katrina and homeowners policy

In the wake of the terrible wrath of Hurricane Katrina in August 2005, cities were laid waste, the countryside was turned upside down, and miles and miles of homes along the Gulf Coast were ravished, flooded and irretrievably damaged. The psychological toll of that great destruction is still to be calculated, but the first round of the legal cases regarding insurance reimbursement are now being decided. Just last month the first of these lawsuits, tried before a judge in the US District Court for the Southern District of MS, was handed down. The verdict? Homeowner is, by and large, out of luck. The typical homeowner policy, unless one had bought the federally-offered flood insurance, would only cover the most minimal losses. The purpose of this essay is to lay out the court's rationale, for it will probably be copied in many other cases.

A Few Simple Facts

Paul and Julie Leonard owned a house 515 feet from the Gulf Coast at an elevation of 12' above sea level in Pascagoula, MS. It was significantly damaged from storm surge, as it is called, between 11:00 a.m. and noon on August 29, 2005. Water coursed through their house to a depth of five feet. Damage from the Katrina loss was estimated at around $130,000. The Leonards held a homeowner's insurance policy through Nationwide Insurance Company which, after investigating the loss, applied the $500 deductible to the Leonards loss and tendered a check to them for $1,661.17. Not exactly what they might need to rebuild.

The issue before the court was how to interpret the "coverages" and "exclusion" language in the Leonard's homeowners policy. An additional issue was the legal standard applicable to an insurance agent who is asked about the advisability of purchasing flood insurance. The Leonards agent discouraged them from buying such insurance since they lived in an area where such insurance wasn't required. This federal flood insurance, which Nationwide was authorized to offer, would have cost the Leonards' about $400 more per year. But the agent didn't materially represent the terms of the homeowners policy to the Leonards.

The Policy Language

The typical homeowner's policy, which almost no one ever reads, consists of six parts--a section of definitions, then the coverage section, perils insured against, exclusions and conditions. Then, finally, there is a "Part II" to the policy, which deals with third-party liability--i.e., when someone is injured on your property and brings a claim against you through your homeowner's policy. The Leonard's policy provided as follows:

"Perils Insured Against
(Section I)
Covered Causes of Loss
Coverage A--Dwelling and
Coverage B--Other Structures
We cover accidental direct physical loss to property described in Coverages A and B except for losses excluded under Section I - Property Exclusions. Coverage C - Personal Property
We cover accidental direct physical loss to property described in Coverage C caused by the following perils except for losses excluded under Section I-- Property Exclusions:
* * * 2. Windstorm or hail.
Direct loss caused by rain, snow, sleet, sand or dust driven through roof or wall openings made by direct action of wind, hail, or other insured peril is covered.

All of this is rather complicated language for saying something fairly simple, namely that there is coverage for "windstorm or hail" as defined in the last three lines of the above.

But the court then looked at the policy exclusions. Here they are:

"Property Exclusions
(Section I)
1. We do not cover loss to any property resulting directly or indirectly from any of the following. Such a loss is excluded even if another peril or event contributed concurrently or in any sequence to cause the loss.
* * *
b) Water or damage caused by water-borne material. Loss resulting from water or water-borne material damage described below is not covered even if other perils contributed, directly or indirectly to cause the loss. Water and water- borne material damage means:
(1) flood, surface water, waves, tidal waves, overflow of a body of water, spray from these, whether or not driven by wind."

The court quoted other sections of the policy, but this was the chief exclusion it considered. It was the burden of the homeowner to show that his/her claim is covered under the "Perils Insured Against" section, while the burden fell on Nationwide to prove that the exclusions ought to be invoked against the Leonards policy. Thus, covered was "wind damage" but excluded was "water damage." The basic legal issue before the court, then, was how the damage to the Leonard's house occurred. Was it "water or damage caused by water-borne material" or was it caused by "windstorm or hail"?

The Decision

In few words the court divided the policy as follows: "The wind damage is covered; the water damage is not." Under MS law, which is not much different from that of other states, "where the insured property sustains damage from both wind (a covered loss) and water (an excluded loss), the insured may recover that portion of the loss which he can prove to have been caused by wind." In this case, "none of the damage to the interior of the Leonard property was shown to have been caused by wind. The exterior doors on the first floor were boarded up before the Leonards left their home...The most likely cause of the damage to these french doors was water, not wind."

The court awarded a few more dollars to the Leonards than did the insurance company, but not much. I think the court rested its reasoning primarily on the fact that another source of insurance was available (federal flood insurance) to deal with the Katrina problem, and the Leonards chose not to purchase it. No doubt there will be other sources of compensation for the Leonards as they seek to rebuild their lives, but insurance payouts will not be one of them.

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