When Hurricane Katrina tore through the Gulf states, it caused more than $44 billion worth of property damage. Torrential downpours and high winds caused the levees to break in New Orleans, engulfing more than 80 percent of the city in standing water.
Joseph Sher, an 89-year-old Holocaust survivor, was trapped in his New Orleans apartment for over four days. Although he was rescued by a stranger passing by in a boat, he still is dealing with the effects of the hurricane, more than three years later.
Storm Damage Isn’t Covered
Sher filed with Lafayette Insurance Co. for damages caused by the flooding. Lafayette refused to pay. The company pointed to a clause in the insurance policy that excluded flood damage. Lafayette claimed that the damage to Sher’s home was not from wind but from water from the levee breach. Sher sued, arguing that his insurer did not clarify this clause to specifically exclude waters from levee breaches from its coverage.
The Definition of ‘Flood’
Louisiana’s 4th Circuit Court of Appeals agreed with Sher, ruling that Lafayette was responsible for paying for the damages. The court reasoned that Lafayette’s homeowner policy did not exclude all forms of flooding because its language was ambiguous and covered “man-made events.” However, in February 2008, the Louisiana Supreme Court disagreed, finding that Lafayette did exclude all forms of flooding in its flood-exclusion clause and therefore was responsible for paying only $247,001 from wind damage.
The Court reasoned that the definition of flooding doesn’t depend on whether an event is natural or man-made. Justice Chet Traylor wrote that the definition turns on whether “a large amount of water covers an area that is usually dry.” Traylor noted that the flood was not man-made and was caused by Hurricane Katrina but wasn’t caused by the levees. He commented that, “the levees did not cause the flood; they, whether through faulty design, faulty construction, or some other reason, failed to prevent the flood.” Sher requested a rehearing, but the Court refused to reconsider its ruling.
In its decision, the Court adopted reasoning from an August 2007 decision by the 5th U.S. Circuit Court of Appeals called In Re: Katrina Canal Breaches Litigation. The 5th Circuit held that a group of policyholders could not collect damages from their insurance companies because the exclusions from flood damage exempted the insurance companies from liability. Although the plaintiffs argued that the hurricane caused the damage, the 5th Circuit specified that the damage was caused by flooding, which stemmed from levee failures. The plaintiffs appealed to the U.S. Supreme Court, which upheld the 5th Circuit’s decision in February 2008.
All-Risk Policies and Named-Peril Policies
The 5th Circuit Court of Appeals and the U.S. Supreme Court missed the point. Although it might be interesting for the court to muse about whether wind, flooding, rain, Hurricane Katrina, the Army Corps of Engineers or God caused the damage, the real question is who bears the burden of proving that the damage stemmed from a particular cause.
There are two types of insurance contracts: general “all risk” policies and “named peril” policies. With all-risk policies, the insurer must prove that the damage falls into an exclusion in the contract. With named-peril policies, the insured bears the burden of proving that the peril named in the policy caused the damage. If he or she can do so, the burden shifts to the insurer to prove the loss is excluded.
Sher had the most common type of insurance policy: a named-peril policy for contents and an all-risk policy for his dwelling and surroundings. Under an all-risk policy, as long as the insured party can prove damage occurred that exceeds the policy amount, the insurer must pay. The burden of proof is on the insurance carrier to prove the loss is excluded under the premium. If the insurance carrier can prove this, which is a difficult task in hurricane situations, then it can relieve itself of liability.
Lafayette didn’t want to pay Sher. Nobody likes paying money, least of all insurance companies to policyholders. But the court made a serious error when it analyzed the contract as a named-peril policy instead of an all-risk policy. It doesn’t matter what the court thinks caused the damage. It doesn’t even matter if the exclusion was ambiguous (although the exclusion probably was ambiguous if it generated that much discussion). The only thing that matters in an all-risk policy is whether the insured party can prove the damage occurred in the required amount. If so, the insurer must pay, unless it can shoulder the burden of proof and show that flooding caused the damage.
Because Lafayette failed to prove in this case that flooding caused the damage, it does not fall within the exclusion in the contract, and Lafayette should have been required to pay Sher.
The Impact of Sher v. Lafayette
This decision should make everyone uneasy because regardless of the fact that an insured party has an all-risk policy for his or her dwelling, the court still will analyze it as a named-peril policy and require policyholders to prove that flooding didn’t cause the damage. This is an impossible task, even if policyholders have unlimited financial resources, time and access to the best expert witnesses.
Expect more discussion on this issue when insurers bring claims after damage from Hurricane Gustav.
Bernadette Hayes is working with the Student Hurricane Network to provide legal outreach to those affected by hurricanes Katrina and Gustav. She lives in Washington, D.C.
In re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007), cert. denied, 2008 WL 423587 (U.S. Feb. 19, 2008).
Sher v. Lafayette Ins. Co., 2008 WL 928486 (La. Apr. 8, 2008).