By Steve Tuckey AND Mark Ruquet
In the aftermath of massive flooding caused by Hurricane Katrina, the insurance industry might face complicated coverage disputes with policyholders over whether they have legitimate wind damage claims.
Both Louisiana and Mississippi have so-called "valued policy" laws that could require carriers to pay full replacement value of property suffering total losses even if part of the damage is caused by flooding, which is a risk not generally covered by homeowner policies, noted Don Griffin, vice president for personal lines for the Property Casualty Insurers Association of America.
Mr. Griffin said the laws state that "in the event of a total loss, you have to write a check for the full amount."
He noted that in Florida, where the issue arose after four hurricanes hit the state last year, the industry challenged a similar law but lost in what has become known as the "Mierzwa" decision. The Florida case ruling is under appeal, Mr. Griffin said, and since that time the Legislature has revised the law concerning coverage for future storms.
It remains possible, he said, that carriers with flood exclusions–leaving it up to policyholders to get coverage through the National Flood Insurance Program–will have to fund the replacement costs in the event of a total loss of some properties under these laws. The issue will soon end up in the courts if, as expected, plaintiff's attorneys put their Florida experience to use in Louisiana, Mr. Griffin predicted.
He said the laws were written at a time before the onset of the federal program providing flood insurance. "They were written even before we started separating the property policies to have different windstorm and homeowners' policies, where they started separating out some of these perils," he added.
Much of the damage in Louisiana will come from flooding alone, so this could lessen the number of suits. But there will surely be enough total losses where wind and flooding played a role to keep the issue alive, Mr. Griffin said.
Robert P. Hartwig, senior vice president and chief economist with the Insurance Information Institute in New York, speculated that Katrina could produce a substantial amount of litigation from those who are not happy with their claims settlement where the damage was primarily found to be caused by flooding and there was no flood insurance in place.
This view was shared by Alan J. Levin, an attorney for Edwards & Angell, a national law firm. Mr. Levin, who chairs the firm's insurance and reinsurance practice, said there will be a number of arguments over the cause of damage, whether it originated from rain, wind or flood.
"This will be an ongoing issue that will be discussed in detail and litigated," said Mr. Levin. "There will be no easy answers to these questions." When asked how he thought this would be resolved, he said, "It is too early to guess how this will play out."
Caption for Superdome shot
Massive flooding, especially after Hurricane Katrina had already passed New Orleans, could leave many policyholders at least partially uninsured unless they bought federal flood coverage.
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