The Louisiana Supreme Court handed the insurance industry a victory today with a ruling that there is nothing vague about a policy which excludes "flood" damage.

In its decision concerning a commercial policy covering a small New Orleans apartment extensively damaged by Hurricane Katrina, the high court overturned a finding by the 4th Circuit Court of Appeal that the policy was ambiguous because it used the term flood.

The Lafayette Insurance Company policy which insured the building stated it would not cover damage by, among other items, "flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not."

According to testimony in the case, water rose four feet in the building owned by Joseph Sher after a levee broke.

The appeals court had issued a partial summary judgment for Mr. Sher, saying the policy language was ambiguous and that because there were various causes of floods, the word "flood" itself was ambiguous.

However, the high court declared dismissively, "the entire English-speaking world recognizes that a flood is the overflow of a body of water causing a large amount of water to cover an area that is usually dry land."

If there were two or more interpretations of "flood," the policy might be seen as ambiguous, but the appellate court did not state two interpretations, the Supreme Court said.

Its decision cited an opinion of the 5th U.S. Circuit Court of Appeals in a New Orleans levee break case that "flood exclusions are unambiguous" and a levee break met the prevailing meaning of the term "flood." The U.S. Supreme Court decided Feb. 19 not to review that decision.

The insurance company had issued checks amounting to $2,754 to Mr. Sher, which he did not cash. The Louisiana Supreme Court said he was entitled to $247,000, about half what the appeals court awarded, including penalties against the insurer, damages for building damage above the basement and lost rents.

Howard Kaplan, the lawyer for the defendant in the case, the Lafayette Insurance Company, at Bernard, Casissa, Elliott & Davis in Metairie, La., said the decision will likely "put an end" to the issue of ambiguity of the flood exclusion provision in insurance contracts.

The potential claim cost for the insurance industry in Louisiana if lower court findings of ambiguity in flood policy exclusions were upheld could have run as high as $20-to-$30 billion, he said.

He noted that some issues remain, including whether insurers are entitled to credits under the National Flood Insurance Program. He said the federal courts have said "we are owed such credits, but the state courts have not ruled on the issue."

The case just ruled on was titled Sher vs. Lafayette, No. 07C2441.

Robert P. Hartwig, president of the Insurance Information Institute, said, "I look at the Sher decision as another in a long line of flood exclusions."

"Insurers have defended against numerous attempts to weaken, circumvent or nullify the flood exclusion," he noted. "Whether it was due to storm surge, or in this instance, it was the levee breach."

"Flood exclusions have managed to withstand challenges in both Mississippi and Louisiana, in both state and federal courts," he added.

Mark Racicot, president of the American Insurance Association, said the "AIA is encouraged by the court's reaffirmation of the sanctity of contracts between an insurance company and its policyholder."

"Given the current political environment throughout the entire Gulf Coast, the Louisiana Supreme Court has shown great courage and understanding in rendering its decision," he added.

Mr. Hartwig said the industry is "very gratified" that the Louisiana Supreme Court "reached a decision that was not only consistent with the long-standing language in all policies relating to flood, but also with numerous decisions made by the federal court which have upheld the flood exclusion since Hurricane Katrina in 2005."

But, "the court also provided some insight as to its reasoning that the basis of the decision was not ambiguous," Mr. Hartwig said.

The court said "that it is important that a contract be interpreted according to 'common intent' of each of the party," he added, meaning "there was no expectation on the day the policy was sold on the part of the insurers or the insured that flood would be covered."

The way that occurred, although not mentioned in the court decision, "was that the insurer charged no premium for flood-related losses," Mr. Hartwig said.

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Louisiana High Court Upholds Policy Flood Exclusion

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