In its December 4, 2007 decision in Smith v. Allstate Indemnity Co., the Fifth Circuit Court of Appeals held that Allstate did not act in bad faith when it denied coverage for damage to Norris Edwards Smith’s home caused by storm surge during Hurricane Katrina. Smith v. Allstate Indemnity Co., No. 07-60013 (5th Cir. Dec. 4, 2007) (click here for a copy of the decision).

Smith’s Mississippi home sustained extensive damage on August 29, 2005. Smith submitted a claim for the damage under his homeowner’s policy with Allstate. The policy contained both a water-damage exclusion and a hurricane-deductible endorsement. After inspecting the damage, Allstate concluded that the amount of Smith's covered property damage was $4,553.11. Smith however believed that his damages far exceeded that amount. Smith sued Allstate for an amount of damages to be determined at trial, asserting various causes of action including bad faith, breach of contract, and negligent misrepresentation. Both parties stipulated to the fact that the property damage was caused by rising water pushed by storm surge or flooding.

The U.S. District Court for the Southern District of Mississippi granted summary judgment to Allstate, holding that the policy did not provide coverage for storm surge. Smith appealed.

Smith claimed that the water-damage exclusion did not unambiguously exclude coverage for damage caused by storm surge. The water-damage exclusion excluded coverage for damages resulting from “flood, including, but not limited to surface water, waves, tidal water or overflow of any body of water, or spray from any of above, whether or not drive by wind.” In relying on its decision in Tuepker v. State Farm (click here to see related post), the Fifth Circuit determined that a similarly worded exclusion unambiguously excluded coverage for storm surge. Smith also argued that the hurricane deductible endorsement which altered his deductible for damages caused during a hurricane “by windstorm, or by any object(s) drive by windstorm,” expanded coverage to include damages for storm-surge. However the Fifth Circuit noted that it also rejected this argument in Tuepker v. State Farm.

InsureReinsure.com will continue to monitor Katrina-related coverage developments.