Breaking: Broussard Reversed by 5th Circuit. Sent Back for New Trial (Updated 2X)

Here is the today’s full Sun Herald story by Anita Lee.

The 5th U.S. Circuit Court of Appeals threw out a $1 million punitive damages verdict against State Farm Fire and Casualty Co. on Monday and sent the case back to federal court in Gulfport for a jury to determine how much the company owes Biloxi policyholders Norman and Genevieve Broussard.

State Farm was not malicious or grossly negligent in adjusting the Broussards’ claim, the court found, negating punitive damages that are awarded to deter bad behavior.

“We’re happy with the appellate court’s decision,” said State Farm spokesman Phil Supple. “This ruling confirms our belief the jury should have been given an opportunity to evaluate the question of what damage was caused by wind and what damage was caused by water. It has also been our belief there was no basis for punitive damages, and the appellate court agreed.”

The Broussards’ attorney, Jack Denton, said: “The 5th Circuit is a very conservative court and conservative courts tend to favor corporations over individuals. Corporations abhor punitive damages.”

The court left open the possibility of other damages not covered in the insurance policy, called extra-contractual damages. Those include attorney’s fees and emotional distress.

The opinion also helps policyholders, Denton said, because the court found that under State Farm’s all-perils policy, the insurance company must prove its flood exclusion caused a dwelling loss to deny coverage. State Farm had argued that, once it established flood damage to the dwelling, the policyholder had to show what portions wind damaged in order to recover for those losses.

The Broussard case, one of the first tried after Katrina, generated headlines nationwide. When testimony concluded, U.S. District Judge L.T. Senter Jr. ruled that the case would not go to the jury because State Farm had failed to show its flood exclusion applied to the loss. Instead, Senter decided the Broussards were entitled to policy limits. The jury then awarded them $2.5 million in punitive damages, which Senter later lowered to $1 million.

The appeals court called Senter’s decision “clear error,” saying State Farm did offer the jury “sufficient evidence” to consider. Experts for State Farm testified the wind likely damaged roof shingles, while tidal surge destroyed what remained.

“A rational jury could conclude, based on the testimony of State Farm’s experts, that the Broussards’ home and personal property were destroyed by water,” the appellate decision says.

The court also overruled Senter’s conclusion that the Broussards’ personal property was covered because Katrina was a “windstorm.” Personal property, the court said, also is subject to the water damage exclusion. Because named perils cover contents, the policyholder must show wind destroyed them to recover.

Denton said he had spoken with the Broussards late Monday afternoon. Norman Broussard is a retired insurance agent and former Biloxi councilman.

“There were no unrealistic expectations on the Broussards’ part when the opinion came down,” Denton said. “They’re resolute in going forward with another trial. If we can settle it and spare the Broussards the torture of going through a second trial, I would love nothing more than that.”

After I began reading the Fifth Circuit Opinion I remembered Chip Merlin had written extensively on the Broussard case as he attended the arguments before the court. So I stopped reading the opinion and made a detour to straight to Mr Merlin’s blog entry on the subject.  He was prophetic in the close.

Instead, my prediction is that we (plaintiffs attorneys) will have to do everything we can to help Bill Walker, Jack Denton and the Broussards when they have to try their case again and make sure that we get it completely right the second time. If I have to watch from the bench, I can at least try to help anyway I can.

Those that know about “Chip” understand he is from the Mississippi Gulf Coast (Waveland) and is a dedicated consumer oriented insurance attorney who well knows his wind from his water. Though his main office is in Florida he opened offices in Mississippi teaming up with local attorney Randy Santa Cruz in Bay St Louis. His firm The Merlin Law Group are recognized insurance litigators.

Rather than leave my field of expertise of construction accounting and taxation and give a layman’s opinion that despite being well informed that would still miss the mark, I’ll return to Mr Merlin’s well informed post to explain why Broussard never had much chance at the Fifth Circuit. This gets back to the fact that the Broussards evidently had two policies in one, a “named peril” policy for personal property and an “open peril” for the structure. Mr Merlin explains those concepts the best and where the Broussard’s lawyers went wrong:

In Broussard, State Farm sold an all risk insurance policy. Long standing insurance law principals that are taught in basic classes to all adjusters is that an insured under this type of policy need only show that a physical loss has occurred and the dollar amount of the damage. Unless the insurance carrier proves the loss is excluded, the insured gets paid. This type of policy was developed in the 1940’s and 1950’s and replaced the “named peril” policies.

The proof cause requirements are different between the two policies. The difference is significant and has some relevance in Broussard. If a policyholder has a “named peril” policy, the policyholder has to prove that the physical damage was caused by a peril “named” in the policy. If the policyholder does so, the burden then “shifts” to the insurer to prove that the loss was excluded. There was a great deal of questioning from the appellate jurists regarding these very basic, but sometimes confusing, concepts. Honestly, if insurance companies followed these basic principals and courts did not confuse them, I and my colleagues would have a lot less business.

The “all risk” policy is an enhancement of the “named peril” format because unless excluded, all “physical” damage is typically covered. At trial, the policy holder merely proves that an all risk policy existed, physical damage occurred, and give evidence of a dollar amount of damage to prove a prima facie case of entitlement to benefits. The insurer then has the sole responsibility to prove that the loss was caused by something excluded.

An example as to how the two policies work and produce different results can be helpful. Suppose a person insures a structure in a neighborhood but it cannot be seen by the neighbors because it is set far back on a private road, hidden by trees and vegetation. The person goes on a month long vacation and comes back to find his house completely missing. He learns that during his absence his neighborhood had been ravaged by a fire that destroyed thirty percent of the homes by at least 85 percent of the repair value. Then, tornadoes damaged another thirty percent of the homes and 90 percent of those tornado damaged homes were total losses. Finally, a few days before he arrived home, a tsunami wiped out all the remaining homes and those partially destroyed. No eyewitnesses or direct evidence demonstrated which of these three perils doomed his structure or whether and how much damage occurred as a result of the first two.

If the person was insured under a “named peril” policy covering fire only, he has a major problem. While there are probabilities that the fire may have caused some amount of damage, there is no proof that it did. He cannot meet his burden and will lose at trial because he cannot show that fire caused the damage nor the dollar amount of fire damage.

The result is the opposite under an “all risk” policy. All he needs to show is physical loss–the structure is gone–and the dollar damage which is easy since it is a total loss. Now, the insurer has the impossible burden of proving the exclusion.

While we may learn from the Almighty in our afterlife what really happened, it is simply a guess, speculation and probability as to what caused the amounts of damage to the structure in this life. The insurer should, maybe not happily, but should pay its customer because the exclusion of flood cannot be proven as the cause of loss. This is how the “all risk” product is supposed to work.

Unfortunately, nothing close to this was discussed in Wednesday’s oral argument. As masterful as Bill Walker was at trial, Judge Edith Jones accused Walker of being “flip” in his arguments before the court. Walker teaches insurance law at Ole Miss, but there was little taught during his argument. The judges seemed bewildered.

For example, one panelist asked whether the policyholder has to prove the amount of “covered” damage and not just a dollar amount following damage. While some of my colleagues would knee jerk respond “no,” the correct answer is “yes.” The response should have been: “Yes. In a named peril policy, the policyholder must prove that the damage was caused by a named peril and the dollar amount. However, in an “all risk” policy like the one the Broussards purchased, they must show physical damage and prove a dollar amount of damage. State Farm has already stipulated that the house sustained physical damage and that the dollar amount was for the policy limits to the real and personal property.”

He could have gone a step further, but did not, and said: “The Personal Property section of the policy issued by State Farm covered the contents on a named peril basis. The named peril which caused that damage is “windstorm.” State Farm has stipulated that Hurricane Katrina is a “windstorm.” In State Farm’s manuals and operation guides, it notes that hurricanes are examples of windstorms. Its own claims managers admit this. Thus, the Broussards have met their burden of proof under both sections of the policy. State Farm therefore had the burden to prove the amount of damage excluded and failed to meet this burden.”

The problem is that Bill Walker did not have the evidence about the operation guides and claims manuals in the trial record. He may not even know about them. His discovery was not extensive, but he did not need it at trial because of the excellent job he did at simplifying issues and destroying the ridiculous “probabilities analysis” State Farm concocted in an attempt to prove damage. Judge Senter noted that State Farm admitted that a “windstorm” damaged the property.

I think the bottom line here is this wind-water litigation is not simple contract law. Rather it is industry specific and rooted in hundred of years of tradition. It will be interesting to see how the Broussards react to today’s ruling.  Just as you would not go to a dentist for a brain tumor, the same care should be exercised when choosing a lawyer.

I will no doubt catch heat locally for saying this but my informed yet layman opinion is the 5th Circuit got Broussard right for all the wrong reasons. I was prophetic in an email to Nowdy yesterday on case preparation involving the old Scruggs Katrina group. The timing was pure luck but the concepts apply.  Broussard bears out there will be no easy wins in this wind-water fight and illustrates why we need HR 3121 to spare future disaster victims the trauma of years of litigation to collect on their policies.

sop