In the context of a Katrina-related claim, in its recent decision in Sher v. Lafayette Insurance Company, et al., a Louisiana state appellate court held that an insurer’s water exclusion was ambiguous and that the insurer could not deny coverage for water damage sustained to an insured’s property on the basis of the exclusion. In so holding, the court affirmed the trial court’s grant of partial summary judgment in favor of the insured. Both courts held that the flood exclusion did not specifically exclude coverage for flood damage caused by a levee breach. (We note that unlike in other Katrina-related coverage cases, this case did not involve an issue of whether the damage was caused by wind or water, as it appears from the court opinion that the insured’s loss was caused entirely by flood, apparently due to the breaches of levees in the New Orleans area.) Click here to read the Sher decision.

The policy at issue in this case contained a water exclusion that excluded coverage for "flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not . . . ." The court noted that the policy exclusion specifically listed various natural disasters that cause floods and concluded that "the parties intended to cover and include all risks that were not specifically excluded or limited. [The insurer] failed to specifically exclude all floods because of the ambiguity contained within the water exclusion."

This decision is contrary to an August decision issued by the Fifth Circuit in the In re Katrina Canal Breaches Litigation. (Click here and here to read more about that decision.) In that decision, the federal appellate court analyzed Louisiana law and held that the policies' flood exclusions unambiguously precluded recovery for damages caused by breach of the levees after Hurricane Katrina. It remains to be seen whether the conflicting decisions from the state appellate court and federal appellate court will be reconciled. The insurer has already stated that it intends to appeal the Sher decision, and the Louisiana Supreme Court could reverse the decisions of the lower state courts on this issue.

We will continue to provide updates on Katrina-related coverage litigation on InsureReinsure.com.