by Todd A. Rossi

Insureds have the burden of first establishing insurance coverage. Typically, that involves providing evidence of damage occurring during the policy period resulting from an accident. Hurricane Katrina and its consequences should easily meet these requirements. Once the insured establishes facts that would provide coverage, the insurers must show that a policy exclusion precludes coverage. In some instances, the insurers can rely solely on the policy language, but in other instances, the insurers may have to marshal facts that support one or more exclusionary provisions.

Courts will construe policies as written if the language is clear and free from multiple interpretations. Raising ambiguities to challenge an insurance policy may be the most common form of challenging an insurer’s denial of coverage. If the court finds ambiguities, the policy terms are construed against the insurer, and in favor of coverage. Finding an insurance policy ambiguous is a legal determination. In other words, the court will look at the policy language and will construe the policy terms in favor of coverage if there is at least one reasonable interpretation that results in coverage.

The courts may have difficulty in finding an ambiguity under the flood, rising water, and tidal surge exclusions. Certainly, some portion of the damages caused by Katrina in coastal areas involved rising water. In New Orleans, the rising water resulted from breaches in man-made levees. In other areas of Louisiana and Mississippi, it appears that the rising waters resulted from wind-driven water, resulting in tidal surges that flooded coastal areas. Even so, policyholders have several potential responses.

In both instances, there are factual issues for the courts to decide. In other words, the courts will have to decide whether the “cause” of the loss resulted in whole, or in part, by a flood. Not all jurisdictions use the same analysis in determining the cause of damages incurred. Some states only recognize a single cause, while other states allow coverage when there are concurrent causes, any of which are covered under the policy. Louisiana has allowed policyholders in some instances, to recover for situations involving flooding if the evidence ultimately shows that other factors, such as wind, was the dominant or a substantial cause. For example, there is a class action in Louisiana resulting from Hurricane Katrina in which policyholders claim that the flood exclusion does not apply because the “cause” of the levee breaches was the negligent design, construction, and maintenance of the levees. Under the dominant cause theory, all damages would be covered.

If the policies are not ambiguous, and the policyholders are unsuccessful in convincing the courts that the dominant, or at least the concurrent, cause of their damage was not flood related, there is a potential public policy argument. This position requires an in-depth analysis of the flood exclusion’s history and development. It may also depend on the insurer’s representations to state insurance departments concerning the need and purpose for incorporating flood exclusionary language into the policy. For example, insurers historically are reluctant to insure damage causing events that are likely to occur. This may include flood coverage for homes located along rivers that frequently exceed their flood level, and providing insurance to homeowners that develop properties in a known flood plain. In such instances, the federal flood program has provided those homeowners coverage of up to $250,000.

However, were flood exclusions ever designed to protect against the consequences of a hurricane, particularly along the gulf coast that historically has incurred a large number of significant storms, but without the large scale flooding recently experienced? The history and development of the flood exclusion may shed some light on its purpose and, as a consequence, the scope of the flood exclusion. Even if the history is unclear, or tends to support the insurers, policyholders may still argue that insurers should not be freed from their contractual liability to provide coverage for wind damage, such as that generated by a hurricane, simply because of unanticipated, unexpected, and unprecedented water damage occurring in conjunction with the hurricane.

Courts may, after a historical review of flood exclusion submissions to various insurance commissioners throughout the United States, determine that the insurers’ proposed use of the exclusions was not represented to apply to hurricane situations. The courts may refuse to apply a flood exclusion to hurricane related damages by finding that enforcement would not comport with the reasonable expectation of the parties. Further, the courts may find that enforcement of the flood exclusions and hurricane situations would be against public policy for one or more of the reasons outlined above.