The Battle Over Storm Surge Claims

We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area…. 3. Water Damage. Water damage means: a. Flood, surface water, waves, tidal water, overflow of a body of water or spray from any of these, whether or not driven by wind; b. Water or water-borne material that backs up through sewers or drains or that overflows or is discharged from a sump, sump pump, or related equipment; or c. Water or water-borne material below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool, or other structure; caused by or resulting from human or animal forces or any act of nature. Direct loss by fire, explosion, or theft resulting from water damage is covered.

Surface water from hurricanes and flooding from other sources, including tidal surge, wave wash, or breach of seawalls or levees resulting in flooding conditions, are clearly excluded in the form. An exception applies to personal property (contents) under the "Windstorm or Hail" peril coverage, which reads: "This peril does not include loss to the property contained in a building caused by rain, snow, sleet, sand, or dust unless the direct force of wind or hail damages the building causing an opening in a roof or wall and the rain, snow, sleet, sand, or dust enters through this opening."

What is so difficult about that? Water damage during a hurricane is clearly excluded. The policy, in effect, is saying, "NO!" to flood or seawater that enters or destroys a dwelling. So what part of that do insureds not understand?

For decades the insurance industry, especially the agents who make money selling coverage, have encouraged people in flood-prone areas to purchase flood insurance. Authorized coverage is provided under the National Flood Insurance Act of 1968 and its amendments, such as the Flood Disaster Protection Act of 1973, and Title 44 of the Code of Federal Regulations, ? B. The policy states that it will pay for "direct physical loss by or from flood" to insured property, provided the insured has paid the correct premium, complied with all conditions, and furnished accurate information and statements. Under a National Flood Insurance Program policy, flood is specifically defined:

1. A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is your property) from:

1. Overflow of inland or tidal waters;
2. Unusual and rapid accumulation or runoff of surface waters from any source;
3. Mudflow.

2. Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined in 1.a. above.

Storm Surge and Water Spray

The typical homeowners' or business property forms exclude water damage, including "flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind." The NFIP policy excludes (at section V, exclusion D.): "Rain, snow, sleet, hail, or water spray…." One dilemma faced by insureds and insurers in a hurricane in which the wind pushes water onto normally dry land to the extent that a premise is totally destroyed is in determining whether the source of the damage was initially wind or storm surge.

If portions of a structure remain, determination is easy. For example, after Hurricane Camille struck in 1969, there was a photo of a Mississippi residence standing on four corner-posts with the entire first floor washed away, but no damage to the second floor or roof. The cause of loss was obviously storm surge. Such determination is not always easy, however. Wind and flood adjusters often are called upon to make decisions about the primary causes of loss under pressure of time and multiple catastrophe claims, which quite often can result in disputes.

"Spray" is a similar but lesser problem. Wind-driven spray from a large body of water can do substantial damage, especially to the exterior of a structure, but may be limited to only the exposures facing the body of water. Such damage isn't covered under either policy.

Coastal Hurricane Damage Claims

Many wind-vs.-water damage disputes after Hurricane Katrina in 2005 have resulted in litigation. In November 2005, National Underwriter reported that Mississippi's Attorney General Jim Hood "warned [homeowners'] insurers should do the smart thing and settle the state's suit seeking to compel coverage for … wind-driven water damage claims, or face a flood of individual actions." The report continues, "[Hood] said policyholders were under the impression they had purchased insurance covering them for losses from a hurricane, only to discover insurers refused to pay for losses that involved water damage. [He] explained [that] many homeowners believed that since they were not in a flood zone and were not required to purchase flood insurance, their losses from a hurricane would be covered. Mr. Hood argued that flood insurance only covers events from flooding or tidal waves as a result of standing water rising over its banks. In this case, 90 percent of the losses were the result of storm surge, or wind-driven water that blew up to nine miles inland, far beyond what is regarded as a flood zone. Since storm surge is not specifically excluded from the policy, he said, it is included and should be covered." The referenced suit, Jim Hood, Attorney General v. Mississippi Farm Bureau Ins., et al, was filed in Chancery Court of Hinds County, Miss.

Reasonable Expectations?

Arguments of reasonable expectations, in which a policy covering "windstorm" would cover flooding caused by a hurricane, have not yet been determined, but Hood's theory is likely to fail where policy language is unambiguous. An argument that the policy referenced the word "hurricane" may not be sufficient to counter arguments generally upheld by the courts that insureds have an obligation to read their policies or to at least seek out interpretations from their agents or brokers.

Six months after the filing of Hood's lawsuit, his predicted litigation was beginning to reach court determination. In the case of Tuepker v. State Farm Fire & Casualty Co. Federal Judge L. T. Senter Jr., of the Southern District of Mississippi District Court, noted that the insured's claim alleged that the family's home in Long Beach, Miss., was damaged during the storm allegedly by "hurricane wind, rain, and/or storm surge from [the hurricane]." The court accepted this statement as true, since the home was destroyed. The court found that the insured's policy with State Farm did cover windstorm damage, a fact the insurer did not dispute. The court also found that the flood exclusion "found in the policy for water damage is a valid and enforceable policy provision. Indeed, similar policy terms have been enforced with respect to damage caused by high water associated with hurricanes in many reported decisions." Senter's ruling cited six decisions from the Mississippi Supreme Court, and one from the 5th Circuit. (Home Ins. Co. v. Sherill, 174 F.2d 945 [5th Cir., 1949].)

The plaintiff insureds had argued that storm surge was not a flood. They alleged that "under well-settled meteorological principles and construing the policy against State Farm and in favor of coverage, 'storm surge' does not constitute 'flooding,' so that [the insureds] have coverage for damage to their homes caused by hurricane storm surge under the four corners of their State Farm policies." The insureds argued that the policy wording, by not specifically excluding storm surge, was ambiguous enough to pro-vide coverage. This, of course, was also the focus of Hood's lawsuit.

State Farm had heard this kind of nonsense before. In the Washington case of State Farm v. Emerson (678 P.2d 1139 (1984), that state's Supreme Court commented that "even a casual glance at the policy would indicate that there were limitations to cover-age." Judge Senter dismissed the plaintiff's argument, stating, "Losses directly attributable to water in the form of a storm surge are excluded from coverage because this damage was caused by the inundation of plaintiff's home by tidal water from the Mississippi Sound driven ashore during Hurricane Katrina. This is water damage within the meaning of the policy exclusion."

In another Katrina decision, Buente v. Allstate Ins. Co., Judge Senter stated that the hurricane had "moved tidal waters from the Mississippi Sound on shore and inundated thousands of homes, some within and some beyond the ordinary flood plain established by responsible agencies of the U.S. government. Since the water that entered and damaged the plaintiff's home was tidal water, I find that the damage caused by this inundation is excluded from coverage under the … policy." These decisions were viewed very positively by the insurance industry.

In an insurance class I taught recently at Emory University, I asked the attendees if they had read their policies. We were care-fully reviewing the personal auto and homeowners' forms. These were all intelligent and college-educated adults, but not one, even the attorney in the class, confirmed that they had read their policies. It's like I used to tell student adjusters about reading the policy to the insureds as a way to prepare for the adjustment. The new policy arrives and the husband lifts the corner of the envelope and says, "It's the new insurance policy, Dear!" and she replies, "Oh, good. Put it in the tin box in the closet with the others!" It's not written in Greek, nor is it all "fine print."

Wind or Water? Which Is the Culprit?

The problem in these decisions — the basic problem in all similar water vs. wind disputes — is determining which peril caused the damage. Judge Senter addressed this as follows:

"If the evidence were to indicate that part of the plaintiff's losses were attributable to wind and rain [the covered peril] and part … to flooding [the excluded peril], the determination of which was the proximate cause of the damage to the insured dwelling, or to any given item of property (or determination of the proportion of the damage to the insured dwelling or to any given item of property was proximately caused by each phenomenon) would be a question of fact under applicable Mississippi law." He cited Grace v. Lititz Mutual Ins. Co., 257 So.2d 217 [Miss., 1972].

"Likewise, if the evidence shows that the damage occurred over time so that wind damage preceded damage from a storm surge, the wind damage would be a covered loss, even if subsequent damage from the storm surge that exacerbated the loss was properly excluded from coverage," citing Lititz Mutual Ins. Co. v. Boatner, 254 So. 2d 765 [Miss., 1971].

Judge Senter continued, "To the extent that plaintiffs can prove their allegations that the hurricane winds (or objects driven by those winds) and rains entering the insured premises through openings caused by the hurricane winds proximately caused damage to their insured property, those losses will be covered under the policy. And this will be the case even if flood damage, which is not covered, subsequently or simultaneously occurred." This, he concluded, would be decided by competing experts.

Additionally, State Farm's policy contained an anti-concurrent causation clause that barred coverage for losses "which would not have occurred in the absence of one or more of the [listed] excluded events … regardless of … (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these."

Homeowners Balk at Buying Insurance

In its February 2006 issue, Best's Review's Rick Comejo quoted a Biloxi State Farm agent as stating, "The mentality of Southern Mississippi before Katrina was this: I don't need flood insurance because, one, the mortgage company doesn't require it, and Camille. [Reference to the 1969 Hurricane Camille, which did not create storm surge beyond the immediate shoreline area.] Well, Camille doesn't mean anything anymore."

The Wall Street Journal reported that after Hurricane Katrina, up to 80 percent of the property damaged by the hurricane was uninsured for flood. There were only 45,000 policies in effect statewide in Mississippi. In New Orleans, only around 40 percent of properties were insured for flood. One insurance expert noted, "Every year a large percentage of those eligible to buy federally subsidized flood insurance do not. Like public officials who knowingly choose to invest [just] enough money in flood control to survive a Category 3 hurricane, but not a Category 4 hurricane, homeowners gamble their properties on the theory that 'flood insurance is too expensive.'"

Dividing the Damage – A Potential Solution?

In his book San Francisco is Burning, which chronicled the 1906 earthquake in San Francisco, author Dennis Smith reported that "a central committee of adjusters was created … which determined that 10 percent of the city's damage was caused by the earthquake while 90 percent resulted from the fire and dynamiting. Consequently, the [insurance] companies agreed to pay 90 percent of the face value of the claim."

The article in Best's states that wind velocity was speculated to be 100 to 130 mph before the storm surge occurred. Thus, concluded one adjuster, "It would be reasonable to assume that every structure had moderate wind damage before the [storm] surge even hit. I would have liked to see [insurers] take a position early on to negotiate. They could have said everything south of a certain point [was damaged] 50 percent [by] wind. That would have flown." Rather, he continued, many insurers took a "hard line … saying it was all caused by storm surge. But how do you know that when you have buildings a mile inland that were totally destroyed by wind?" He noted that discerning water damage from wind was easy if there was a waterline, but otherwise was "a shot in the dark."

Similar disputes arose following earlier hurricanes, such as that in Urrate v. Argonaut Great Central Ins. Co., 881 So.2d 787 (La. App., 2004). Following property damage from the 1998 Hurricane Georges, in which the issue was whether damage resulted from (covered) wind or (excluded and uninsured) flood, the insureds ended up with $29,000. An appeal to the state's supreme court was unsuccessful. That may well be the ultimate result of Attorney General Jim Hood's prediction of massive litigation.

Ken Brownlee, CPCU, is a former adjuster and risk manager, based in Atlanta. He now authors and edits claim-adjusting textbooks.