Flood Exclusion Applies to Rita's Storm Surge
In Arctic Slope Regional Corp. v. Affiliated FM Ins. Co. 2009 WL 860037 C.A.5 ( La. ) the companies whose office and construction yard had been flooded by storm surge from Hurricane Rita brought a diversity action against their insurer after the insurer denied coverage under the companies' “all risks” insurance policy. The insurer filed a motion for summary judgment which the U.S. District Court for the Western District of Louisiana granted and dismissed the companies' claims with prejudice. The companies appealed.
Appellants, the insured parties, admitted that Hurricane Rita's storm surge in 2005 flooded Omega Natchiq Inc.'s office and construction yard up to three feet deep. The flood was excluded from coverage by the “all risks” policy Arctic Slope Regional Corporation, the parent company, had purchased from insurer Affiliated FM Insurance Co. Nonetheless, Arctic Slope contended that the loss fell within a policy provision defining coverage for wind/hail damage.
After Affiliated denied coverage for the company's storm surge losses, Arctic Slope filed suit on behalf of itself and related companies. According to the appeals court, Arctic's Slopes appeal from the district court's adverse summary judgment on coverage issues represented a variation on the court's previous insurance coverage decisions in Leonard v. Nationwide Mutual Ins. Co., 499 F.3d 419 (5th Cir.2007) and Tuepker v. State Farm Fire & Casualty Co., 507 F.3d 346 (5th Cir.2007).
Arctic Slope contended that Omega's storm surge damage was expressly covered by the wind/hail provision of the Affiliated policy or alternatively that the policy was ambiguous and must be construed in its favor.
Explaining that a systematic review of the applicable policy provisions was necessary, the court stated that the Affiliated policy covered facilities owned by Arctic Slope and its subsidiaries throughout the U.S. for “all risks of direct physical loss or damage to insured property except as defined and limited herein.” According to the court, the policy went on to cover losses from both “flood” and “wind and hail,” subject to specific sub-limits, restrictions and exclusions.
Arctic Slope conceded that while the policy definition of “flood” encompassed storm surge damage, the policy excluded flood coverage, at a minimum, in low-lying flood-prone areas like Omega's location. Apart from the defined time period and locations in which flood damage was covered, the policy specifically excluded loss or damage caused by “[f]lood, [s]eepage or [i]nflux of water from natural underground sources below the surface of the ground …”
Arctic Slope maintained, however, that Omega's damage fell within the plain language of the wind/hail provision because the storm surge consisted of water driven by wind onto or into Omega's property. Based on this premise, the company proposed two levels of ambiguity in the policy.
First, the policy was allegedly ambiguous because it excluded coverage for the storm surge damage within the flood definition while authorizing coverage for the same damage in the wind/hail provision. While the district court rejected this interpretation of the wind/hail provision as unreasonable in light of the entire policy, the appeals court stated that it need not opine on that conclusion because even if a hurricane storm surge fell within the definitions of both an excluded peril and a covered peril, the policy was not ambiguous as it explicitly stated that it covered all risks of direct physical loss or damage “except as excluded under this policy.” The court stated that there was no ambiguity when the policy was read as a whole and the exclusion of storm surge as a flood event could not be reversed by its possible inclusion as a wind/hail event.
Second, Arctic Slope argued the anticoncurrent (“ACC”) clause was ambiguous because there was only one cause of damage—storm surge—not separate causes defined as separate perils in the policy and because the flood exclusion was awkwardly articulated within the clause. The court determined that the ACC clause was unequivocal and unyielding, as it excluded insurance against loss or damage caused by or resulting from any of the listed causes, including flood. Further, it then repeated that loss or damage was excluded “regardless of any other cause or event whether or not insured under this policy that contributes concurrently or in any sequence to the loss or damage.” Thus, the storm surge flood occasioned by Hurricane Rita “whether driven by wind or not” was not covered by this policy and the ACC clause precluded coverage of the loss or damage under the wind/hail provision as water “carried, blown, driven or otherwise transported by wind onto or into said location.”
According to the court, the ACC clause operated exactly as it was intended, eliminating application of an efficient proximate cause rule, whereby a jury could be called upon to determine the relative contribution of the covered and the excluded perils, by excluding coverage altogether.
The court also rejected Arctic Slope's contention that the description of a flood peril excluded by the ACC clause was itself ambiguous. The court explained that it was simply “a microcosm of the general scope of policy coverage,” that is, certain perils were covered as defined and limited in the policy and subject to the policy's express exclusions. Thus, flood loss, as supplementally defined to include seepage or influx of water from below ground, remained excluded under the ACC clause, although it was covered subject to other qualifications.
Therefore, the court held that Omega's loss from Hurricane Rita's storm surge was not covered by Affiliated's policy, either as a matter of express policy interpretation or by inference drawn from ambiguity.