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NEW ORLEANSA federal judge's refusal to dismiss coverage suits stemming from water damage caused by breached levees in New Orleans following Hurricane Katrina may benefit some commercial buyers even though the policies involved are mainly homeowners' policies, according to legal experts on both sides of the issue.
But that's only if the decision withstands the appeals that some of the dozen or so insurers involved have decided to pursue.
In his Nov. 27 decision regarding four individual insurance-related cases contained in In re Katrina Canal Breaches Consolidated Litigation, Judge Stanwood R. Duval Jr., of the U.S. District Court for the Eastern District of Louisiana in New Orleans, drew a distinction between natural and manmade flooding. Insurers had argued their property policies excluded flooding regardless of its source, but Judge Duval disagreed and held that the language in most of the policies was ambiguous regarding exclusions for manmade flooding.
He did, however, uphold the contention of both State Farm Fire & Casualty Co. and Hartford Insurance Co. of the Midwest that their policies did not cover flooding under any circumstances.
At the heart of Judge Duval's decision was the Insurance Services Office Inc.'s water damage exclusion contained in many of the policies in question. Judge Duval wrote that "flood is not defined anywhere in the policy."
"The plethora of insurance case law where the issue of causation is at play with respect to the application of a water damage exclusion is a further demonstration that the term is subject to two reasonable interpretations," with some courts limiting the exclusion to naturally occurring events, wrote the judge.
"It is the considered opinion of this court that because the policies are all-risk, and because 'flood' has numerous definitions, it reasonably could be limited to natural occurrences. Simply put, the language of the ISO Water Damage Exclusion chosen by the insurer is unclear." Under Louisiana law, the court is "constrained to find the language ambiguous," he wrote. "To find otherwise, leads to absurd results. Once this finding is made, the court is further constrained to interpret it against the insurer."
The judge found that the ISO water damage exclusion contained in the Travelers Property Casualty Co. of America policy held by Xavier University in New Orleans is "ambiguous and as such affords Xavier coverage for damages provided that Xavier can prove that the flooding it experienced was caused by the negligence of man."
A spokesperson for St. Paul Travelers Cos. Inc. said, "We respectfully disagree with Judge Duval's ruling, and intend to appeal it because the ruling is inconsistent with many other court rulings that held a flood is a flood, whether or not manmade factors are involved. The language in our policies clearly excludes damage from flood water."
A spokesperson for another insurer involved in the caseAllstate Insurance Co.said the Northbrook, Ill.-based insurer also plans to appeal.
If it ultimately stands, the decision may help some commercial policyholders, say legal experts.
Douglas Widin, who represents policyholders as counsel in the Philadelphia office of Reed Smith L.L.P., said that language in the homeowners' policies and the Xavier University policy are "quite similar." Reed Smith was not involved in the case.
Mr. Widin said there are "a lot of policies out there on standard ISO forms that are going to have the same type of language as the standard ISO form homeowners" policies that are the subject of the decision.
He cautioned, though, that large commercial properties "are going to be mostly insured under manuscripted policies and most of those manuscripted policies have flood coverage in them" even if the coverage is subject to sublimits.
"To the extent that the ISO" language was problematic in its definition of flood, the same language in an ISO commercial property policy would be affected by the decision, said Randy J. Maniloff, a partner in Philadelphia-based White & Williams L.L.P. Mr. Maniloff, who represents insurers but who was not involved in the case, called the decision a "classic example of result-oriented jurisprudence. I don't think the decision is adequately reasonedI think he strains to find an ambiguity that doesn't exist."
"Any court that wants to find coverage can take the easy way out and say the term is ambiguous and work backwards to justify the result," said Mr. Maniloff. "There's a lot of law out there that goes against this decision."
Mr. Maniloff called the decision "reminiscent of the early days of the coverage battles over asbestos and pollution. There, the courts created legal fictions to find coverage that otherwise did not exist because it enabled them to solve these widespread social problems. The distinction between an artificial and naturally occurring flood is also a legal fiction being created to solve a huge social and economic problem."
Robert Hartwig, executive vp and chief economist of the Insurance Information Institute in New York, doubted whether the ruling would withstand an appeal.
"We don't believe it will be upheld on appeal," he said. But if by some "remote" possibility the decision is upheld by the 5th U.S. Circuit Court of Appeals, it would become a "multibillion dollar decision, because it is a federal decision that is not confined to Louisiana."
Mr. Hartwig, who will become the III's president on Jan. 1, said the ruling would hurt homeowners insurers but would be less severe on commercial property policyholders "because commercial flood insurance is widely available" and has responded to Katrina claims.
In contrast, Mr. Widin said he thinks "the judge did a very nice job and displayed a judicial temperament" in approaching the case. "For example, he did not reach out unnecessarily to address the anti-concurrent causation issue," he said.
"It's not a total victory for either side" with the possible exception of State Farm and Hartford, Mr. Widin said.
In re Katrina Canal Breaches Consolidated Litigation, U.S. District Court for the Eastern District of Louisiana. No. 05-4182. Nov. 27, 2006