Louisiana Supreme Court Rules for Insurance Company in Katrina Lawsuit

The Louisiana Supreme Court recently decided a case involving private insurance of the flood damage resulting from Hurricane Katrina. The insurance policy at issue, like almost every other insurance policy that is not subsidized by the NFIP, contained the standard exclusionary clause for flood damage. The trial court and court of appeals both ruled that the word "flood" as used in the policy was ambiguous and, therefore to be construed against the insurance company. Those courts further found that because the flood that caused the damage resulted from failed levees and because "flood" as construed by the courts did not exclude flood damage from man-made causes, the policy covered the damage. The total judgment against the insurance company was upwards of $800,000.

The Louisiana Supreme Court overturned the lower courts, however, and declared that "...the entire English speaking world recognizes that a flood is the overflow of a body of water causing a large amount of water to cover an area that is usually dry
land," and that "flood" was therefore not ambiguous.

The disaster in New Orleans of 2005, due to Hurricanes Katrina and Rita, should serve as a warning to all of us that building things in the path of destruction is a bad idea. Insurance companies caught onto the idea years ago and began excluding certain types of damage from their coverage. Because of the greatly heightened risk factors associated with buildings in flood-prone areas, private insurers got out of the business of insuring flood damage. Our federal government, in all of its wisdom, took the place of the market-driven insurance industry and began subsidizing the development of high flood risk areas. Not surprisingly the program is now close to bankrupt, with a Congressional overhaul in the works that, instead of cutting back the program and acknowledging that some areas simply do not conduce to development, adds wind coverage to the mix and puts the NFIP in arguably worse shape than it ever has been.

Meanwhile, we have sensible courts like Louisiana's Supreme Court who read private policies as they were intended to be read and continue to allow private insurers to contract out of covering flood damage. On the whole, its an untenable situation that seems to have no good end in sight.

Here in SC, meanwhile, we have continuing coastal development (that is not only increasing in volume, but also in size and value) as well as developers trying to build on our riverine flood plains. All this in the wake of some of the worst floods on record in the Midwest.

The Louisiana Supreme Court opinion can be found here.