Some of the most interesting developments over the past six months in the world of insurance coverage come out of Hurricane Katrina, the largest insured loss in U.S. history. Several thousand lawsuits, filed in Mississippi and Louisiana, focused on the question of whether property damage arising from the hurricane was caused by wind or objects propelled by wind, both of which are covered under the standard property insurance policy, or by excluded water or flood. This year has already brought us several decisions as well as several individual and group settlements.

Earlier this week, the next wind vs. water trial involving State Farm was to begin in the U.S. District Court in Gulfport, Mississippi. The plaintiff, Michael McCoy, a resident of Pass Christian, Mississippi, sought full payment of his insurance claim resulting from damages sustained during Hurricane Katrina, consisting of $189,402 in actual damages and $5 million in punitive damages.

According to the Pre-Trial Order, McCoy’s property was completely destroyed by Katrina, reducing it to a slab. State Farm insured McCoy’s home and personal property under a homeowner’s insurance policy, providing coverage for the dwelling up to $108,230, and coverage for the home’s contents up to $81,172. After the hurricane destroyed McCoy's home, he filed a claim with State Farm for the full policy limits.

State Farm denied McCoy’s homeowners claim based on a determination that all of the damage was caused by flood damage, an excluded peril under the policy. McCoy, however, contended that the damage was caused by wind, a covered peril. On May 2, 2007, State Farm provided $8,354.28 to McCoy to compensate him for the amount of damage it determined was caused by the wind. This was partially based on a State Farm adjustor's opinion of a 60% probability that McCoy’s home suffered minor roof cover loss due to the wind. Beyond this amount, State Farm determined that the remainder of the McCoy home and its contents were destroyed entirely by excluded water/storm surge.

McCoy argued that State Farm’s procedures resulted in a blanket denial of all homeowners’ claims if there was any evidence of a storm surge (wind-driven water), absent independent windstorm damage to separate portions of the property. Additionally, McCoy asserted that State Farm’s procedures resulted in no payment in any slab case.

Jury selection was scheduled to begin on Monday, June 4, but before a jury could be chosen, McCoy and State Farm announced that they settled the case, for an undisclosed amount.

Earlier this year, State Farm went to trial in two wind vs water disputes. The first trial resulted in the payment of policy limits plus $1 million in punitive damages (Broussard v. State Farm). The second trial resulted in a judgment of $66,234 in compensatory damages, based on a jury calculation that wind destroyed 47 percent of the home and 25 of the home’s contents, plus an undisclosed amount of punitive damages. The parties ulitmately settled before the jury determined the amount of the punitive damage award (Gemmill v. State Farm).

In addition to the McCoy settlement, there has been a flurry of recent activity in the insurance industry arising from Katrina-related damage. Last month, State Farm announced that it would pay $6.8 million to resolve a class action lawsuit arising out of State Farm’s alleged under-compensation of Florida policyholders for damages resulting from Hurricanes Katrina and Wilma. Also, Allstate Corporation and Nationwide Mutual Insurance Company were subpoenaed by a federal grand jury in Mississippi, as part of an investigation into their handling of Katrina claims. Allstate also announced that it received a subpoena from the U.S. Department of Homeland Security, which is currently investigating insurers that issue policies under the National Flood Insurance Program.