Plaintiffs lose on Katrina

Plaintiffs lose on Katrina
Policy excludes water damage, judge rules
By Becky Yerak
Copyright © 2006, Chicago Tribune
Published August 16, 2006

In a case closely watched by an industry facing numerous lawsuits since Hurricane Katrina, a federal judge in Mississippi ruled largely in favor of Nationwide Mutual Insurance Co. on Tuesday, saying that the insurer's policy excluding water damage is "valid and enforceable."

U.S. District Judge L.T. Senter Jr., in a decision that pleased not only the Columbus, Ohio-based business but the insurance industry in general, said that the homeowner's policy of Pascagoula, Miss., residents Paul and Julie Leonard covers wind damage but excludes claims for water damage.

The Leonards estimated the total damages from the storm, which devastated New Orleans and also hit Mississippi, to be more than $130,000, of which they estimated about $47,365 was caused by wind. The estimate included the cost of replacing the roof and making structural repairs to the garage.

Nationwide cut a check for only $1,661.17 to the Leonards to cover wind damage to roof shingles and a fence damaged by a downed tree.

And the judge agreed that they weren't due much more than that.

"Storm surge is a type of flooding that is covered by flood policies sold under the National Flood Insurance Program and excluded under standard homeowners' policies," Senter wrote in a 13-page ruling. "Almost all the damage to the Leonard residence is attributable to the incursion of water."

Senter's ruling removes a cloud of uncertainty over the insurance industry, as companies such as Northbrook-based Allstate Corp. and Bloomington-based State Farm have also been hauled into court for allegedly failing to pay claims filed after Katrina.

"In the insurance coverage debate over wind versus water, Judge Senter's ruling has taken much of the wind, literally and figuratively, out of the plaintiff attorney's argument," Ernie Csiszar, chief executive of the Des Plaines-based Property Casualty Insurers Association of America, said in a statement. "Judge Senter has made it very clear that the flood exclusion applies to storm surge."

Worries eased

The ruling appeared to ease the worries of insurance company investors.

On an up day on Wall Street, shares of Allstate, the nation's No. 2 home and auto insurer, closed up 1.7 percent to $57.36, St. Paul Travelers Cos. shares increased 2.4 percent to $44.14, and Hartford Financial Services Group Inc. shares jumped 1.5 percent to $82.72.

"The case is obviously a decision in favor of insurers," said Robert Hartwig, chief economist for the New York-based Insurance Information Institute. "It was in favor of upholding terms of the contract, every word of which was approved by regulators in the state, upheld by previous court decisions and recognized by the federal government."

A national flood insurance program, created 38 years ago and available at subsidized rates, covers the sort of losses that the Leonards were suing for, Hartwig explained.

The decision also benefits residents hoping to rebuild their lives along the Gulf Coast, Hartwig maintains, because "had the decision gone in the opposite direction, that would have created an impossible business environment for insurers in the state."

The judge, however, did say that provisions in Nationwide's policy that purport to exclude coverage for damages caused by a combination of water, which is excluded, and wind, a covered loss, are ambiguous.

And Senter did rule that the Leonards were owed an additional $1,228.16 from Nationwide to replace damaged windows and to clean and repair exterior walls above the water line.

Indeed, the additional damages and the questioning of some of Nationwide's policy language had the plaintiff's lawyer claiming a victory for his side.

Still a win

"We would have liked to have gotten more damages for our client, but a win is a win, and we're happy we won," said Leonard lawyer Richard Scruggs. "We just finished the first inning of a nine-inning game, and the plaintiffs are up one."

The Leonards also claimed that a Nationwide agent, Jay Fletcher, told them they didn't need flood coverage, but Senter said he didn't consider that a misrepresentation of fact.

"Paul Leonard knew flood insurance was available and optional, and he testified that his inquiry to Fletcher was prompted by public discussion of insurance coverages applicable to flooding associated with Hurricane George," Senter wrote.

"Thus, Leonard had at least some reason to understand that the water damage exclusion in the Nationwide policy would exclude flooding during a hurricane, and after reading the policy his reliance on the inference he drew from his conversation with Fletcher was no longer reasonable."

Nationwide said it was "very pleased" that Senter "upheld the long-standing flood exclusion language, which is foundational to traditional homeowner policies across the country."

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byerak@tribune.com