The Louisiana Supreme Court handed the insurance industry a major victory last week with a ruling that there is nothing vague about a policy excluding “flood” damage–a decision that the defendant's attorney said could save insurers between $20 billion and $30 billion.

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 state's 4th Circuit Court of Appeal that the policy was ambiguous because it used the term “flood.”

The Lafayette Insurance Company policy that insured the building stated it would not cover damage by, among other calamities, “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 that 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, losses for building damage above the basement and lost rents.

The decision in Sher vs. Lafayette, No. 07C2441, will likely “put an end” to the issue of ambiguity of the flood exclusion provision in insurance contracts, according to Howard Kaplan, the lawyer for Lafayette.

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 from $20 billion to $30 billion, said Mr. Kaplan, with Bernard, Casissa, Elliott & Davis in Metairie, La.

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

Robert P. Hartwig, president of the Insurance Information Institute, said “insurers have defended against numerous attempts to weaken, circumvent or nullify the flood exclusion, 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.”

Mark Racicot, president of the American Insurance Association, said his group 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” the Louisiana Supreme Court “reached a decision that was not only consistent with the longstanding 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.”

However, he added, “the court also provided some insight as to its reasoning that the basis of the decision was not ambiguous.” The court said “it is important that a contract be interpreted according to 'common intent' of each of the parties,” according to Mr. Hartwig–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 noted.

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