BARRY.NILSSON. Lawyers

In Re Katrina Canal breaches Consolidated Litigation - United States District Court - Eastern District of Louisiana

THE FACTS

Hurricane Katrina was one of the deadliest and most destructive hurricanes in the history of the United States. It was the sixth strongest Atlantic hurricane ever recorded, and the third strongest hurricane to reach US landfall on record. Katrina reached its peak strength at 1.00pm on 28 August 2005. There were extensive failings of the levies and flood walls protecting New Orleans, Louisiana and surrounding communities. The major levy breaches in the city of New Orleans included the Seventeenth Street Canal Levy, the London Avenue Canal and the wide and navigable Industrial Canal (the Canals), which left approximately 80% of the city flooded. After the devastation thousands of property owners had their insurance claims for water damage rejected by insurers relying on various flood exclusions. The actions commenced by aggrieved complainants were consolidated in this proceeding.

The United States District Court decided to use this proceeding as an umbrella for all cases concerning damages caused by flooding as a result of breaches or overtopping in the areas of the Canals. The Court considered 4 cases (each involving multiple plaintiffs and multiple defendants) all of which had as their centrepiece the issue of insurance coverage under home owners policies. The first case was a class action referred to as the Vanderbrook matter. It involved Hanover Insurance Company, Standard Fire Insurance Company, State Farm and Fire and Casualty Company, Hartford Insurance Company of the Midwest, and Unitrim Preferred Insurance Company. The ISO policies issued by Standard Fire, Hartford, Hanover and Unitrim contained identical language. They included the following coverage clause:-

'COVERAGE A ' DWELLING and COVERAGE B ' OTHER STRUCTURES: We insure against risk of direct loss to property described in coverages A and B only if that loss is a physical loss to property.'

The following exclusions appeared in each of the policies:-

'(1)    {We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.
'
(c)    Water damage, meaning:-

Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind;'

'Flood' was not defined in the policies apart from the Hartford policy which defined flood to include a 'release of water held by a dam, levy or dike, or by a water or flood control device ''.

The State Farm policy contained a lead-in provision that the company did not insure for any loss which would not have occurred in the absence of certain excluded events (of which flood was one) 'regardless of the cause of the excluded event'.

THE LITIGATION

In the Vanderbrook matter the plaintiffs sought coverage for water damage caused by the collapse of the Seventeenth Street Canal floodwall. With regard to the insurance coverage claims the Court fully understood the implications of its decision with Judge Duval commenting:-

'It cannot be gainsaid that in approaching these motions, which are the first in a daunting line of litigation concerning insurance coverage for the losses caused by the canal breaches in New Orleans, the potential impact of such a decision on individuals as well as the insurance industry might be considered overwhelming.'

The plaintiffs contended that the water damage caused to their homes and property was not the result of 'flood' or other similar excluded events, but was water intrusion caused by a broken levy wall. The plaintiffs claimed that the defendant insurers had wrongly invoked the flood exclusion clauses.

The defendant insurers argued that all water damage caused by the canal breach was excluded from coverage, as the policies specifically excluded cover for water damage caused by or resulting from a 'flood', and that the inundation of the city of New Orleans caused by the failure of its levies was a 'flood' within the meaning of the policy.

The defendants relied on supporting case authority, and in particular a decision of the Supreme Court of the State of Colorado where the majority held that the generally accepted meaning of the term 'flood' did not include a distinction between artificial and natural floods. The ISO insurers argued that the word 'flood' was all encompassing. The plaintiffs maintained that the majority decision in the Colorado case was incorrect. They argued that in the context of this particular exclusion, 'flooding' was limited to natural events. The plaintiffs submitted that it was the negligence of those responsible for the levy that caused the water inundation, rather than a natural event.

THE DECISION

Judge Duval referred to the definition of the word 'flood' in Webster's Third New International Dictionary of English Language, the Compact Oxford English of Current English Dictionary and the American Heritage Dictionary of the English Language. With reference to these definitions Judge Duval said:-

'Accordingly, based on these definitions of 'flood', it is clear to this Court that implicit in the 'overtopping' definitions, a natural event caused by rain or tide is contemplated. Thus, these definitions alone provide evidence that a reasonable interpretation of the term 'flood' would be inundation caused by a natural event.'

His Honour in applying Louisiana law observed that he was obliged to construe the wording of an exclusion clause narrowly. He observed the general rule that insurance policies should be construed to effect, rather than deny coverage.

In deciding on the ambiguity point, Judge Duval said:-

'Simply put, the language of the ISO water damage exclusion chosen by the insurer is unclear. Indeed, the broad definition the defendants seek to employ ' that is that the term 'flood' means the inundation of usually dry land by water ' makes the remaining part of the exclusion superfluous. The ensuing words 'waves, tidal water, overflow of the body of water or spray from any of these, whether or not driven by wind' are all instances relating to natural events which can cause inundation of usually dry land. Thus, to use the broadest definition of the term 'flood' in interpreting this exclusion, would render the rest of the clause useless.'

Judge Duval observed that once a finding of ambiguity was made the Court must interpret any such ambiguity against the insurer. He observed that it was the insurers who were responsible for policy wordings, and if they wanted to make the language clear ie. that 'flood' included water damage caused by negligent acts or omissions, then they could have done so in the policy wording as State Farm and Hartford had in fact been done.

With the State Farm policy, His Honour observed that it did precisely what the ISO policies failed to do. It made it clear that regardless of the cause of flooding, there was no coverage provided. The language was clear and as such the Court was able, without difficulty, to find that State Farm had excluded coverage for all flooding. Similarly with the Hartford policy, Judge Duval found that again it was clear on the face of the document that the insurer had specifically excluded this type of loss or damage. Judge Duval ordered that the other insurance companies should pay the water damage claims.

Similar findings were made by Judge Duval with regard to flood exclusions in the other 3 matters under consideration.

COMMENT

If upheld, the decision could cost insurers billions of dollars on top of the reported $41 billion they have already paid out to Hurricane victims. It is expected that the case will go to the United States Court of Appeals for the Fifth Circuit.

For further information on this topic, please contact:

• Robert Samut