Anti-Concurrent-Causation Language Upheld By 5th Circuit Court Of Appeals

Nationwide Insurance won strong support for the anti-concurrent-causation language in its Mississippi homeowners' policies when a federal appeals court in New Orleans ruled the wording “is not ambiguous.”

The ACC clause is used to override a damage claim from a covered cause, such as wind, when an event such as flood–which is excluded in the policy language–occurs in the same time period.

In its decision in Leonard v. Nationwide Insurance Co., the 5th U.S. Circuit Court of Appeals interpreted Mississippi state law as also backing Nationwide in its arguments that insurance agents cannot orally modify the language in insurance contracts, as the plaintiffs alleged in their lawsuit.

“The district court should never have considered this argument because [the agent's] statements are irrelevant to interpreting this policy as a matter of Mississippi insurance law,” the panel said.

The appeal arose from a 2006 decision in the case of Paul and Julie Leonard, who sued Nationwide after the company refused to pay for storm-surge damage–wind-driven water–to their home in Pascagoula, Miss. Nationwide argued the home was lost to excluded flood damage, rather than wind.

However, the fact the decision came out as Congress reconvened with a flood of bills and hearings on coastal insurance issues on its agenda is likely to add further fuel to those who say a federal solution is required, at least one lawmaker believes.

In a statement issued just hours after the ruling, Brian Martin, policy director for Rep. Gene Taylor, D-Miss.–who fought with his own insurer over his Hurricane Katrina claim–said the ruling “strengthens our case that wind and flood need to be in the same policy.”

Rep. Taylor is the primary sponsor of H.R. 920–a bill recently passed by the House Financial Services Committee that would allow homeowners to buy wind insurance as well as flood insurance through the National Flood Insurance Program.

The bill could be on the House floor by Oct. 15, although the wind insurance provision faces an uncertain future in the Senate and is also opposed by the Bush administration.

In addition, Robert P. Hartwig, president of the Insurance Information Institute, said “the decision does not back Mr. Martin. It contradicts his conclusion and backs the insurance industry's position that 'purchase of a flood insurance policy along with a homeowners' insurance policy will provide complete protection to homeowners in the event of a catastrophic event.'”

A Nationwide representative, Joe Case, responded to the court's decision by stating: “While we are studying the implications of the ruling, it does appear the court's ruling fixes the issues Nationwide addressed in its appeal.”

Mr. Case added that this includes upholding Nationwide's ACC provision as clear and legal. “That portion of the ruling aligns with decisions handed down by courts across the country affirming the validity of anti-concurrent causation provisions,” he said.

“Had the district court ruling been allowed to stand, it may have meant that Nationwide's Mississippi homeowners policies could have been forced to cover losses for which premium had never been collected” Mr. Case added.

“We will continue to study the decision and remain committed to resolving all claims fairly and in a timely fashion,” he said.

David P. Rossmiller, a lawyer with Dunn Carney Allen Higgins & Tongue in Portland, Ore., and an expert on insurance issues, said the Leonard case “is of major importance to the insurance industry,” noting that ACC provisions have been a key part of property insurance policies for at least 25 years. “Insurers rely on them to keep judges and juries from sticking them with losses they never contemplated,” he said.

He added that the underlying ruling by District Court Judge L.T. Senter was “somewhat strange, because to decide the case under the facts before him, he did not need to consider the anti-concurrent cause language at all–such language is only operable where multiple causes combine and result in the same damage.”

However, Mr. Rossmiller said the Katrina wind and water acted separately, as separate forces, and caused separate damage to the house.

“It would have been best had the 5th Circuit simply said that, and that the water damage to the house was a single force that was expressly excluded by the terms of the flood exclusion, which includes a definition for waves driven by wind,” he explained.

“The 5th Circuit's analysis of the causation issue, like [Judge] Senter's, was somewhat off-base, but it nevertheless got the right result–the anti-concurrent cause provision is not ambiguous.”

In comments to the Associated Press, Zach Scruggs, an attorney representing dozens of policyholders on the Gulf Coast, called the ruling disappointing. Mr. Scruggs said the Leonards will appeal the ruling.

In his comments, Mr. Martin said that in its decision, “the appeals court is saying it is okay for a company to sell a policy that is likely to be worthless for a major hurricane if you also have flood risk.”

He added that “if the wind insurance does not cover wind damage, that means it is impossible to buy insurance and know that you are covered.”

“The flood policy is not supposed to pay for wind damage,” Mr. Martin added. “Congress should ban any company with an anti-concurrent causation clause from participating in the flood program. I think this also helps our case that the antitrust exemption has to go and the federal government needs to take over regulation of insurance. Consumers and taxpayers need federal intervention.”

An American Insurance Association representative, Blain Rethmeier, reacted to the ruling by saying: “We view this decision and the others from the U.S. 5th Circuit that have recently preceded it as a clear affirmation that insurers need not fear that politically motivated decisions will undermine the precise agreements they have struck and upon which free enterprise is based.”

Meanwhile, earlier last month, plaintiff attorneys asked the same federal appeals court in New Orleans to review two of its own rulings against class actions by homeowners disputing insurers' treatment of Hurricane Katrina damage claims.

The request for an en banc rehearing by all 17 judges of the 5th U.S. Circuit Court of Appeals follows decisions earlier in August by two of the court's three judge panels that uphold policy language excluding claims for flood damage.

In their petition, lawyers asked the court to set aside the Aug. 8 decision of the panel of the court in Chauvin v. State Farm Fire & Casualty.

That decision upheld an Aug. 2, 2006 ruling by U.S. District Court Judge Sarah S. Vance in New Orleans that dealt with the application of a Louisiana state statute–the Valued Policy Law.

Under the Valued Policy Law, an insurer is required–when there is a complete loss–to pay the full face value of the policy. The law also precludes a carrier from accepting premiums for one face value and then claiming the loss is a lesser amount.

Judge Vance found that VPL was not intended to expand coverage to excluded perils such as flooding.

The appeals panel also rejected the contention by lawyers for homeowners that the VPL means home insurers have to pay for the full value of a policy when the house is destroyed by a combination of flooding and hurricane wind damage.

Attorneys in their court papers argue that a rehearing is justified because the case constitutes “extraordinary circumstances,” according to Jeff Struckhoff, an attorney with Lestelle and Lestelle, Metairie, La.–the lead law firm in the Chauvin case. “There is a great deal at stake in these cases, both for the property owners and the insurance industry,” he said.

In the second case, lawyers are asking the full court to set aside an Aug. 1 decision by its panel in re: Katrina Canal Breaches Litigation. In that case, the appellate court decided that flood exclusions apply to man-made as well as natural disasters.

The appeals ruling reversed a November decision by U.S. District Court Judge Stanwood Duval in New Orleans. He found that flood exclusion language in many insurance company policies did not rule out water damage from levee breaches caused by negligent design, construction and maintenance of the levees.

Drew Ranier, a partner for Ranier, Gayle and Elliott based in Lake Charles and New Orleans, La., said lawyers for the plaintiffs asked for review because the 5th Circuit panel should have certified the case to the Louisiana Supreme Court for its interpretation of state law before ruling, among other reasons.

“These are interpretations of Louisiana law at issue here, and it is ultimately the interpretations of Louisiana law that will prevail here,” he argued.

In fact, oral arguments in the first case interpreting the Valued Policy Law stemming from losses from Hurricane Katrina, Sher v. Lafayette Insurance Co., will be held Sept. 12 before the 4th Louisiana Circuit Court of Appeals, based in New Orleans, Mr. Ranier said.

The case will then go before the Louisiana Supreme Court, which is the ultimate arbiter of Louisiana law, Mr. Ranier noted in comments to National Underwriter and in court briefs submitted to the 5th Circuit.