When a Flood is Just a Flood

On August 2, 2007, the United States Fifth Circuit reversed the Eastern District of Louisiana's Judge Stanwood Duval, who had previously ruled that the "water damage" exclusion used by certain insurance companies was ambiguous. A unanimous, three judge panel, composed of Judges Carolyn King, Harold R. DeMoss and Priscilla Owen, held that the catastrophic inundation of New Orleans in the aftermath of Hurricane Katrina was a "flood" and that those damages caused by that flood were not covered by the various homeowners' insurance policies at issue in the case. The following is a brief analysis of the allegations, the procedural history and the Fifth Circuit's opinion.

On August 29, 2005, Hurricane Katrina struck the United States' Gulf Coast, causing massive damage to portions of Southeast Louisiana and Mississippi. In the City of New Orleans, three canals, the 17th Street Canal, the London Avenue Canal and the Industrial Canal, broke through their levees and inundated almost eighty percent of the city. In addition to extensive loss of life and property, these levee breaches spawned four cases: Richard Vanderbrook et al v. Unitrin Preferred Insurance Company et al., Xavier University of Louisiana v. Travelers Property Casualty Company of America, Gladys Chehardy et al. v. State Farm Fire & Casualty Company et al. and Kelly A. Humphreys v. Encompass Indemnity Company. Though each case involved different descriptions of Katrina's effects and made claims against different insurers, each shared a common thread of policy language interpretation: whether or not the damage caused by the levee failures could be excluded under the homeowners' policy's "flood" exclusion.

Unlike Xavier v. Travelers, which was included with others in the Katrina Canal Breaches Consolidated Litigation presided over by Judge Stanwood R. Duval and ultimately dismissed by the Fifth Circuit Court of Appeals, the case of Allianz v. Tulane was individually assigned to Judge Kurt D. Engelhardt and ultimately resulted in a favorable outcome for Tulane.

At the district court level, the plaintiffs had been successful in arguing that the Travelers, Unitrim, Hanover, Standard Fire, Liberty Mutual, Lafayette, Auto Club, Aegis, Allstate, Louisiana Citizens Encompass and Great Northern "flood" exclusions were ambiguous and, under Louisiana law, had to be construed against the insurance company. Only State Farm, whose policy included explanatory language that the district court found sufficient to remove any ambiguity, had the claims against it dismissed.

As to the non-State Farm insurers, their "flood" exclusions denied coverage for "water damage," which they basically defined as, for example, "[. . .] flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind [. . .]." State Farm's policy added introductory language to its "exclusion" section, in which it stated "[w]e do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, occurs as a result of any combination of these."

The plaintiffs argument in all four cases against each insurer was that the negligence of the entities responsible for maintaining the levees was the efficient proximate cause of the Katrina flooding. Because the "flood" exclusions only enumerated "natural" floods, the water damage caused by the levee failures was covered under the insurers' homeowners' policies. The Chehardy plaintiffs added a further nuance by claiming that their homeowners' policies were "all-risk" policies, and coverage was mandated unless specifically excluded, which the levee failures were not.

To resolve the issue, the Fifth Circuit panel had two options: certify the question of Louisiana-based insurance policy interpretation to the Louisiana Supreme Court or make an "Erie guess" and interpret Louisiana law themselves. They chose the latter, which, under the seminal U.S. Supreme Court case, Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938), requires a federal court sitting by virtue of its diversity jurisdiction to apply the substantive law of the controlling state. Louisiana law on insurance policy interpretation is based on civilian, contract-based principles in which the intent of the parties is discerned through an analysis of the language the parties used to confect their agreement. That being said, a number of principles control that interpretation: words should be given their "generally prevailing meaning," the policy should be construed as a whole, ambiguity is to be analyzed in the context of the policy as a whole and resolved through a determination of the parties' "reasonable expectations," but if ambiguity is found, it must be resolved against the policy's drafter. The intent of Louisiana's insurance law, according to the Fifth Circuit, is to give effect to the policy as a whole.

The plaintiffs in the four cases argued that "flood" was ambiguous in the context of their homeowners' policies because the word was not defined in the policy. The Chehardy and Xavier plaintiffs alleged that the availability of clearer exclusionary language, either on an industry-wide basis or in comparison to the policy's "earth movement exclusion," made the "water damage" exclusions at issue ambiguous. The Fifth Circuit quickly rejected this argument because, it found, Louisiana law does not require a finding of ambiguity simply because an exclusion could have been "more explicitly" crafted. Rather, the Fifth Circuit looked to the "generally prevailing meaning" of the word "flood" by turning to dictionaries and insurance treatises. Whether in the Oxford English Dictionary, Black's Law Dictionary, the American Heritage Dictionary of the English Language or Appleman's Insurance Law and Practice, the Fifth Circuit found the definition, in its most basic terms, stood for the situation when water overflowed onto normally dry land.

Looking next, in the absence of guiding Louisiana jurisprudence, to cases from around the country, the Fifth Circuit determined that the cases uniformly held that the event created by a failed levee, dike or dam was a "flood." The Fifth Circuit specifically dismissed the district court's analysis of Kane v. Royal Ins. Co. of Am., 768 P.2d 678 (Colo. 1989), which is "the most prominent such case" on the issue of levee failure and insurance coverage. The Fifth Circuit ultimately held that "[w]hen a body of water overflows its normal boundaries and inundates an area of land that is normally dry, the event is a flood. This is precisely what occurred in New Orleans in the aftermath of Hurricane Katrina. Three watercourses — the 17th Street, Industrial and London Avenue Canals — overflowed their normal channels, and the levees built alongside the canals to hold back their floodwaters failed to do so. As a result, an enormous volume of water inundated the city. In common parlance, this event is known as a flood." The appellate court further gave short shrift to the plaintiffs' argument that the doctrines of nosciture a sociis and ejusdem generis, in which a word is defined in relation to those around it, require that "flood" be limited to naturally occurring floods in the context of the homeowners' exclusions. Specifically, because the word "flood" was used alongside only "natural" events, a "flood" caused by the negligence of man was not excluded by the policy.

The Fifth Circuit disagreed with the plaintiffs' "man versus nature" approach to policy interpretation. The appellate court felt that to label the effects of Katrina as "man-made" would be to ignore the very fact of Katrina and "the excess water associated with" it. "The non-natural component is simply that in certain areas, man's efforts to mitigate the effect of the natural disaster failed, with devastating consequences," the Fifth Circuit wrote. "In sum," the court wrote later, "we conclude that the flood exclusions in the plaintiffs' policies are unambiguous in the context of the facts of this case. In the midst of a hurricane, three canals running through the City of New Orleans overflowed their normal boundaries. The flood-control measures, i.e., levees, that man had put in place to prevent the canal's floodwaters from reaching the city failed. The result was an enormous and devastating inundation of water into the city, damaging the plaintiff's property. This event was a 'flood' within that term's generally prevailing meaning as used in common parlance, and our interpretation of the exclusions ends there. The flood is unambiguously excluded from coverage under the plaintiffs' all-risk policies, and the district court's conclusion to the contrary was erroneous."

The Fifth Circuit's opinion is not binding on the Louisiana Supreme Court, which will hear the identical issue later this year. Nevertheless, the Fifth Circuit has corrected an erroneous judgment that threw the insurance industry into chaos and caused hundreds of millions of dollars in subrogation claims to be brought against the federal government through the Army Corps of Engineers. Should you have any questions on the status of the In re: Katrina Canal Breaches Litigation, please do not hesitate to contact us.

Reprinted with permission from Deutsch, Kerrigan & Stiles, LLP by Stauber Associates, LLC Blue Bell, Pennsylvania