Wednesday, November 29, 2006

Judge rules insurance covers New Orleans homeowners

Judge rules insurance covers New Orleans homeowners
By Jeffrey Jones

NEW ORLEANS (Reuters) - A Louisiana federal judge has ruled many New Orleans homeowners whose houses sustained water damage after Hurricane Katrina are not excluded from coverage under their insurance policies, a judgment that represents a loss for the insurance industry.

In an 85-page judgment, U.S. District Court Judge Stanwood Duval denied motions by some insurers seeking to stop policyholders from receiving claims they said were prevented by exclusion language spelled out in the policies.

The insurance companies argued the industry standard wording for what constitutes a flood covers any inundation of dry land by water.

But in his decision, which insurers are expected to appeal, Duval drew a distinction between flooding that occurs naturally and the destructive force of the water that rushed into the city when the levees gave way.

He also said insurers' definitions of the word "flood" were ambiguous and did not necessarily include man-made causes, such as levee failures.

"It is the considered opinion of the Court that because the policies are all-risk, and because 'flood' has numerous definitions, it reasonably could be limited to natural occurrences," Duval wrote.

One exception was State Farm Fire & Casualty Co., whose policy language specifically spelled out exclusion of flood coverage regardless of the cause.

Several levees and footwalls in and around New Orleans breached after the deadly August 29, 2005 storm, submerging 80 percent of the city and causing severe damage to more than 150,000 homes. Some studies have blamed the failures on poor design and maintenance of the flood barriers.

The judgment covers four separate cases under an umbrella for levee and canal failure proceedings and involved State Farm, Travelers Property Casualty Co. of America, Encompass Insurance Co. and a host of others.

"In the New Orleans area, everyone who bought insurance from a company other than State Farm at the moment now stands the prospect of getting full coverage under their homeowners policy for their damages, to the extent those damages were the result of water being released from the levee," John Ellison, co-lead counsel for the plaintiffs, said on Tuesday.

The decision runs counter to that of a judge in Mississippi, who ruled in August that a couple from that state, whose home was hit with $130,000 of damage from Katrina, was not covered by their policy due to the exclusion of flood coverage.

One insurance industry official said he believed the ruling will be overturned on appeal, as it appears to ignore that companies are using the well-established standards accepted by federal regulators.

If it stands, it will force insurers to restrict coverage and raise rates in the hurricane-ravaged Gulf Coast and slow the recovery, said Robert Hartwig, chief economist with the Insurance Information Institute.

However, companies have already raised rates even without paying the water damage claims yet, Ellison said.

Katrina cost insurers about $41 billion in claims, the largest event in the history of the industry, with homes accounting for nearly half of the total.