H URRI CANES G USTAV AND I KE I NSURANCE I SSUES
I NT RO DUCTIO N
In recent weeks, Hurricanes Gustav and Ike have impacted the entire Gulf Coast
region. As a result, many individuals and businesses have sustained property and
commercial losses. First and foremost, we have provided a brief summary of the current
Emergency Rules promulgated by Louisiana’s Insurance Commissioner pursuant to Gov.
Jindal’s executive order. Further, we have summarized recent rulings regarding various
significant insurance legal issues litigated after Hurricanes Katrina and Rita.
L OUISIANA E M E RG E NCY R UL ES A P P LICAB LE TO I NS URANCE I NDUS T RY
Louisiana’s Insurance Commissioner has issued two emergency rules affecting
the insurance industry, Emergency Rule 24 and 25. Emergency Rule 24 suspends certain
policy provisions and statutes applying to various insurance policies, including casualty
insurance, homeowners insurance, life insurance, vehicle insurance, fire and extended
coverage, and other specific insurance. Rule 24 suspends any policy provision that
imposes “upon an insured a time limit to perform any act or transmit information or
funds” until October 1, 2008.1 Rule 24 further “suspends any notice of nonrenewal,
nonreinstatement or any other notices related to insurance and no similar notices shall be
issued until October 1, 2008.”2 Section 4411 of Rule 24 states that “no policy shall be
cancelled or nonrenewed because of a claim resulting from Hurricane Gustav or its
aftermath.” Rule 24 is limited to 36 parishes and does not have legal effect on anyone
residing beyond the impacted parishes as defined.
Emergency Rule 25 applies mostly to insurance related to the health care industry
and to medical needs. For the purposes of this newsletter, no additional discussion is
necessary.
1
La. R.S. 37:4401, et al.
2
Id.
I MP ACT OF H URRICANE K AT RINA F LOO D L IT IG ATION
Hurricanes Katrina and Rita placed hazard policy flood exclusions squarely under
the judicial microscope. Particularly, the U.S. Court of Appeals for the Fifth Circuit and
the Louisiana Supreme Court have recently ruled on issues regarding 1) damage from
flooding caused by levee failure, and 2) damage caused by flooding and wind (i.e. “wind
versus flood damage”).
In Sher3, the insured sued for insurance coverage for damage to his property
caused by Hurricane Katrina. The Louisiana Fourth Circuit Court of Appeal held that the
term “flood” in the policy’s exclusions was ambiguous and did not apply to the type of
water damage the insured suffered from Hurricane Katrina. The Louisiana Supreme
Court reversed and found that “the plain, ordinary and generally prevailing meaning of
‘flood’ is the overflowing of water into an area that is usually dry.” Critically, the
Louisiana Supreme Court held that the definition of “flood” does not depend on whether
the event is a natural or man-made disaster and determined the insured’s building
suffered flood damage that was excluded by the insurance policy. Similarly, in In re
Katrina Breaches4, the U.S. Court of Appeals for the Fifth Circuit found that the flood
exclusion unambiguously precluded recovery. The Fifth Circuit determined that when a
body overflows its normal boundaries and inundates an area of land that is normally dry,
the result is a flood. Consequently, the Fifth Circuit held that, by definition, a flood
occurs whenever a levee ruptures and fails to hold back floodwaters. The Fifth Circuit
concluded that the rising waters in the New Orleans area following Hurricane Katrina
constituted a “flood” within the meaning of the insurance policies’ exclusions.
The more challenging coverage determination is property damaged by both wind
and flood. Many hazard policies contain anti-concurrent cause exclusionary language
which purport to bar coverage for certain perils (such as flood), even if caused in whole
or in part by an otherwise covered peril. This language is significant because the typical
sequence of events resulting from a hurricane is violent wind followed by excessive
water. When covered perils combine with non-covered perils to cause damage, insurers
rely on anti-concurrent cause provisions to deny coverage. Courts have been reluctant to
strictly enforce these provisions. Historically speaking, Louisiana courts have seemingly
ignored them and have awarded damages by allocating covered and non-covered perils,
Smith v. Winchester, 80 So.2d 414 (La. 1955), or by finding that the dominant efficient
cause of the loss was a covered peril, Picone v. Manhattan Fire and Marine Ins. Co., 50
So.2d 188 (La. 1950). Courts almost always permit the issue of causation to be decided
by the trier of fact, thereby ensuring costly and protracted litigation.
Importantly, the “wind versus flood” issue has been recently and often litigated in
Louisiana and Mississippi. The prevailing rule is the doctrine of “efficient proximate
cause.” Historically, this doctrine required the homeowner to illustrate that the covered
3
Sher v. Lafayette Ins. Co., 2008 La. LEXIS 796 (La. 2008).
4
In re: Katrina Canal Breaches Litigation Richard Vanderbrook et al., 495 F.3d 191 (5th Cir. 2007).
peril (i.e. wind) was the proximate or efficient cause of the loss.5 Analyzing “wind
versus flood,” the U.S. District Court for the Western District of Louisiana has held that
an insured will be afforded coverage if he or she can prove that damage resulted from
wind, regardless of whether there was concurrent or subsequent water damage.6 The U.S.
District Court for the Eastern District of Louisiana has held that an insured who sustains
property damage from both flood and wind may recover his or her “segregable” wind and
flood damages.7 The U.S. District Court for the Southern District of Mississippi
rationalized this legal premise by stating “if there is wind damage covered under a
homeowners policy, the right to collect the insurance applicable to that damage would
come into existence at the time the damage occurred. If the insured property were later
more severely damaged by flooding…the insurer under the homeowner’s policy would
still be responsible for this wind damage.”8 To synthesize, courts will look to the time
when the covered peril caused the damage and will segregate out the wind damage from
the flood damage under a standard homeowner’s policy.
L OUISIANA V AL UED P OL ICY L AW
The application of Louisiana Valued Policy Law (“VPL”) posed another
controversial post-Katrina and Rita insurance issue. Many states enacted VPLs in the late
1800s and early 1900s to curtail insurers from profiting by selling insurance policies with
inflated values and then only paying actual value when the insured property was a total
loss. Many insureds attempted to recover full policy value under VPL for damages
caused by both wind and flood. The courts, however, have consistently held that
Louisiana’s VPL “only requires an insurer to pay the agreed face value of the insured
property if the property is rendered a total loss from a covered peril.”9 Consequently,
unless the property was totally damaged from the covered peril, it does not appear that
the insured can recover the full value of the property under Louisiana’s VPL.
P OWE R O UT AG E L IT IG AT IO N
The U.S. Court of Appeals for the Fifth Circuit held that a homeowner’s policy
did not include coverage for damage to refrigerators and freezers caused by power
outages occurring outside the residential premises, affirming the district court’s
5
See Jackson v. Johns-Manville Sales Corp., 781 F.2d 394, 397 (5th Cir. 1986).
6
In re Cameron Parish Rita Litigation, 2007 WL 2066813 (W.D. La. 2007).
7
Weiss v. Allstate Ins. Co., No. 06-3774, 2007 WL 891869, at *1 (E.D.La. Mar. 21, 2007) (Vance, J.);
Broussard v. State Farm Fire and Casualty Co., No. 06-8084, 2007 WL 2264535, at *2-3 (E.D.La. Aug. 2,
2007) (Vance, J.).
8
Mills v. State Farm Fire & Casualty Company, 2007 WL 1514021 (S.D.Miss. 2007).
9
Chauvin v. State Farm Fire & Casualty Co., 2007 WL 2230724 (5th Cir 2007); see also Landry v.
Louisiana Citizens Property Ins. Co., 983 So.2d 66 (La. 2008) (holding that the homeowner must prove
that the damage resulted from the proximate or efficient cause of a covered peril and held that an insurer
can set forth alternative calculations for paying for a covered loss in a policy).
decision.10 The Fifth Circuit interpreted the expanded coverage for “power interruption
occurring on the residence premises”11 as an exclusion of other “unspecified types of loss
attributable to such interruption.” It determined that Hurricane Katrina caused an
extensive electrical power loss and not a power outage. Hence, the electrical power loss
did not occur on the residence premises, but off the premises. The Fifth Circuit,
accordingly, upheld the insurer’s refusal to replace the homeowner’s freezer and
refrigerator unites damaged by food putrefaction as a result of power outages after
Hurricane Katrina.
B AD F AIT H C L AIMS AND P E NAL T IE S U NDE R L O UISIANA L AW
Louisiana law expressly requires all insurers to pay the amount of a claim within
thirty days after the insured or any party of interest proffers a “receipt of satisfactory
proof of loss.” La. Rev. Stat. §22:658(A)(1). Unlike a typical loss claim, in the case of a
catastrophic loss, the insurer is required to initiate loss adjustment of a property damage
claim within thirty days after the notification by the claimant. La. Rev. Stat.
§22:658(A)(3). In addition to these stringent time response requirements, Louisiana has
placed additional duties on the insurers. The insurer has “an affirmative duty to adjust
claims fairly and promptly and to make a reasonable effort to settle claims with the
insured or the claimant, or both.” La. Rev. Stat. §22:1220(A). Specifically, under
Louisiana law, the insurer breaches that duty if there is a:
(1) misrepresentation of pertinent facts or insurance policy
provisions,
(2) failure to pay a settlement within thirty days after an
agreement is reduced to writing,
(3) denial of coverage or attempt to settle a claim on the basis of an
application which the insurer knows was altered without notice to, or
knowledge or consent of, the insured,
(4) misleading by the insurer as to the applicable prescriptive period, or
(5) failure to pay the amount of any claim due any person insured by the
contract within sixty days after receipt of satisfactory proof of loss from
the claimant when such failure is arbitrary, capricious, or without probable
cause.
10
Maria Arias-Benn, et al v. State Farm Fire & Cas. Ins. Co., Case No. 06-30771 (5th Cir. 08/06/2007).
11
“Additional Coverage”, subsection 7: Power Interruption. We cover accidental direct physical loss
caused directly or indirectly by a change of temperature which results from power interruption that takes
place on the residence premises. The power interruption must be caused by a Loss Insured occurring on the
residence premises. The power lines off the residence premises must remain energized. This coverage
does not increase the limit applying to the damaged property.”
(6) failing to pay claims pursuant to R.S. 22:658.2 when such failure is
arbitrary, capricious, or without probable cause.
L A . R E V . S T AT . §22:1220(B)(1-6).
The conduct prohibited in La. Rev. Stat. §22:658(A)(1) and §22:1220(B)(5) are
virtually identical and most often litigated.12 Essentially, both statutes forbid the
untimely payment of a claim after receiving satisfactory proof of loss when that failure is
arbitrary, capricious, or without probable cause.13 Louisiana courts will evaluate the
“arbitrary, capricious, or without probable cause” standard on a case-by-case basis.14
The statutes each impose specific consequences if the insurer’s actions do not
conform to the imposed obligations. Namely, if the insurer fails to adequately respond to
a claim within thirty days, the insurer will be subject to pay a penalty, in addition to the
amount of the loss, of fifty percent of the damage due or up to one thousand dollars,
whichever is greater. La. Rev. Stat. §22:658 (B)(1). Further, if the insurer fails to
properly pay the amount of a claim within sixty days, the claimant may be awarded
general and special damages associated with the breach of the imposed duty, as well as
penalties up to five thousand dollars. La. Rev. Stat. §22.1220.
In addition to the penalties outlined above, Louisiana and Federal jurisprudence
has held that La. Rev. Stat. § 22:1220 creates a separate cause of action for general
damages, which include mental anguish and distress.15
Although Mississippi has not adopted an Unfair Claims Practices Act, insurers
and adjusters can be found in bad faith if their actions are found to be both (1) without a
legitimate or arguable basis and (2) willful, wanton or in reckless disregard for the rights
of the insured. Under Mississippi common law, an insurer and/or adjuster can in “bad
faith,” and damages may include, in addition to contractual remedies, prejudgment and
post-judgment interest, attorney’s fees, consequential damages and punitive damages.
N AT IO NAL F LOO D I NS URANCE A CT
The National Flood Insurance Act (NFIA) governs most if not all flood insurance
policies. See 42 U.S.C. δ 4001-40029. Under FEMA’s administration of the National
Flood Insurance Program (NFIP), “Write Your Own” (“WYO”) insurance companies
12
Reed v. State Farm Mutual Automobile Insurance Company., 2003-C-0107 (La. 10/21/03), 857 So.2d
1012.
13
Calogero v. Safeway Insurance Company of Louisiana, 99-1625 (La. 1/19/00), 753 So.2d 170.
14
Scott v. Insurance Company of North America, 485 So.2d 50, 52 (La. 1986).
15
Weiss v. Allstate Ins. Co., 512 F. Supp. 2d 463 (E.D. La. 2007); see also Perrien v. State Farm, 2008
U.S. Dist. LEXIS 52244 (E.D. La. 2008).
issue standard government policies, collect premiums, adjust claims, pay on those claims
and defend lawsuits. FEMA bears all of the financial risk in the adjustment of claims and
in the defense of lawsuits.
The NFIA does not expressly preempt state law; however, courts in many
jurisdictions, including Louisiana, Mississippi and Florida, have ruled that federal law
preempts state law in claims related to NFIP issued policies.16 Courts in Louisiana have
extended federal preemption over bad faith claims made by insureds. See West v. Harris,
573 F. 2d 873 (5th Cir. 1978)(Barring an insured from asserting a bad faith claim based in
state law due to federal preemption).
Conversely, the U.S. Court of Appeals for the Fifth Circuit has ruled that state law
applies to claims against WYO agents for fraudulent or negligent procurement of an
NFIP policy. See Spence v. Omaha Indemnity, 996 F.2d 793 (5th Cir. 1993). Thus, an
insured may bring a claim against a WYO insurer in state court for negligent or
fraudulent misrepresentation of coverage. Other states bar such actions in state law. An
insured may only recover pecuniary damages under the NFIP, and pre-judgment interest
is prohibited. The NFIP also bars recovery for punitive damages and for the recovery of
attorney’s fees.
16
See Stapleton v. State Farm Fire and Casualty Co., 11 F.Supp. 2d 1344 (M.D. Fla. 1998); Durkin v. State Farm
Mutual Insurance Company, 3 F. Supp. 2d 726 (E.D. La. 1997) and Eddins v. Omega Insurance Company, 825 F.
Supp. 752 (N.D. Miss. 1993).
For additional information, contact:
V. Thomas Clark, Jr.
(225) 378-3246
tom.clark@arlaw.com