Fifth Circuit Court Rules in Insurers’ Favor in Katrina Levee Breach Case

A highly anticipated federal appeals court ruling in a Hurricane Katrina class-action case has insurers breathing a little easier. The Fifth Circuit Court of Appeals in New Orleans ruled Aug. 2, 2007, in In re Katrina Canal Breaches Litigation, No. 07-30119, that property owners in New Orleans whose buildings were flooded as a result of levee breaches in the aftermath of the August 2005 hurricane have no standing to recoup their losses from their insurance companies because of the flood exclusions in their insurance policies.

The ruling could affect thousands of residential and business policyholders in the New Orleans area and save insurers an estimated $1 billion in payouts.

Plaintiffs in the case had contended that because their properties were flooded as a result of the levee breaches, a “man-made act,” the flood exclusions in the policies were void. According to court filings, the plaintiffs argued that “the massive inundation of water into the city was the result of the negligent design, construction, and maintenance of the levees and that the policies’ flood exclusions in this context are ambiguous because they do not clearly exclude coverage for an inundation of water induced by negligence.”

The court concluded, however, “that the plaintiffs are not entitled to recover under their policies.”

The court reasoned, according to an opinion written by Circuit Judge Carolyn King, “that even if the plaintiffs can prove that the levees were negligently designed, constructed, or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs’ policies unambiguously preclude their recovery. Regardless of what caused the failure of the flood-control structures that were put in place to prevent such a catastrophe, their failure resulted in a widespread flood that damaged the plaintiffs’ property. This event was excluded from coverage under the plaintiffs’ insurance policies, and under Louisiana law, we are bound to enforce the unambiguous terms of their insurance contracts as written.”

The American Insurance Association was quick to issue a comment on behalf of the many insurers the trade group represents. According the AIA, the Appeals Court ruling “corrected an earlier, flawed decision by US District Judge Stanwood Duval in which he constructed a man made v. natural causation distinction not found in property insurance policies in order to defeat a clear exclusion applying to the flood losses at issue.”

AIA President Marc Racicot stated: “There has been tremendous pressure upon the courts and insurers to craft political ‘solutions’ to overcome the tragic events of Hurricane Katrina. Fortunately, the Court … has acted to preserve the sanctity of contract upon which private property and free markets ultimately depend.

“The Court’s decision … reinforces the important principle that clear, contractual provisions should be applied as written.”

Allstate, Encompass, State Farm and Unitrin were among the insurance companies named as defendants/appellants in the lawsuit.

The case was sent to the Fifth Circuit after Judge Duval, with the United States District Court for the Eastern District of Louisiana, ruled in November 2006 that ambiguous language in the water damage exclusions in some insurance policies left open the possibility that the plaintiffs could have standing to recover losses under their policies. Judge Duval refused insurers attempts to have the case dismissed. Instead, he sent the case to the Fifth Circuit Court for a review.