Underwriters Win First Round Before High Court On Levee Cases

WASHINGTON--In the first of the Katrina flood cases to hit the Supreme Court, the court declined to review a federal appeals court ruling that upheld the flood exclusion in homeowners policies issued by Allstate and Travelers.

The Supreme Court, without comment, declined to hear two separate appeals from August 2007 decisions of the 5th U.S. Circuit Court of Appeals, based in New Orleans.

Those cases were consolidated lawsuits by various plaintiffs, including Xavier University, and two groups of homeowners seeking class action status. The suits were brought in the wake of Hurricane Katrina in 2005.

David Rossmiller, a partner at Dunn Carney Allen Higgins & Tongue LLP in Portland, Ore., and an expert on contract issues in insurance policies, said that regardless of what the state court rules in the other cases, the class action lawsuits brought against Allstate and Travelers are dismissed.

"It's the end for these plaintiffs, they can't go to state court; they are done." Mr. Rossmiller said.

"The Supreme Court's decision takes us one step closer to resolving this issue and allowing our customers to move forward with the rebuilding process," Allstate spokesman Michael Siemienas said.

The basis of the plaintiff's appeal was the 5th Circuit's denial of their request to be allowed to bring their claims in Louisiana state courts, Mr. Rossmiller said.

According to Mr. Rossmiller, the plaintiffs wanted to be in state court because certain divisions of the Louisiana Court of Appeals have found flood exclusions ambiguous, particularly the Fourth Division in Sher v. Lafayette, which is on appeal to the State Supreme court and will be argued on Tuesday.

In the 5th Circuit case, the court reversed a federal district court decision that found language in several flood exclusions ambiguous. The district court ruled the contracts did not clearly state whether man-caused flood was excluded as opposed to natural caused flooding, Mr. Rossmiller said. This was based on the plaintiff's contention that the canals were breached due to human errors in construction.

In its decision, the 5th Circuit panel said, "even if plaintiffs can prove that the levees were negligently designed, constructed or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs' policies unambiguously preclude their recovery."

But the issue continues to be argued, as the Louisiana Supreme Court is scheduled to hear arguments Tuesday in Sher v. Lafayette where the court will decide if the flood exclusion language in policies issued by Lafayette Insurance Co. is ambiguous.

That appeal is based on a case filed by lawyers for New Orleans apartment complex owner Joseph Sher. He sued Lafayette Insurance for refusing to pay for most of the damage to his property.

Last year, a state judge ruled that Lafayette's flood-exclusion language was ambiguous and therefore covered "man-made events."

Louisiana's 4th Circuit Court of Appeals also supported Sher in its November decision.

In its appeal, Lafayette is asking the state Supreme Court to reverse that ruling, arguing that all flooding in New Orleans is excluded under the company's homeowner policies.

"An ordinary layperson reading this provision would have no doubt that there is no coverage for damage caused by the massive flood that occurred in New Orleans," Lafayette lawyers argued in briefs. "To the average person, it seems preposterous that lawyers have spent countless hours arguing over whether there was a 'flood.' Of course there was."

Lawyers for Sher argue that Lafayette and other insurers could have clarified policy language to specifically exclude water from levee breaches from coverage--but did not.