Insurance Cases Hit U.S. Supreme Court

"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," said an Allstate representative, Michael Siemienas.

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 vs. Lafayette, which is on appeal to the state Supreme Court and will be argued on Feb. 26.

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 flood caused by human error or negligence was excluded, as opposed to just naturally caused flooding, Mr. Rossmiller explained.

This was based on the plaintiff's contention that the canals were breached due to human errors in levee construction.

In its decision, the 5th Circuit panel said that "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."

The Louisiana Supreme Court is scheduled to hear arguments on Feb. 26 in Sher vs. Lafayette, where the court will decide if the flood exclusion language in policies issued by Lafayette Insurance Company is ambiguous.

That appeal is based on a case filed by lawyers for New Orleans apartment complex owner Joseph Sher, who sued Lafayette 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 Mr. 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 its homeowner policy.

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

In another major ruling, the Supreme Court ruled 8-1 that manufacturers of medical devices are immune from liability for personal injuries as long as the Food and Drug Administration approved the device before it was marketed and it meets the agency's specifications. The ruling covers devices such as heart valves, implantable defibrillators or breast implants.

However, an official with an insurer involved in this niche of the product liability sector said the ruling in Riegel vs. Medtronic Inc. in no way immunizes medical device manufacturers or the doctors who use the devices from potential liability.

"I do not see a sea change for product liability insurance costs, but for those med device companies looking to insure pre-market-approved devices, there may be some marginal pricing changes, and maybe some willingness of insurers to take a look at those risks," said Kevin Quinley, senior vice president of Medmarc, a risk specialty insurance company based in Chantilly, Va.

The decision dealt with Charles Riegel, who was injured during an angioplasty when a balloon catheter burst while being inserted to dilate a coronary artery. The device had been approved for use by the FDA two years before. Mr. Riegel died after the lawsuit was filed, and the case was continued by his wife, Donna. The decision affirmed the dismissal of Ms. Riegel's lawsuit.

Reacting to the decision, Sen. Edward Kennedy, D-Mass., chair of the Health, Education, Labor and Pensions Committee and sole Senate sponsor of the 1976 law at the heart of the court decision, disagreed with the decision and promised action.

"In enacting legislation on medical devices, Congress never intended that FDA approval would give blanket immunity to manufacturers from liability for injuries caused by faulty devices," Sen. Kennedy said, adding that "Congress obviously needs to correct the court's decision."

But Mr. Quinlan disagreed. "There is not a lot of stripping away here," he said, noting that injured patients still have the right to sue for negligent manufacture, and can still sue a physician who is accountable for an adverse outcome. "In reality, this case dealt with med mal rather than product liability," he said.

"The doctor wasn't sued because that is not where the money was," he added. "The doctor overinflated the catheter, he used the device on a patient for whom such use was contraindicated; it was pretty much a black and white case of medical malpractice."

However, he noted, the family did not sue the doctor, just the manufacturer. "This speaks volumes about our current liability system," he said.

"There are still plenty of avenues for financial redress on the part of injured patients," Mr. Quinlan said. "It does make one path more difficult for them, but there are other paths."

Specifically, he said, the decision does not rule out lawsuits claiming that a device was made improperly, in violation of FDA specifications. "Cases may also be brought under state laws that mirror federal rules, as opposed to supplementing them," Mr. Quinlan said.

Also last week, the Supreme Court rejected Allstate's challenge to a state law that bars the insurer from buying additional auto repair facilities, and also restricts the company from participating in the running of 15 repair shops it owns in the state.

The law was enacted in 2003 after Allstate bought Sterling Collision Centers in 2001, which gave the insurer nationwide entry into the auto repair business.

In its request that the Supreme Court review the case, Allstate argued that the Texas law violates restrictions the Constitution places on state regulation of interstate commerce. The state passed the law to protect smaller collision repair firms in the state from insurance industry competition.

A U.S. District Court in Texas rejected Allstate's challenge, and the 5th U.S. Circuit Court of Appeals in New Orleans followed suit, saying the law was "based not on domicile but on business form," and didn't violate the Constitution.

"While we are disappointed that the Supreme Court declined to hear Allstate's challenge to Texas House Bill 1131, we are continuing to provide exceptional service at the more than 60 Sterling shops countrywide, including the 15 we currently operate in Texas," said an Allstate representative, Michael Siemiena.