between flooding caused by natural reasons or "acts of God" and flooding caused by human error. In this case, the plaintiffs pinned the blame for water damage on New Orleans's broken levees, saying the water that poured in through the breach destroyed their homes.

Their complaint, the judge noted, alleged that "water damage inflicted on the petitioners' homes and property was not the result of flood, surface water, waves, [tidal] water, tsunami, seiche, overflow of a body of water, seepage under or over the outfall canal wall, or spray from any of the above, but was water intrusion caused simply from a broken levee wall."

The judge exempted State Farm and the Hartford Co. from his ruling because their policies include specific language that excludes damage from broken levees.

The question of what caused the most severe damage to homes--and what insurance companies should pay for--has become the central issue in Katrina-related litigation. Usually it has focused on the wind-water controversy. Most homeowners' insurance policies don't include coverage for water damage or flooding; homeowners have to buy separate flood insurance through the Federal Emergency Management Agency (FEMA).

In the aftermath of the storm, many insurance companies denied coverage to homeowners, citing this exemption. Homeowners argued that Katrina's damage was caused not by flooding but by wind-driven storm surges. (See Carmel Sileo, After Katrina, a Deluge of Denials, TRIAL 21 (Dec. 2005).)

In this case, Duval wrote, the insurance policies did not include wording that specifically exempted flooding caused by human error. In his 85-page opinion, he repeatedly acknowledged the ambiguity of the term "flood" and the difficulty of defining it but also noted, "The policies before the court are 'all-risk' policies, and any exclusion must be clear and unambiguous."

Duval concluded, "Under the principles of Louisiana law, the court is constrained to find the language ambiguous.... Once this finding is made, the court is further constrained to interpret it against the insurer."

The plaintiffs also sued the Board of Commissioners of the Orleans Levee District for negligence and breach of duty. The eight-member board is "responsible for the operation and maintenance of levees, embankments, seawalls, jetties, breakwaters, water basins, and other hurricane and flood protection improvements surrounding the City of New Orleans," according to its Web site. The claims against the board were severed and remanded to state court.

The Louisiana ruling differs sharply from another federal court decision in Mississippi, where in August, Judge Lyonel Thomas Senter Jr. ruled that Nationwide Insurance was not obligated to pay homeowners for Katrina-related damage.

The plaintiffs, Paul and Julie Leonard, claimed that the destruction of their home was due to a storm surge--that is, wind--rather than flooding. In finding for the defendant, Senter said the Leonards inferred a type and extent of coverage that the policy's language plainly did not cover.

The policy "provides coverage for windstorm damage, but its terms specifically exclude coverage for damage caused by water (with the specific and limited exception of water damage caused by rain that enters an insured structure after its watertight integrity has been lost through the action of the wind)," the judge wrote. "When he read his policy, this exclusion should have put Paul Leonard on notice that further inquiry was necessary concerning his understanding that the policy would cover the risk of rising water during a hurricane." (Leonard v. Nationwide Mut. Ins. Co., 438 E Supp. 2d 684 (S.D. Miss. 2006).)

In December, State Farm announced it would no longer offer wind-damage coverage to residents of the Mississippi coast, or property insurance to anyone living within one mile of the coastline of Alabama, Mississippi, or South Carolina.