Key Flood Ruling Goes To U.S. 5th Circuit

A federal appeals court in New Orleans has set Aug. 6 as the date to hear oral arguments over the first post-Hurricane Katrina decision on an insurer's policy language excluding flood coverage.

The appeal of a Mississippi federal court judge's ruling, which was regarded at the time as being pro-insurer, is being brought by Nationwide Insurance Co.

Brian Green, a lawyer with Edwards Angell Palmer & Dodge in New York, said the appeal reopens to scrutiny lower court rulings dealing with an agent's duty of care to a customer and the language in the Nationwide contract dealing with windstorm damage and flood exclusion.

The August 2006 decision by Judge L.T. Senter in Paul Leonard and Julie Leonard v. Nationwide supported Nationwide. The Leonards are from Pascagoula, Miss., one of the coastal areas hard hit Hurricane Katrina.

The decision validated the water exclusion in the Nationwide contract as valid and enforceable, and extended it to storm surge, which is wind-driven water, Mr. Green said. In the decision, however, the judge held that the Leonards were allowed to recover the amount of damages caused by wind or objects propelled by wind.

That portion of the ruling effectively barred policy language eliminating a windstorm claim if there was concurrent damage from flooding.

The decision did reject the Leonards' contention that their agent was responsible because he told the couple they didn't need flood insurance.

Judge Senter found against the Leonards' argument that because the agent told them they didn't need flood insurance, that meant the Nationwide policy did provide coverage for flood, Mr. Green said.

Mr. Green said he found it interesting that the 5th U.S. Circuit Court of Appeals is the appellate court for both Mississippi and Louisiana, "which means that the appeals court decision will provide guidance to federal court judges in both states."

Although insurance industry representatives called the decision a victory, the Leonards' counsel, Richard "Dickie" Scruggs, said the decision was a good one for him. Subsequently, his firm successfully brought cases against insurers arguing that their evaluation of claims was flawed because they failed to properly factor in the amount of wind damage.

Joe Case, a spokesman for Nationwide, said the company's appeal of Judge Senter's decision "is about the more technical provisions of his ruling."

"Even though Nationwide prevailed at trial, we are asking the appellate court to correct what we feel are some critical errors made by the district court which could undermine Nationwide's homeowner contract language in Mississippi."

Specifically, he said, the company is arguing that the District Court ruling on the anticoncurrent provision "runs counter to Mississippi law. And if allowed to stand, the District Court will have granted some policyholders a windfall at the expense of others."

Mr. Case added that Nationwide is "also arguing that the District Court erred by giving the Leonards the opportunity to circumvent their contract by relying on alleged oral statements by their agent."

"Even though the district court said the Leonards' agent did nothing wrong, we are asking the court to rule out the use of this tactic in other cases in the future because agents don't have the authority to orally modify a contract. Otherwise, an insurance contract would be worthless if a policyholder can simply allege that an agent said something inconsistent with the terms," he said.

The Leonards have filed a cross appeal. The ruling that the insurer is appealing holds the company accountable for paying just $1,200 in wind damage.