Disputes Over Katrina

Coverage Are Inevitable

By Randy J. Maniloff

The pictures of destruction and despair caused by HurricaneKatrina are incomprehensible. While each picture may be worth athousand words, no descriptions are adequate to convey the tragichuman suffering and loss of life and property that have taken placeon the Gulf Coast since Katrina had her way.

The money needed to rebuild Louisiana, Mississippi and Alabamawill come from several sources--principally government, charity andinsurance. The insurance industry has substantial experiencehandling property losses from hurricanes, but Katrina is like noother hurricane.

All hurricanes involve damage caused by wind and rain, but inKatrina's case, this was just the opening act. Many of the claimsthat are made for property damage will involve a confluence of someof the following additional factors: flood, looting, vandalism,pollution, fire (arson and other causes), power failure,governmental action, mold and further deterioration of propertybecause it is inaccessible for weeks, if not months. The list couldsurely go on.

Katrina will also likely cause far more claims for businessinterruption than normally results from a hurricane--even apowerful one.

Given such a wide variety of causes of loss and that first-partyproperty policies often significantly vary in their terms andconditions, it is difficult to describe a typical Katrina claim andwhat the insurance response might be. What's more, first-partyproperty claims in general are often complicated by the need todetermine the proximate cause of a loss.

Some of the causes of loss that will likely be at issue inKatrina claims are excluded by first-party property policies. Forthis reason, as claims evolve over the next few weeks and months,expect much discussion in coverage circles of the concepts of"efficient proximate cause" and "anti-concurrent causation" lead-inclauses.

The doctrine of efficient proximate cause provides that if acovered peril causes an excluded peril, coverage is available evenfor the damage caused by the excluded peril.

On the other hand, an anti-concurrent causation lead-in clauseis designed to override efficient proximate cause by precludingcoverage for a certain peril, even if caused by an otherwisecovered peril.

For example, many standard forms contain the followinganti-concurrent causation lead-in clause to many of itsexclusions--including those for flood, power failure, earth sinkingand mold: "We will not pay for loss or damage caused directly orindirectly by any of the following. Such loss or damage is excludedregardless of any other cause or event that contributesconcurrently or in any sequence to the loss."

There will no doubt be calls for insurers to simply disregardthe terms and conditions of their policies and start writingchecks.

The problem with insurers ignoring the terms and conditions oftheir policies is that they have customers in 47 other states towhom they owe an obligation of financial preparedness for theirpotential losses. Not to mention that the 2005 hurricane seasondoes not end until November.

While many property damage claims from Hurricane Katrina aregoing to be as unique as the storm's tales of survival, someinsight into how these claims may be handled can be gained byexamining court decisions that have addressed coverage for pasthurricanes and floods--albeit without Katrina's many complicatingfactors.

One theme of these past cases--and one that will be prevalent inKatrina claims--is the interplay between damage caused by wind andwind-driven rain versus flooding. In some cases, this willdetermine the extent to which damage is covered or shared betweenprivate insurance and the National Flood Insurance Program.

In >Urrate v. Argonaut Great Central Insurance Company, thecourt reviewed a claim involving damage to Brunings SeafoodRestaurant by Hurricane Georges in 1998. The restaurant was doingbusiness in a wood-frame building on pilings over LakePontchartrain in Jefferson Parrish, La.

The restaurant was severely damaged, with part of the buildingswept away. Brunings was insured by a flood policy--which covereddamages from flooding and tidal waves--and a property insurancepolicy issued by Argonaut, which excluded such damage.

Following a bench trial, the judge concluded that the glassdamage, in excess of $35,000, was caused solely by wind and coveredonly by the Argonaut policy.

The judge also determined that the restaurant suffered abusiness loss for the last quarter of 1998 of $80,000 andattributed 25 percent of that loss to wind damage. The judgeattributed 15 percent of the 1999 business loss to wind damage. TheCourt of Appeal of Louisiana affirmed the decision, demonstratingthat allocation of property damage and lost business income betweenthat wind and flood is fact-intensive.

The ultimate decision was far from a scientific certainty. Andconsider how long the process took--nearly six years from the timeof the hurricane (or seven-and-a-half years when you consider thatthe court's decision was appealed--by both sides--to the LouisianaSupreme Court, which denied both.)

In Kish. v. The Insurance Company of North America, the SupremeCourt of Washington examined claims by several insureds for damageto their homes when flood waters overtopped protective dikessurrounding the Stanwood sewage lagoon in Stanwood, Wash. Eachpolicy contained an exclusion for loss resulting directly orindirectly from water damage--which was defined, in part, toinclude flood and overflow of a body of water.

The coverage case went to trial on the issue of the "efficientproximate cause" of the damage to the plaintiffs' houses, which thejury concluded was "record-breaking rainfall in the Stillaguamishbasin." The Washington high court stated: "The efficient proximatecause rule applies only where two or more independent forcesoperate to cause the loss."

In holding that rain and flood are not distinct perils, the Kishcourt said: "We believe the average purchaser of insurance wouldexpect that the term 'flood' would encompass rain-induced flood.Rain is a well-recognized and common part of a flood." The Kishcourt also observed: "[A]ny application of the efficient proximatecause to the facts of this case would make it difficult for anyinsurer to ever exclude flood damage without excluding all raindamage. This would be an unfortunate occurrence for insuredsbecause that could result in less coverage for insureds in thisstate."

Another case--Southern Hotels Limited Partnership v. Lloyd'sUnderwriters at London Companies, et al.--dealt with damage to ahotel that was insured under a policy covering wind and waterdamage. Flood damage was subject to a $200,000 deductible (thehotel was insured under a NFIP policy for $200,000).

The court noted that "the plaintiff (Southern Hotels) has theburden of proving both the damage and the causal connection betweenthe damage and the covered cause of loss. This proof must be shownby a reasonable preponderance of the evidence, and with some detailand specificity. A mere possibility of causation and damage areinsufficient."

In a Mississippi case, Ludlow Corp. v. Arkwright-BostonManufacturers Mutual Insurance Company, the insured claimed lossesof approximately $2 million. The insurer argued that the damage wasnot covered because it resulted from flood, tidal waves, wave wash,or water damage to property situated below the flooded high-watermark. The jury returned a verdict in the amount of $108,000.

While the issues in Ludlow were principally related toevidentiary rulings by the trial court, the Mississippi SupremeCourt held that the inadequacy of the verdict, from the insured'sperspective, was a direct result of the failure of the proof toestablish an insured loss to the property.

As illustrated, when courts are required to allocate betweendamage caused by flood and by wind and wind-driven rain, thedecisions are highly fact-intensive, are admittedly non-scientific,and sometimes take several years from the time that it stoppedraining.

Coincidentally, less than one month before Katrina hit, theLouisiana Court of Appeal denied rehearing of its June 2005decision in Jean Boudreaux and the Victims of the Flood on April 6,1983 on the Tangipahoa River v. The State of Louisiana, Departmentof Transportation, et al., in which it addressed claims for damagesbrought against the State of Louisiana after a 1983 flood.

It was alleged that the state designed and built the Interstate12 Bridge over the Tangipahoa River in such a negligent andimproper manner that it disrupted the natural flood plain, causingthe river's rising waters to flood the plaintiffs' properties.Twenty-two years after the flood, the Louisiana Court of Appealissued a decision addressing and upholding various property damagedeterminations made by the trial court.

Needless to say, somebody, somewhere, is already thinking aboutpotential litigation over the breaches in the New Orleans leveesystem.

A fuller version of this article and additionalinformation on past cases are available at "FC&S Online," aproduct of the National Underwriter Company, parent of thismagazine. FC&S subscriptions may be obtainedat http://www.nationalunderwriter.com/nucatalog.

Randy J. Maniloff is an attorney in the Business InsurancePractice Group at White and Williams, LLP in Philadelphia.

Caption for photo of Katrina flood damage:

With many policies excluding or limiting flood coverage, expectcourt battles lasting months or even years over "efficientproximate cause" and "anti-concurrent causation" lead-inclauses.

Quotebox (if we get a mug):

"There will no doubt be calls for insurers to simply disregardthe terms and conditions of their policies and start writingchecks."

Randy J. Maniloff