“Crash on the levee, Mama,
Water's gonna overflow.”
–Bob Dylan, “Down in the Flood.”

Not that insurance companies needed a reminder, but a Louisiana court ruling late last month underscored the fact that we have a long, long way to go before we sort out the industry's ultimate losses from Hurricane Katrina. The ruling, issued by Judge Stanwood R. Duval Jr., of the U.S. District Court for Eastern Louisiana, offered thousands of New Orleans residents a ray of hope that their flood-related losses may in some cases be covered by insurance because they resulted from the failure of levees.

The judge's ruling, in a case that consolidated several complaints for damages resulting from levee breeches, turned on the time-honored practice of interpreting insurance-policy ambiguities in insureds' favor-and the judge gets to decide what's ambiguous. According to news reports, Judge Duval found that the standard ISO flood-insurance exclusion was less than crystal clear-and therefore unenforceable–in regard to whether it applies to “man-made” flood disasters, like those that might result from ruptures of negligently designed or maintained canals or levees.

Several insurers had a dog in this fight, including State Farm, Hartford, Allstate and Travelers. Some fared better than others. The judge let State Farm and Hartford off the hook because their policies contained language (an endorsment in Hartford's case) that went beyond the standard ISO flood exclusion. The others weren't so lucky.

Judge Duval immediately sent his ruling to the 5th U.S. Circuit Court of Appeals for a review. Robert Hartwig, chief economist for the Insurance Information Institute, expressed doubt it would stand. “The judge reached the wrong conclusion,” he was quoted as saying in the New York Times. “The policies clearly exclude flood-related damage under any and all circumstances.”

If Judge Duval does get the appeals court's backing, he will then decide whether to certify the cases as a class-action lawsuit, according to news reports. Class-action status is to litigation what accelerants are to fires. According to the Wall Street Journal, the losses ultimately could amount to more than $1 billion–on top of the $41 billion that Katrina already has cost insurers. The appeals court is not expected to rule until spring at earliest.

Ironically, the Wall Street Journal published an article less than a week earlier outlining Allstate's new strategy to sharply curb its exposure to coastal property risks and have its agents start cross-selling life insurance and annuities to middle-income baby boomers instead. No doubt Judge Duval's ruling made those annuities look better than ever.

Back in August, insurers fared better in court when Judge L.T. Senter Jr., of the U.S. District Court for the Southern District of Mississippi, upheld the standard flood insurance exclusion in a policy issued by Nationwide Insurance Co. Under his ruling, however, insurers are still responsible for damage caused by Katrina's winds, as opposed to storm surge and flooding. Determining how much loss to assign to each peril, based in many cases on whatever evidence can be construed from bare foundations, should keep insurance defense counsel gainfully employed for some time to come.

An interesting side issue in the New Orleans cases has been whether Judge Duval–or any judge in the Crescent City–can rule on them impartially. By mid-November some 17 class-action lawsuits and thousands of others had been filed against insurers and those responsible for the levees' upkeep, according to the Houston Chronicle. The paper said that in one of them The Board of Commissioners of the Orleans Levee District sought to disqualify any New Orleans federal judges from hearing cases brought against them. The matter was appealed all the way to the U.S. Supreme Court. On the day that the High Court refused to get involved, Judge Duval issued his ruling in the matter at hand.

Recusal requests apparently have become common in the wake of Katrina, and different judges have responded in different ways. Some that suffered heavy storm damages themselves have decided they can't objectively hear Katrina cases. (All the state court judges in a Jefferson Parish judicial district recused themselves from such cases.) Others who were not greatly affected have concluded they can.

According to news reports, Judge Duval had to evacuate his home for two months following Katrina. His daughter's house was flooded, although she was compensated and agreed not to be part of any class-action litigation. The judge also had to relocate his courtroom twice.

“As a matter of extreme serendipity, my family and I had no economic loss as a result of the flooding in Orleans and Jefferson parishes,” Judge Duval wrote in a decision, according to the Houston Chronicle. “Any inconvenience was ephemeral and remote. Obviously, if I cannot hear this case, no judge in this district can.”

Thus it is that the owners of some 250,000 water-damaged properties in New Orleans, who in the days following Katrina discovered they were out of luck if they hadn't bought flood coverge, may yet find a way to tap insurers' pockets. Once again, the words of Bob Dylan seem oddly relevant:

“It's gonna be the meanest flood that anybody's seen.
Oh, Mama, ain't you gonna miss your best friend now?
You're gonna have to find yourself
another best friend somehow.”

No doubt some insurers are thinking, “Maybe Mama already has.”

Special Reports /

What's Going On: Will levee breaks release a flood of insurance dollars?

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