Appeals Court to Hear Arguments in Katrina Levee Breach Lawsuits

A federal appeals court grapples Wednesday with a billion-dollar legal question: Are insurance companies obligated to cover water damage from the failure of levees in New Orleans following Hurricane Katrina?

Insurers say their homeowner policies do not cover damage from any type of flooding, including water from the levees that broke in the aftermath of the Aug. 29, 2005, storm.

In November 2006, however, a federal judge in New Orleans ruled that flood exclusion language in some insurance policies is ambiguous because it doesn't distinguish between damage from an act of God and from a manmade catastrophe.

That ruling by U.S. District Judge Stanwood Duval Jr. is up for debate Wednesday during a hearing at the 5th U.S. Circuit Court of Appeals in New Orleans. A three-judge panel is scheduled to hear arguments from lawyers for policyholders and several insurance companies.

In court papers, a lawyer for policyholders with consolidated cases against insurers said Duval properly concluded that the definition of "flood" in policies is limited to "naturally occurring events."

Many insurance policies "do not define the term 'flood' in any manner, and nowhere is 'flood' specifically defined to include the breaking of levees or dams or to include waters released due to the negligent maintenance, design or construction of such structures," plaintiffs' attorney John Ellison wrote in his 63-page brief.

Ellison, a Philadelphia-based lawyer, accuses insurers of deliberately drafting vague policy language "to frustrate the reasonable expectations of Louisiana homeowner policyholders from whom they collected premiums for years."

Duval's ruling last year allowed the consolidated levee cases to proceed against Allstate , The St. Paul Travelers Companies and several other insurers, but the judge immediately forwarded the case to the 5th Circuit.

In court papers, Lexington Insurance attorneys argue that punishing insurers for failing to define common words like "flood" could force them to engage in "defensive over-specification, which would inevitably lead to longer policies that are less comprehensible to most policyholders."

"Because dictionary definitions are silent about the kind of event that triggers a 'flood,' they provide no justification for (Duval's) conclusion that the term flood can be reasonably read as limited to 'natural events,'" Lexington lawyers wrote.

Insurance Industry Losses

The insurance industry stands to lose an estimated $1 billion (740 million euros) in Louisiana if policyholders successfully challenge companies' refusal to cover damage from levee breaches, said Robert Hartwig, chief economist at the industry-funded Insurance Information Institute in New York.

"This particular legal theory is probably the most dubious and biggest stretch that has been filed (since Katrina)," Hartwig said. "Flood is excluded whether it's an act of God or an act of nature."

The list of more than 100 policyholders involved in the litigation includes Xavier University. Six feet of water inundated the historically black college in New Orleans after nearby levees broke. Xavier sued Travelers after the company only paid for a fraction of more than $50 million (36.95 million euros) in damage to the school.

Duval agreed last year to dismiss State Farm Insurance from the litigation. He ruled that State Farm's policies included language that clearly excluded all flood damage, regardless of the cause.

Randy Maniloff, a Philadelphia-based lawyer who represents insurers and has written about the Katrina litigation, said the 5th Circuit could have the final say in the levee litigation.

"This is not the kind of case the Supreme Court would hear. It's a pure issue of state law interpretation," he said.

Joseph Bruno, the lead lawyer for residents who sued insurers and the Army Corps of Engineers over damage from the levee breaches, sees a "better than even chance" that the 5th Circuit upholds Duval's ruling despite the court's relatively conservative reputation.

"This is a contract interpretation issue," Bruno said. "This is not a liberal versus conservative issue."