This is an interesting situation, how much wind insurance can an insured collect when they are tendered their flood policies? The courts have split on this issue and depending on the Hurricane, an insured can either collect the policy limits or have their wind recovery reduced by their flood payouts. Such a legal mess would be prevented under a true multi-peril concept such as HR 3121 and taxpayers would not have to be worried about being stuck with a bill that should have been paid by private wind insurance.
Here are some exerpts from Rebecca Mowbray’s story:
How much money Louisiana homeowners can collect on their insurance policies depends a lot on which hurricane hit them.
Federal judges in New Orleans have ruled that the amount of money Hurricane Katrina victims can recover from their homeowners insurance policies is limited by the amount they received from the National Flood Insurance Program.
But federal judges in Lake Charles have ruled that Hurricane Rita victims can potentially collect the full value of both the flood and the wind policies, meaning that they could end up with payouts totaling more than the value of their homes.
“This probably is one of the last behemoth issues in the hurricane litigation,” said Soren Gisleson, head of the insurance section at the Louisiana Association for Justice, formerly known as the Louisiana Trial Lawyers Association.
The rulings make a big difference for homeowners.
The cases which I am familiar here in Mississippi have ended up more “Rita like” with insurers being made to honor their policies exclusive of NFIP payments. Ms Mowbray’s story continues:
Both New Orleans resident Kenneth Bonura and Cameron Parish residents Reggie and Kim Murphy lost their homes in the 2005 hurricanes. Because of the court rulings, Bonura had the potential to collect only $26,900, or 19 percent of the homeowners coverage that he paid for on his $178,000 house. But the Murphys could collect as much as $228,500 from both their flood and wind policies, or 52 percent more than the value of their $150,500 home.
Multiplied across thousands of homes, the court rulings on whether homeowners insurance policies and flood insurance policies should work together or independently are worth big bucks. Attorneys view the “flood offset” issue as just a notch below questions about the valued policy law, which aims to prevent insurers from overcharging premiums, and controversy over whether a manmade flood is excluded from homeowners insurance policies. But unlike those questions, which have been dealt with at the 5th U.S. Circuit Court of Appeals and which are pending before the Louisiana Supreme Court, the flood-offset questions have had no such resolution.
Attorneys following the hurricane litigation say they’re aware of no appeals that would bring the split between the federal judges on opposite sides of the state before the 5th U.S. Circuit for resolution, an unusual situation.
“You don’t see it often, but it does occasionally happen,” said Edward Sherman, a dean at Tulane Law School who teaches civil procedure and complex litigation.
Meanwhile, few cases in state court have the potential to test the issue. But plaintiffs attorneys are crossing their fingers that the state Supreme Court will accept writs filed by both a St. Bernard Parish homeowner and a locally domiciled insurer over the issue.
If the case Shirley Frught v. Lafayette Insurance Co. is accepted, it would be the first time in the insurance litigation from the 2005 hurricanes that the state’s high court would get to speak before the federal appeals court has.
It is worth noting at this point that NFIP regulations found at 44 CFR 62.23 says that “the primary relationship between the WYO Company (private insurer) and the Federal Government will be one of a fiduciary nature, i.e. to assure that any taxpayer funds are accounted for and appropriately expended,” and further that “the entire responsibility for providing a proper adjustment for both combined wind and water claims and flood-only claims is the responsibility of the WYO Company.” While these program regulations are not law, the logic involved in making insurers properly adjust wind-water claims is consistent in that under both policies the insurance company has a duty to properly adjust claims. The story continues:
Last spring, as the Katrina insurance litigation was finally getting under way in federal court, Allstate Insurance Co. filed a slew of motions contending that if homeowners had received payments on their flood policies, cashing the checks amounted to an admission that the damage was caused by flooding. Any further recovery on their homeowners policies should be limited by how much they received on flood, Allstate argued, to prevent homeowners from double-dipping.
Plaintiffs attorneys cried foul, and said that homeowners had paid premiums on two separate policies, and they were entitled to the full value of their money on each one rather than see their flood payments subsidizing insurance companies. If the court considered the two policies in tandem, people who had bought flood insurance would be more limited on their potential recovery under homeowners than those without flood insurance, creating a disincentive for people to buy all-important flood coverage.
A string of rulings from different judges last spring largely went in favor of the insurers’ position that the flood and wind policies should work in tandem, such as an April 13 ruling for Allstate in the case of New Orleans homeowner Edward Esposito.
“Esposito is entitled to recover in this lawsuit any previously uncompensated losses that are covered by his homeowners policy and which when combined with his flood proceeds do not exceed the value of his property. Esposito is not entitled to obtain a windfall double recovery by now recharacterizing as wind damage those losses for which he has already been compensated by previously attributing them to flood,” Judge Jay Zainey wrote, agreeing that a flood payment was tantamount to an admission that damage was caused by flood.
In the consolidated Rita litigation against State Farm Fire and Casualty Co., plaintiffs attorney Jennifer Jones sought to make a pre-emptive strike on behalf of her 125 clients. In motions filed May 1, Jones asked Judge Patricia Minaldi in Lake Charles to declare that it would be inappropriate for State Farm to receive a credit for the amount of money her clients collected from the flood program.
Minaldi largely sided with Jones, saying that unless State Farm had expressly stated in its policy that it would reduce the value of the homeowners policy in the event of a flood, it couldn’t use the existence of a flood to limit its obligations under the homeowners policy.
“The plaintiffs entered into two distinct contracts — the homeowners policy and the NFIP policy,” Minaldi wrote. “The plaintiffs paid premiums under both policies in exchange for separate coverages. State Farm is therefore obligated to pay for losses which are attributable to wind damage irrespective of other policies or coverages.”
Since then, the split in federal rulings between New Orleans and Lake Charles has continued.
The plaintiffs bar in New Orleans says that every federal judge in New Orleans who was faced with a flood-offset motion from the insurance companies has endorsed it in some fashion. Meanwhile, on Feb. 14, Jones scored another favorable ruling for a Cameron Parish grocery store when Chief Judge Richard Haik Sr. denied the flood-offset motion by the Underwriters at Lloyds, London.
Although the federal courts on either side of the state are at loggerheads, so far no one’s appealed to the 5th U.S. Circuit to set the law of the land, because it’s been in no one’s interest to do so.
Plaintiffs attorneys in New Orleans say that after losing arguments on the valued policy law and whether levee breach flooding was properly excluded from insurance policies at the federal appeals court, they figured they didn’t have a shot on the flood-offset question in federal court.
After losing the flood-offset ruling in the consolidated Rita litigation, State Farm didn’t appeal, either.
After winning so many flood-offset rulings in New Orleans, State Farm counsel Peter Martin said it wasn’t worth it to bother appealing Minaldi’s ruling. “We view this as kind of a minority decision,” Martin said.
But Cameron Food Mart v. Lloyds could break the deadlock. Bob Fenet, a Baton Rouge attorney representing Lloyds, said he’s talking with his client about appealing to the 5th U.S. Circuit.
“Let’s find out what the law is. There’s definitely a split in the courts, and that’s what the court of appeals is for,” Fenet said. “Every time there’s a storm, we’re going to have to litigate over flood versus wind.”