The United States Court of Appeals for the Fifth Circuit recently issued two opinions addressing the applicability of policy exclusions to damages from Hurricane Katrina. One case is from a federal district court in Mississippi, and the other is from a federal district court in Louisiana. Leonard v. Nationwide Mut. Ins. Co., Case No. 06-61130 (August 30, 2007); In Re Katrina Canal Breaches Litigation, Case No. 07-30119 (August 2, 2007).
In the Leonard case, the court affirmed the judgment of the district court but criticized the district judge’s reasoning. Specifically, the Fifth Circuit disapproved the district court’s rejection of the policy’s anti-concurrent cause clause. The anti-concurrent cause clause excludes coverage, not only for losses caused by an excluded peril, but also for losses caused by a combination of an included peril and an excluded peril. The district court had found the clause to be ambiguous, which necessarily would allow the court to choose the meaning most favorable to the insured.
The Fifth Circuit held that the exclusion was unambiguous. That is, the policy excludes damage caused by wind “concurrently or in any sequence” with water. Leonard, Slip Op. at 14. As a result, the policy covered only damage “caused exclusively by wind.” Id. at 14 (emphasis added). Conversely, “if wind and water synergistically caused the same damage, such damage is excluded.” Id. at 14 (emphasis added).
The court then found that the anti-concurrent cause clause did not violate Mississippi’s public policy. Mississippi historically applied the “dominant and efficient cause” test under which a loss is covered if the covered peril was the proximate or efficient cause of the loss, even if other factors contributed to the loss. That rule was applied in cases following Hurricane Camille. However, the Fifth Circuit held that, although the dominant and efficient cause of the loss doctrine applies in the absence of a contrary contractual provision, a contrary contractual provision such as an anti-concurrent cause clause is enforceable.
The court also rejected the Leonards’ argument that the exclusion for “tidal wave” did not include “storm surge.” Id. at 27. The term “flood” has a concrete meaning and includes storm surge.
The Leonards also argued that representations from the selling agent served to alter the terms of the policy. The Fifth Circuit rejected this argument, holding that representations of an agent cannot affect the unambiguous terms of a policy exclusion.
The appeal from Louisiana involved similar issues applied to the breach of the New Orleans levees. Although state law controls a federal judge’s decision in diversity cases, Louisiana and Mississippi law were generally consistent. The court held that, notwithstanding that “flood” was not defined in the policy, the court could consult a dictionary. The court then concluded that “flood” includes inundation by water, even if caused by negligent construction or design of a levee. The Louisiana case differed from the Mississippi case in that, while the Mississippi policyholder sustained losses caused by both flood and wind, the Louisiana policyholders’ losses were caused solely by flood. The coverage issue was whether the anti-flood exclusion included floods caused by negligent construction or design. The Fifth Circuit rejected the distinction, holding that the flood exclusion applied even if the loss was caused by human intervention.
We can only hope that these decisions will begin to wind down the extensive Katrina litigation. Needless to say, future decisions will be forthcoming, but the rules of coverage are now well established.
Lew Hassett is a partner in the firm’s litigation group and chairs the firm’s insurance and reinsurance dispute resolution group. His practice concentrates in the areas of complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies. Lew received his bachelor’s degree from the University of Miami and his law degree from the University of Virginia.
