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Small Clause, Big Problem

Lee Celano for The New York Times

Marilyn Haverty standing where Hurricane Katrina destroyed her property last year in Bay St. Louis, Miss.

Published: August 4, 2006

Marilyn Haverty, whose house in Waveland, Miss., was buffeted by wind and surging water in Hurricane Katrina, thought her homeowner’s insurance would cover at least the wind damage. But it never paid her a penny.

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Hurricane Katrina

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As it turns out, Ms. Haverty’s insurance policy, like nearly every one around the country, said, essentially, that if the house was damaged by a flood or earthquake or something else not covered, it did not matter that she had coverage for wind damage. There was no coverage at all.

Since at least the mid-1980’s, insurers have been putting into their home insurance policies “anti-concurrent causation’’ clauses that effectively eliminate coverage that insurers promise to provide when selling their policies. But most people skip over the legalistic language — if they read their policies at all. And until Katrina, there had never been such an outpouring of challenges.

“There’s no question that the anti-concurrent clause is bad for policyholders,’’ said Adam F. Scales, an associate professor who teaches insurance law at the Washington and Lee University School of Law, in Lexington, Va. “It’s not fair because it defeats policyholders’ reasonable expectations.’’

Insurers counter that they need the clause to protect themselves from being drawn into paying for floods, earthquakes or mudslides and other widespread calamities that are beyond their scope and that they specifically refuse to cover.

The insurance companies say they expect to pay out $17.6 billion for homes damaged in Katrina and $20.8 billion to businesses — the most insurers have ever paid out in a catastrophe. But lawyers for homeowners say the insurers would have had to pay out perhaps billions more had it not been for the anti-concurrent clause. Industry officials said they had no comprehensive data, but acknowledged that a substantial amount of money was at stake.

The provision has become one of the central issues in the thousands of lawsuits that have been filed against insurance companies since Hurricane Katrina hit last August.

In the first trial, which began in July and is now awaiting a federal court judge’s verdict, the homeowner’s lawyer, Richard F. Scruggs, argued that the storm surge in Katrina was not a flood — as defined by the insurance companies — but an inseparable part of the hurricane. Mr. Scruggs also argued that his client, Paul Leonard, a police lieutenant, was told by his agent that he did not need to buy flood insurance. Mr. Scruggs contended that the anti-causation clause should be voided.

The insurance companies say they paid for damage to homes in areas where there was no flooding. Where there was flooding, they say, they paid for damage that could have come only from wind, like the loss of a roof and broken upper-story windows — above the highest marks left by flood waters. But they have generally refused to pay for damage to houses, or parts of houses, that were hit by both wind and flood water.

“They are sitting on this idea that the water washed everything away and whether there was any wind damage or not, they don’t feel they have to provide any coverage,’’ said Zach Butterworth, a lawyer in Bay St. Louis, Miss., who, with Mr. Scruggs, is representing Ms. Haverty and dozens of other storm victims.

Courts around the country have been divided on whether the provision may be used to deny coverage. Many have backed the insurers. But other courts have sided with policyholders, concluding that the clause was ambiguous or ran counter to reasonable expectations of what was covered.

“It is not a settled issue,’’ said E. Farish Percy, a law professor and insurance expert at the University of Mississippi. “Courts that have decided in favor of plaintiffs are saying, ‘It may be perfectly clear to an insurance lawyer, but it’s not that clear to a policyholder.’ ’’

Insurers and other insurance experts say the only way policyholders can protect themselves is to take on the additional expense of buying special government policies that cover floods and earthquakes. But that is only a partial remedy for more expensive homes that are flooded, because the federal government limits coverage for floods to $250,000. Earthquake insurance sold by California carries a high deductible.