A 5th U.S. Circuit Court of Appeals panel in New Orleans hasruled that standard insurance policy exclusions for water and flooddamage prevent Hurricane Katrina victims from recovering damagesfrom their insurers.

“This event was excluded from coverage under the plaintiffs'insurance policies, and under Louisiana law, we are bound toenforce the unambiguous terms of their insurance contracts aswritten,” Judge Carolyn King wrote for a three-judge panel on Aug.2.

In a controversial lower court decision last November, NewOrleans U.S. District Court Judge Stanwood Duval had ruled thatpolicies with standard language from the Insurance Services Officeissued by Allstate and other carriers were ambiguous and did notexclude water damage caused by negligent and intentional acts.

Judge Duval's ruling, however, did not extend to more detailedexclusionary language in policies issued by State Farm, whichexcluded water damage coverage regardless of cause.

In last week's Appeals Court decision, Judge King said: “Weconclude…that even if the plaintiffs can prove that the levees werenegligently designed, constructed, or maintained and that thebreaches were due to this negligence, the flood exclusions in theplaintiffs' policies unambiguously preclude their recovery.”

She added, “Regardless of what caused the failure of theflood-control structures that were put in place to prevent such acatastrophe, their failure resulted in a widespread flood thatdamaged the plaintiffs' property.”

The decision potentially reverses claims filed by thousands ofhomeowners against Unitrin, Hanover, Encompass and Travelersinsurance companies.

The language of the Appeals Court decision last week stands instark contrast to Judge Duval's decision last year.

Judge Duval had said that many of the insurance policies inquestion were ambiguous in that they did not distinguish betweenfloods caused by an act of God (such as excessive rainfall) andfloods caused by acts of man (which would include the leveebreaches following Katrina's landfall).

He pointed to the existence of clearer language in State Farm'spolicy to find coverage for policyholders with other policies. “TheState Farm policy does precisely what the ISO Water ExclusionPolicy fails to do. It makes it clear that…there is no coverageprovided for any flooding 'regardless of the cause,'” he wrote.

Judge King, writing for the Appeals Court, saw no need to drawdistinctions between natural and man-made causes of flooding inpolicy language.

“The fact that an exclusion could have been worded moreexplicitly does not necessarily make it ambiguous….Nor does thefact that other policies have more explicitly defined the scope ofsimilar exclusions,” she wrote.

Later, directly attacking the plaintiffs' contention that theflood that ensued in the aftermath of Katrina was non-natural, shewrote: “This focus…ignores the sizeable natural component to thedisaster–a catastrophic hurricane and the excess water associatedwith it. The non-natural component is simply that in certain areas,man's efforts to mitigate the effect of the natural disasterfailed, with devastating consequences.

“But if man's failure to adequately prepare for a naturaldisaster could alone transform the disaster into a non-naturalevent outside the scope of a policy's exclusion, it is difficult toconceive how an insurer could ever exclude the resulting loss; anynatural event could be recharacterized as non-natural eitherbecause man's preventative measures were inadequate or because manfailed to take preventative measures at all.”

The Appeals Court also relied on various dictionary definitionsof flood that refer to “the overflow of some body of water thatinundates land not usually covered with water” to find in favor ofthe insurers.

“In light of these definitions, we conclude that the floodexclusions are unambiguous in the context of this case and thatwhat occurred here fits squarely within the generally prevailingmeaning of the term 'flood,'” Judge King wrote.

“When a body of water overflows its normal boundaries andinundates an area of land that is normally dry, the event is aflood. This is precisely what occurred in New Orleans in theaftermath of Hurricane Katrina. Three watercourses–the 17th Street,Industrial and London Avenue Canals–overflowed their normalchannels, and the levees built alongside the canals to hold backtheir floodwaters failed to do so. As a result, an enormous volumeof water inundated the city.”

“In common parlance, this event is known as a flood,” the judgeconcluded.

Going on to note that a levee is defined as a flood-controlstructure–”its very purpose is to prevent the floodwaters of awatercourse from overflowing onto certain land areas”–she wrote:“By definition, whenever a levee ruptures and fails to hold backfloodwaters, the result is a more widespread flood. That a levee'sfailure is due to its negligent design, construction, ormaintenance does not change the character of the water escapingthrough the levee's breach; the waters are still floodwaters, andthe result is a flood.”

The judge also attacked plaintiffs' attempts to bolsterarguments that flood exclusions do not apply to non-natural causesof water damage, by relying on cases where policyholders prevailedin situations like water-main breaks. “Unlike a canal, a water mainis not a body of water or watercourse,” she wrote, referring todictionary definitions of flood.

Reacting to the Appeals Court decision, Marc Racicot, presidentof the American Insurance Association, said, “Nobody could haveever anticipated the destruction caused by Hurricane Katrina.” Headded that the insurance industry “remains fully committed tohelping those in need with assistance and to helping foster therebuilding process.”

However, he noted, “the Court's decision today reinforces theimportant principle that clear, contractual provisions should beapplied as written.”

Mike Siemienas, a representative for Northbrook, Ill.-basedAllstate, said the company “is pleased that the 5th Circuitconcluded the policy exclusions for flood damage are unambiguousand enforceable and apply to damage resulting from the flooding ofNew Orleans.”

Phil Supple, a representative for Bloomington, Ill.-based StateFarm, said the company was pleased that the lower court decisionreaffirming its contract language had been upheld.

Jennifer Wislocki of Travelers in Hartford added: “We're pleasewith the 5th Circuit ruling, which upholds the flood exclusion inour policies.”

Likewise, Neil Alldredge, vice president for state andregulatory affairs for the National Association of Mutual InsuranceCompanies, said, “While we sympathize with the plight of thehomeowners and residents affected by this tragedy, this was thecorrect decision for this issue.”

Justin Roth, NAMIC's senior federal affairs director, added:“This case underscores the need for residents in flood zones topurchase insurance through the federal government's National FloodInsurance Program. It's another illustration of why the nation'sflood maps need to be updated and homeowners in those areas need tobe aware of, and urged to purchase, coverage through the NFIP.”