IN INSURANCE company offices last month, you could hear a collective sigh of relief as an important decision in a Hurricane Katrina-related case came down in favor of the carriers. In Paul Leonard and Julie Leonard v. Nationwide Mutual Insurance Co., the U.S. District Court for the Southern District of Mississippi honored the standard flood-damage exclusion in homeowners policies.

“The provisions of the Nationwide policy that exclude coverage for damages caused by water are valid and enforceable terms of the insurance contract,” Judge L.T. Senter Jr. wrote. As a result, he threw out all but a small part of the Leonards' claim for $158,000. “Almost all of the damage to the Leonard residence is attributable to water,” he wrote.

Naturally, insurance companies praised the decision, and there is no denying its importance to their interests. But I found the decision equally compelling as a case in which an insurance agent narrowly dodged a bullet. If I were an agent or broker interested in avoiding E&O claims, I'd read it very much as a cautionary tale.

Jay Fletcher, Nationwide's agent in the case, had been the Leonards' agent since 1989. Fletcher himself was a defendant in the case when it originally was filed in state court, but all claims against him were dismissed when the case was moved to Judge Senter's bailiwick.

In trying to collect from Nationwide, the Leonards contended that Fletcher misled them by implying that their home- owners policy would cover water damage caused by storm surge. Paul Leonard claimed he got that impression during a conversation with Fletcher in 1999. The two met to discuss various matters, and the conversation got around to flood insurance. Leonard said the topic was on his mind because of public discussions concerning the lack of such coverage in homeowners policies, following Hurricane Georges in 1998.

“Paul Leonard, who had never experienced flooding to his home and who did not live in Flood Zone A, asked Fletcher whether he … needed to purchase flood insurance coverage,” Judge Senter wrote. “Fletcher told Leonard that he … did not need that type of coverage.”

“Flood Zone A” is the designation for high-risk flood areas under the National Flood Insurance Program. If a house in such an area has a federally backed mortgage, the owner is required to carry flood insurance. The Leonards' house wasn't in such a zone. Maybe that's why Fletcher answered Leonard as he did–despite the fact that the house was just 515 feet from the beachfront and only 12 feet above sea level. Still, Judge Senter seemed puzzled by Fletcher's views on flood insurance:

“Fletcher sometimes discouraged his clients from purchasing flood insurance policies. That much is clear from the testimony of a variety of witnesses …. There was enough evidence on this point to warrant the conclusion that Fletcher, as a matter of habit and routine, expressed his opinion, when asked, that customers should not purchase flood insurance unless they lived in a flood-prone area (Flood Zone A) …. But between 2001 and the time of Hurricane Katrina, Fletcher sold approximately 187 flood insurance policies in the Pascagoula area. Fletcher sold 12 policies in the neighborhood in which the Leonards lived.”

In so many words, the judge said he couldn't figure out why Fletcher discouraged some clients from buying flood insurance but went ahead and sold it to others–some quite near to the Leonards. Nontheless, Fletcher had not said anything to put himself on the hook.

“There was no discussion of the reason Fletcher did not believe Leonard needed to buy a flood insurance policy. Leonard apparently inferred that Fletcher's reason for advising him that he did not need a flood policy was that his home- owners policy would cover any and all water damage that might occur during a hurricane,” Judge Senter wrote. “This was an erroneous inference, and one that might have been avoided had either party to the conversation been more articulate in his inquiry or in his reply.”

While Fletcher could have said more, Judge Senter did not find he legally was obligated to do so: “This is no evidence in the record to establish the standard of care applicable to an insurance agent who is asked about the advisability of purchasing flood insurance. Absent proof of this standard of care, there is insufficient evidence to support a finding that Fletcher's statements to Paul Leonard indicating that he … did not need to purchase a flood insurance policy breached a standard of care that governed Fletcher's conduct as an insurance agent in these particular circumstances. Fletcher's statement was advisory in nature, and the statement was made in circumstances in which it was reasonably foreseeable that Leonard would rely on it. But there is no evidence to support the conclusion that this statement was made negligently.”

Judge Senter also found that Leonard wasn't completely in the dark. Given his allusion to Hurricane Georges in his 1999 conversation with Fletcher, Leonard had “at least some reason to understand” that his homeowners policy would exclude flooding associated with such an event, he said. “His reliance on the inference he drew from his conversation with Fletcher was no longer sustainable.”

So Fletcher did not mislead his clients about the scope of their coverage. “In fact,” wrote Judge Senter, “Fletcher and Leonard never had any discussion of specific policy provisions and coverages.”

If I were an insurance agent, I'm not sure I'd take great comfort from this opinion. To me it brings to mind the famous line from “Cool Hand Luke”: “What we have here is a failure to communicate”–in this case, that even if you are not required to buy flood insurance, you still can sustain flood damage–and your homeowners policy won't cover it if you do. Here, the miscommunication did not rise to the level of legal liability for the agent, but it sufficed to drag him into the case in the first place. Sometimes it can be as dangerous to say too little as it can to say too much.

Special Reports /

What's Going On: E&O issues in last month's Hurricane Katrina decision

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