The decision earlier this month by a federal appeals court in New Orleans supporting insurer flood exclusions in Hurricane Katrina claims should send a message to homeowners about the need to buy flood insurance, one industry group contends.
Joining other insurer groups and individual carriers in applauding the ruling by the 5th U.S. Circuit Court of Appeals panel, Justin Roth, senior federal affairs director of the National Association of Mutual Insurance Companies, made the case for flood insurance purchases. "This case underscores the need for residents in flood zones to purchase insurance through the federal government's National Flood Insurance Program," he said.
"It's another illustration of why the nation's flood maps need to be updated and homeowners in those areas need to be aware of, and urged to purchase, coverage through the NFIP," he added.
The court held that standard insurance policy flood and water damage exclusions prevent Katrina victims from recovering losses from insurers, even if the damage was because man-made levees failed, rather than purely due to natural hazards.
Neil Alldredge, vice president for state and regulatory affairs at the NAMIC, said that "while we sympathize with the plight of the homeowners and residents affected by [the Hurricane Katrina] tragedy, this was the correct decision for this issue."
Judge Carolyn King, writing for a three-judge panel, said in the court's decision that "this event was excluded from coverage under the plaintiffs' insurance policies, and under Louisiana law, we are bound to enforce the unambiguous terms of their insurance contracts as written."
Marc Racicot, president of the American Insurance Association, said the court's decision "reinforces the important principle that clear contractual provisions should be applied as written."
"Nobody could have ever anticipated the destruction caused by Hurricane Katrina," he added, noting that the insurance industry "remains fully committed to helping those in need with assistance and to helping foster the rebuilding process."
The appeals court decision overturned a ruling by U.S. District Court Judge Stanwood Duval, who ruled last November that policies with standard language from the Insurance Services Office issued by Allstate and other carriers were ambiguous, and that they did not exclude water damage caused by negligent and intentional acts.
Explaining why the policies were ambiguous, Judge Duval said the exclusions in question did not distinguish between floods caused by an act of nature–such as excessive rainfall–and floods caused by acts of man, which would include the levee breaches following Katrina's landfall.
In his decision, he contrasted the existence of clearer language in policies written by State Farm, whose policy "does precisely what the ISO Water Exclusion Policy fails to do. It makes it clear that…there is no coverage provided for any flooding 'regardless of the cause.'"
Judge King, on the other hand, saw no need to spell out or draw distinctions between natural and man-made causes of flooding in policy language. "The fact that an exclusion could have been worded more explicitly does not necessarily make it ambiguous….Nor does the fact that other policies have more explicitly defined the scope of similar exclusions," she said.
Later, directly attacking the plaintiffs' contention that flooding in the aftermath of Katrina was non-natural, she wrote: "This focus…ignores the sizeable natural component to the disaster–a catastrophic hurricane and the excess water associated with it. The non-natural component is simply that in certain areas, man's efforts to mitigate the effect of the natural disaster failed, with devastating consequences."
She added that "if man's failure to adequately prepare for a natural disaster could alone transform the disaster into a non-natural event outside the scope of a policy's exclusion, it is difficult to conceive how an insurer could ever exclude the resulting loss; any natural event could be recharacterized as non-natural either because man's preventative measures were inadequate or because man failed to take preventative measures at all."
The appeals court also relied on various dictionary definitions of flood that refer to "the overflow of some body of water that inundates land not usually covered with water" to find in favor of the insurers.
"In light of these definitions, we conclude that the flood exclusions are unambiguous in the context of this case and that what occurred here fits squarely within the generally prevailing meaning of the term 'flood,'" Judge King wrote.
"When a body of water overflows its normal boundaries and inundates an area of land that is normally dry, the event is a flood. This is precisely what occurred in New Orleans in the aftermath of Hurricane Katrina," she wrote.
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