It’s a long and winding road from Katrina to Wall Street; but, that’s where the F’word is going- so gas up as we follow using this FEMA map of landmarks:
- Part 1: Friend of the Fifth Circuit’s Opinion in the consolidated Katrina Canal Levee Breech?
- Part 2: Final statistically unreliable report- Hurricane Katrina: Wind Versus Flood Issue.
- Part 3: Financial Crisis: Wall Street dead end for disaster protection.
Friend of the Fifth Circuit’s Opinion in the consolidated Katrina Canal Levee Breech?
Every f’n road trip has to have a place to start. This one starts with the recent change in policy language reported in this post on SLABBED – with the Fifth’s decision on the appeal of the consolidated Katrina Canal Levee Breach litigation in the rear view mirror.
…starting in January insurance policies around the country will contain language specifically excluding coverage for manmade floods from broken dams or levee breaches.
The decision to change policy language to specifically exclude manmade floods is odd considering the Fifth’s decision that it already does – re: consolidated Katrina Canal Breaches Litigation (pages 45-47)
…We do not rely upon the NFIP to decide this appeal. Our decision is based instead upon our determination that the flood exclusions in the policies before us unambiguously preclude the plaintiffs’ recovery. But to the extent that the NFIP’s definition of “flood” is further evidence of the term’s generally prevailing meaning, we note that it is consistent with our interpretation.
The NFIP makes no distinction between inundations of water caused by natural levee ruptures and those caused by man-made ruptures…
The decision on appeal, however, made the distinction between natural and manmade flooding.
In a decision that could cost insurers many more billions of dollars than they have already paid out in Hurricane Katrina claims…the United States District Court for the Eastern District of Louisiana, released an 85-page ruling by Judge Stanwood R. Duval Jr. in several consolidated cases in which plaintiffs argued that flood damage “arising out of all levee breaches which occurred in the aftermath of Hurricane Katrina” should be covered since such flooding is not specifically excluded in the policies. In denying insurers’ attempts to have the lawsuits dismissed, the judge cited ambiguous language in the water damage exclusions in some policies. (emphasis added)
Expecting the decision to be appealed, Judge Duval forwarded it to the 5th U.S. Circuit Court of Appeals for review.
While Judge Duval wrote that many insurers’ policies do not specifically exclude “man-made” water breaches, he found exceptions in the policies of State Farm and The Hartford, both of which exclude damage from flooding regardless of the cause.
If NFIP makes no such distinction in paying flood claims, how could the Fifth miss the ambiguity? The Louisiana State Supreme Court also missed the point when it relied, in part, on the Fifth’s decision when overturning Sher v Lafayette (page 10).
According to Louisiana attorney John Houghtaling, quoted in the Times Picayune, the insurance industry itself had made the distinction prior to Katrina.
Houghtaling’s firm noted that in 2004, the industry asked the state insurance commissioner to approve new policy language making it clear that water from levee breaches wasn’t covered in homeowner policies. Houghtaling said that proved the industry knew that previous policy language — which remained in use by all but two firms at the time of Hurricane Katrina — was ambiguous. The Supreme Court didn’t address that argument in its ruling. (emphasis added)
Following Katrina, the industry took the position that no clarity was needed although the reinsurance industry did not appear as certain..
Holborn estimates that the direct insured Property and Marine market loss due to Katrina will be between $45Bn and $65Bn, assuming that Flood exclusions and sub-limits are interpreted as intended. Eliminating Flood exclusions could add tens of billions more exposure, but that is outside of our current estimates.
Of course, that may be because the insurance industry’s exposure was abundantly clear.
Reinsurance paid for an estimated 45 percent of U.S. losses incurred by insurers as a result of the 2005 storms, according to the Insurance Information Institute, but Allstate was on the hook for the entire cost of damages covered by its Louisiana customers’ homeowner policies. By the end of 2006, it had paid $1.4 billion in homeowners claims in Louisiana, where it is, after State Farm, the state’s second-largest residential insurer. (emphasis added)
Instead of serving as reinsurance for Allstate, FEMA could have stepped up represented the taxpayers position in court and spared NFIP the reported shortfall.
The National Flood Insurance Program (NFIP) is in debt to the American tax payer to the tune of $18 billion…
Given the number of NFIP policy holders in New Orleans, it is telling that the agency did not.
After…floodwaters receded, politicians initially blamed the residents of this below-sea-level city, claiming too few had purchased federal flood insurance on top of their homeowners policies, which cover only wind damage.
Yet an analysis by the office of Donald Powell, the Bush administration’s Gulf Coast recovery czar, found few communities were better insured against flooding than New Orleans: Two out of three homes had flood insurance, 13 times more than the national average of 5%. (emphasis added)
FEMA had a lot of f’n trouble with numbers following Katrina – you’ll see more about that at our next stop, Final statistically unreliable report– Hurricane Katrina: Wind Versus Flood Issue.
I sure hope to forkin’hell you plan to write a book. I really don’t care what it would be about, but would suggest you stay in this vein of attack. Whoa.
Revenge is best served on the half shell I always say.
Editilla
Thanks, Editilla, maybe “how Congress gets f”n shot in the foot by federal agencies” or “why good programs go bad” – bet it would be hard to give copies away!
Whether NFIP makes a distinction between natural flood and manmade flood doesn’t necessarily impact the issue of whether private insurers policies make that distinction. In fact, generally speaking it is the position of private insurors that their flood exclusion does not distinguish between man made and natural floods and applies equally to exclude both. The change in policy language noted, is in response to court decisions purporting to find some distinction and thereby an ambiguity. That is to try and make sure it is clear the policy says, and will be interpreted by the courts to say, what the insuror felt it said all along.
The fact that NFIP makes no distinction between natural and mandmade flood would seem to be supportive of the argument that there is no ambiguity in the private policy flood exclusion and that the 5th circuit stretched to find an ambiguity where none really existed.
If they had to “try and make sure it is clear” then, as written, it was ambiguous – the courts didn’t just pull the notion from thin air.
If you keep focused on the fact that two insurers do specifically exclude manmade floods then because neither NFIP and certain private policies don’t exclude manmade flood, the private policies should pay claims on manmade floods under the rule of what’s not specifically excluded is included.
JMO and always appreciate yours, justme, even when we don’t agree.
We agree what isn’t excluded is covered – but flood is specifically excluded.
The fact that NFIP doesn’t differentiate between natural and manmade floods should actually support the position that the exclusion in the private insuror policy shouldn’t make that same differentiation. That is, a flood is covered under NFIP and excluded under other property policies.
As the Fifth Circuit (and other courts) found, there is no ambiguity in the exclusion. However, some courts have found otherwise – whether you call that pulling it out of thin air or not (and I probably do – the flood exclusion is pretty straight forward, only by adding words like manmade or natural is there an ambiguity)
“try to make sure it is clear” actually means “try to make it so clear that no court can find some way around it”.
And I will make a small wager the two insurers that do specifically exclude manmade flood do so, not because they thought the prior exclusion was ambiguous, but in response to a court decision or discussion.
I’ll have to say, justme, that I’m betting with you and not against you on the specific exclusion having taken root in a court decision, although not necessarily on a discussion.
It’s probably why others were seeking the regulatory change in 2004 – the one that didn’t happen – and why there will be industry wide change in policy language in January.
However, all but those two were stuck with the ambiguity in 2005 and IMO the 5th circuit ruled with its eyes closed to that reality.
They avoided the all inclusive language of the NFIP by excluding flooding in part but not “from any cause”.
It’s raining here now and if my roof leaked, my house could fill with standing water as deep as some experienced from the levee breach – and the only word to describe it would be to say my house flooded but, in this case, the damage would be covered.
In much the same way there is no other word for the “flooding” I just described, there is no other for the “flooding” from the canals – but “for lack of a better word” is no reason for excluding the “flood damage” that followed the breach.