Within two weeks after Hurricane Katrina, Louisiana Insurance Commissioner Jay Robert Wooley was quoted as saying that with post-hurricane insurance claims, "Lawyers are going to have a ball; it's got more legal questions than you can imagine."
A few days later on Sept. 15, 2005, Mississippi Attorney General Jim Hood filed a lawsuit against five of the largest homeowners' insurers in Mississippi, asking the court to declare as "void and unenforceable" and in violation "of the public policy of the State of Mississippi" common insurance policy exclusions that typically apply to damage caused by water or flood. The same day, a class-action petition was filed in Louisiana state court against 15 separate insurance companies that argued the cause of damage to thousands of homes in New Orleans was the negligent construction of the levees, therefore negating the flood exclusion. Other less-publicized lawsuits followed in each of the states hit by Hurricane Katrina.
In the following weeks thereafter, news reports appeared from nearly all media sources, often questioning the legitimacy and propriety of the flood exclusion. This was accompanied by articles from dozens of lawyers and other insurance industry professionals discussing the various disputes that likely would arise from Hurricane Katrina insurance claims. Some predicted that property claims from the hurricane would present a minefield of insurance coverage issues. Others suggested that, in addition to water and flood, exclusions for pollution, mold, corrosion, sewer back-up, failure to preserve the property from further damage, collapse, and faulty construction might be cited by insurers.
Now that more than a year has passed, it is helpful to consider whether the predicted flood of legal issues has materialized.
Precedents Predict Future
As with many lawsuits, both the Mississippi attorney general's lawsuit and the New Orleans' class-action lawsuit are moving slowly. The Mississippi lawsuit was promptly removed to a federal court by insurers, but on March 10, 2006 -- almost six months after the lawsuit was filed -- the federal judge remanded the case back to state court. While this ruling was generally characterized as a loss for the insurers, the ultimate ruling on the substantive insurance issues in the case is many months, if not years, away. The Louisiana lawsuit also is many months or years from a final decision.
While it is impossible to predict the outcome of the Mississippi attorney general lawsuit or the New Orleans class action lawsuit, previous national disasters suggests that these and other lawsuits will have little or no impact on the vast majority of Hurricane Katrina insurance claims. State and federal courts in Mississippi, Louisiana, and Alabama have ruled on flood exclusions in connection with past hurricanes. Generally, the courts have looked at the specific facts of each case to determine whether the damage was caused by flood, which is excluded, or wind, which is covered. Similarly, the property insurance coverage disputes that resulted from the destruction of the World Trade Center focused primarily on the particular facts of that case.
The class-action petition in the New Orleans lawsuit also seems to focus on the particular factual circumstances that led to the flooding of the city. Instead of trying to convince the court that the flood exclusion is invalid, the lawsuit asks the court to rule that the flood exclusion simply does not apply because the damage was caused by defects in the construction of the levees. While this type of argument has not been particularly successful in other circumstances, it seems likely that even if it does succeed, the circumstances are sufficiently unique so as to have little or no impact elsewhere.
The Mississippi attorney general lawsuit does not focus as much on the specific cause of the damage to properties, but argues that the flood exclusion should be declared invalid, or in the alternative, ambiguous. But this lawsuit appears to be directed only at homeowners' insurance policies -- not commercial insurance policies -- and seems to focus upon the wording of certain specific exclusions. Thus, while this case has potentially far-reaching effects, it would apply only in Mississippi, and a ruling might ultimately prove to be somewhat narrow in its effect.
A Legislative Intervention?
Both Congress and state legislatures have reacted to Hurricane Katrina by considering legislative changes. For example, Congress has considered legislation that would give FEMA, which administers the National Flood Insurance Program, the authority to make certain changes in the rates for flood coverage. The Louisiana senate approved legislation that would prevent insurance adjusters from denying homeowners' claims based strictly on floodwater marks, thus requiring insurers to consider other evidence when adjusting a claim. So far, there has been no legislation that attempts to preclude the use of the flood exclusion or other specific insurance policy provisions.
State insurance commissioners also have taken action specific to the handling of claims of Hurricane Katrina. For example, the Mississippi commissioner of insurance suspended the 180-day deadline for policyholders to make repairs or give notice of intent to make a claim as a result of Hurricane Katrina. The extension of this deadline was because of the shortage of building materials, contractors, and construction workers. While Hurricane Katrina might result in some regulatory changes, an overhaul of the insurance claim-handling process is not on the horizon.
While the lawsuits proceed and the legislatures and regulators consider various changes, thousands of insurance claims that resulted from Hurricane Katrina are being adjusted and paid. In all likelihood, the vast majority of insurance claims will not be affected by the Mississippi attorney general's lawsuit, the New Orleans' class-action lawsuit, or the other lawsuits that have arisen from Hurricane Katrina.
Back Where We Started
Insurance claims resulting from Hurricane Katrina certainly are unique in some respects, and in number are particularly significant. But ultimately, the handling of Hurricane Katrina insurance claims has involved the same general practice as other insurance claims. The process begins with first notice of loss to the insurer. This is followed by an investigation, which includes determining the cause(s) of loss, extent of damage, and the cost for repairs or replacement of damaged property. Experts are retained to give professional assistance in the process. If the cause of loss is covered under the insurance policy, as in the case of wind, then the insurer typically makes payment for the amount of the damage.
On the other hand, if the cause of loss is excluded, such as flood, pollution, or mold, the claim is denied. In situations where there are multiple causes and the damage can be separated, the insurer typically pays for the portion of the damages that are caused by a covered loss. If the causes of loss cannot be separated, the analysis can be more complicated and fact-intensive, and the outcome determined by state law.
When putting aside the unprecedented volume and damage, not to mention the resulting time it takes to complete the process, the handling of insurance claims that resulted from Hurricane Katrina are expected to be very similar to previous national disasters and insurance claims generally. Similarly, there is an expectation that future insurance claims will follow the same process and to be subject to the same insurance law.
Christian Preus is a partner with Meagher & Geer in Minneapolis. He can be reached at 612-338-0661.