The property-casualty industry faces its first post-Katrina "wind vs. flood" court challenge in a bench trial that opened last week in a Mississippi federal district court, and while confident of a victory, at least one industry leader predicted potential "chaos" should the judge rule against carriers.
The case pits Pascagoula residents Paul and Julie Leonard against the Nationwide Mutual Insurance Company before U.S. District Judge L.T. Senter Jr.'s court in Gulfport, Miss. Famed plaintiff's attorney Richard Scruggs has brought the case, along with several others testing the flood exclusion of homeowners' policies that insurers are citing to deny numerous claims stemming from the 2005 hurricanes.
For the first four days of the trial, the plaintiffs focused on allegations that their insurance agent, Jay Fletcher, told the Leonards they did not need to buy flood insurance because their policy protected them against all hurricane-related damage, including from any resulting "storm surge."
A Nationwide representative, Joe Case, noted that Mr. Scruggs has already dismissed the agent as a co-defendant in the case, and finds it interesting that he is "back-pedaling" now in targeting his role.
"Mr. Leonard had flood insurance on a prior policy before he became a Nationwide customer. He has testified he understood the policy, and his admitted understanding refutes the notion that he relied on his agent's advice," Mr. Case said.
In their complaint, the Leonards also cite the fact that the policy contained a 2 percent "hurricane deductible" for "wind, rain and storm surge" damage, leading the couple to believe they would be protected in the event of a Katrina-like storm.
However, about two weeks following the Aug. 29, 2005 hurricane, the couple was notified there would be only a payment of $1,600 for damages caused specifically by wind–and none for the bulk of the destruction purportedly caused by flood.
"Although the subject policy does not define 'flood' or any of these listed perils, none of them, as they are commonly understood and defined in the English language, occurred during Hurricane Katrina or caused damage to the plaintiff's property," the complaint alleges.
The Leonards also contend Nationwide denied the claim without sending an adjuster to the property, despite "instructions" from Mississippi Insurance Commissioner George Dale that that was improper procedure.
Mr. Case said there will be an adjuster testifying that he did visit the property before issuing his claim finding.
The property-casualty industry is holding firm that the standard homeowners insurance flood exclusion–in place since the early 1970s and the creation of the National Flood Insurance Program–is necessary to maintain carrier solvency.
Robert Hartwig, executive vice president and chief economist for the Insurance Information Institute–who was named last week as the organization's new president starting on Jan. 1–said the outcome of the case will garner a lot of attention, but in the end "each case will have to be judged on its own merits."
However, Mr. Hartwig said that a victory for the Leonards could create "chaos" in the marketplace by reinforcing the notion that contracts can be rewritten after a disaster.
Joseph Annotti, senior vice president of public affairs for the Property Casualty Insurers Association of America, said that "based on the case law and earlier opinions issued by Judge Senter, it is very clear the flood exclusion applies to storm surge."
"We are confident that these cases will be decided based on the facts and according to the terms of the contract," Mr. Annotti said. "However, if the court were to ignore the facts and force insurers to cover losses that were never covered by insurance, that would be a shot across the bow of insurers and have a very adverse impact on the marketplace."
Mr. Annotti noted that such cases are common after hurricanes, but the scope of Katrina's destruction has magnified the issue considerably. Not only does the insurance industry face numerous other suits–some brought on by Mr. Scruggs–but they must also contend with a suit initiated by Mississippi Attorney General Jim Hood that would force insurers to pay for damage caused by wind-driven rain.
The large number of homeowners without flood insurance has forced the industry, along with state and federal lawmakers, to examine whether the current system for covering mega-catastrophe risk is adequate for the task.
Allstate has spearheaded a drive to create state and federal catastrophe back-up funds, which has met resistance from others in the industry and other interested parties.
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