The United States Court of Appeals for the Fifth Circuit held on August 2, 2007, that flood exclusions in first party property insurance policies “unambiguously preclude” recovery for damage caused by the “massive inundation of water” from ruptured levees into New Orleans following Hurricane Katrina, despite allegations that the levees were negligently designed, constructed, or maintained. In Re: Katrina Canal Breaches Litigation, No. 07-30119, (5th Cir. Aug. 2, 2007).
The Court of Appeals reversed a November 2006 decision of the Eastern District of Louisiana, which held that exclusions barring coverage for damage caused by “flood” applied only to floods resulting from so-called “natural” causes, and not to floods resulting from negligent or intentional acts. The district court determined, therefore, that to the extent that a policyholder could prove that the post-Katrina flooding in New Orleans was caused by negligent design, construction or maintenance of the levees alongside the canals, the flood exclusion would not preclude coverage. The district court’s opinion was premised on its conclusion that the flood exclusion was ambiguous and must therefore be construed narrowly and in the insureds’ favor.
The Fifth Circuit squarely rejected the district court’s conclusion and reasoning: In sum, we conclude that the flood exclusions in the plaintiffs’ policies are unambiguous in the context of the facts of this case. In the midst of a hurricane, three canals running through the City of New Orleans overflowed their normal boundaries.
The flood-control measures, i.e. levees, that man had put in place to prevent the canal’s flood waters from reaching the city failed. The result was an enormous and devastating inundation of water into the city, damaging the plaintiffs’ property. This event was a “flood” within that term’s generally prevailing meaning as used in common parlance, and our interpretation of the exclusions ends there. The flood is unambiguously excluded from coverage under the plaintiffs’ all-risk policies, and the district court’s conclusion to the contrary was erroneous.
The opinion in Katrina Canal Breaches Litigation relates to four of more than 40 Hurricane Katrina cases that have been consolidated for pretrial purposes in the Eastern District of Louisiana. These cases involve various all-risk property insurance policies including homeowners policies, commercial property policies, and renters policies. More than a dozen insurance companies are parties to the appeal, including Allstate, Liberty Mutual and Travelers. In each case the insurers contended that the claimed damage was excluded from coverage under a flood or water damage exclusion. While the precise wording of the exclusions varied these are typical examples: We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.
. . . Water Damage, meaning:
. . . Flood, surface water, waves, tides, tidal waves, overflow of a body of water, or spray from any of these, whether or not driven by wind . . . . Hanover, Standard Fire and Unitrin policies.
We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
. . . Water
. . . Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not . . . .
In each case, the insureds argued that the exclusions were ambiguous and did not apply to the water damage resulting from the canal breaches. The district court, ruling on motions to dismiss, for judgment on the pleadings and/or for partial summary judgment, agreed. The court then certified each of its orders for interlocutory appeal under 28 U.S.C. § 1292(b).
Fifth Circuit Opinion
The Court of Appeals reviewed the district court orders de novo under Louisiana law, which controlled each of the policies at issue. The court noted that, under Louisiana law, the words of an insurance contract are to be given their generally prevailing meaning and that unambiguous terms will be enforced as written. The court explained the process by which ambiguities where they exist are resolved, but emphasized that “an insurance contract should not be interpreted in an unreasonable or strained manner under the guise of contractual interpretation to enlarge or restrict its provisions. . . . ‘” Interpretation of the Flood Exclusions
The Fifth Circuit analyzed and rejected each of the arguments advanced by the insureds. The court rejected the contention that the lack of a formal definition of “flood” in the policies rendered the exclusions ambiguous. The court stated that in the absence of a definition the generally prevailing meaning applied, noting that a rigid rule essentially requiring that all terms be defined would lead to an absurd (and never-ending) series of definitions, followed by definitions of the defining terms, and so on.
The court also found unpersuasive the argument that the exclusion was ambiguous because it could have been worded more explicitly or contained more detail. The task of a court is to determine the meaning of the words of the contract as written, not to determine whether the meaning could have been expressed better.
Furthermore, the court stated, even if the scope of an exclusion is not apparent on its face, a court should not immediately construe it in favor of coverage; rather a court should apply the rules and tools of contract construction in order to ascertain and apply the generally prevailing meaning of the relevant terms.
To determine the prevailing meaning of the term “flood,” the court turned first to dictionary definitions, analyzing popular dictionaries as well as legal dictionaries and encyclopedias. It also examined legal treatises including Appleman’s and Couch, as well as case law from Louisiana and other jurisdictions. The court found that where courts outside of Louisiana had “considered whether a flood exclusion similar to the ones here unambiguously precludes coverage for water damage resulting from the failure of a structure such as a dam or dike, they have uniformly declared that the inundation of water falls within the language of the exclusion.”
The court also addressed the insureds’ attempt to inject ambiguity into the term “flood” by arguing that the exclusionary language applies only to floods with “natural” causes, and not to inundations of water with “non-natural” causes such as an inadequate levee. As an initial matter, the court questioned the notion that the flooding from Hurricane Katrina was anything but natural. There was, after all, a catastrophic hurricane. If the failure of human efforts to control the flooding from such an event, or human failure to take preventative measures, made the resulting flood non-natural, it would be impossible as a practical matter ever to exclude flood damage from coverage.
In any event, the court also rejected the argument that “flood,” as used in the exclusion, is limited to natural events. The court analyzed the insureds’ reliance on cases arising from water main leaks or ruptures. The fact that some courts have held that water damage from broken water mains was not excluded by the flood exclusion was unpersuasive given that: (a) unlike canals, water mains are not bodies of water; (b) water main leaks are almost always much smaller in scale than the inundation from a massive hurricane; and (c) unlike water mains, levees are flood-control structures that by definition interact with floodwaters.
The court also rejected the insureds’ arguments based on the doctrine of reasonable expectations, including the argument that the flood exclusions were sufficiently clear and unambiguous that a policyholder, even in the context of these all-risk policies, could not reasonably expect that the massive inundation of water from the breached levees was an excluded flood.
Finally, the court noted that these cases involved only one cause of loss and it therefore did not address the applicability or impact of anti-concurrent causation clauses or the efficient-proximate-cause rule.
The Fifth Circuit’s interpretation of the flood exclusion under Louisiana law is consistent with the weight of authority from other states: an inundation of water as associated with a hurricane is an excluded flood, even when the flood occurred as a result, in part, because of negligent design, construction or maintenance of a levee. The Court of Appeals’ thorough analysis may be significant in future cases in which an insured argues that flood damage is not excluded because the flood had a “non-natural” cause. The decision also confirms the prevailing view that courts should not read into policies of insurance terms or limitations that do not plainly appear on the face of the policy, nor should courts automatically apply a strict or narrow construction of policy terms in the absence of a finding of ambiguity.