A 5th U.S. Circuit Court of Appeals panel in New Orleans has ruled that standard insurance policy exclusions for water and flood damage prevent Hurricane Katrina victims from recovering damages from their insurers.

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

In a controversial lower court decision last November, New Orleans U.S. District Court Judge Stanwood Duval had ruled that policies with standard language from the Insurance Services Office issued by Allstate and other carriers were ambiguous and did not exclude water damage caused by negligent and intentional acts.

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

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

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

The decision potentially reverses claims filed by thousands of homeowners against Unitrin, Hanover, Encompass and Travelers insurance companies.

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

Judge Duval had said that many of the insurance policies in question were ambiguous in that they did not distinguish between floods caused by an act of God (such as excessive rainfall) and floods caused by acts of man (which would include the levee breaches following Katrina's landfall).

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

Judge King, writing for the Appeals Court, saw no need to draw distinctions between natural and man-made causes of flooding in policy language.

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

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

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

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

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

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

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

Going on to note that a levee is defined as a flood-control structure–”its very purpose is to prevent the floodwaters of a watercourse from overflowing onto certain land areas”–she wrote: “By definition, whenever a levee ruptures and fails to hold back floodwaters, the result is a more widespread flood. That a levee's failure is due to its negligent design, construction, or maintenance does not change the character of the water escaping through the levee's breach; the waters are still floodwaters, and the result is a flood.”

The judge also attacked plaintiffs' attempts to bolster arguments that flood exclusions do not apply to non-natural causes of water damage, by relying on cases where policyholders prevailed in situations like water-main breaks. “Unlike a canal, a water main is not a body of water or watercourse,” she wrote, referring to dictionary definitions of flood.

Reacting to the Appeals Court decision, Marc Racicot, president of the American Insurance Association, said, “Nobody could have ever anticipated the destruction caused by Hurricane Katrina.” He added that the insurance industry “remains fully committed to helping those in need with assistance and to helping foster the rebuilding process.”

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

Mike Siemienas, a representative for Northbrook, Ill.-based Allstate, said the company “is pleased that the 5th Circuit concluded the policy exclusions for flood damage are unambiguous and enforceable and apply to damage resulting from the flooding of New Orleans.”

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

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

Likewise, Neil Alldredge, vice president for state and regulatory affairs for the National Association of Mutual Insurance Companies, said, “While we sympathize with the plight of the homeowners and residents affected by this tragedy, this was the correct decision for this issue.”

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

Special Reports /

La. Appeals Court Rules For Insurers On Flood

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