As we wrote about here, the Fifth Circuit heard oral argument on June 5 on the appeal of Judge Duval's November 2006 decision on the enforceability of various policies' flood exclusions. On August 2, the Fifth Circuit issued its opinion and partially reversed Judge Duval's decision. You can read the Fifth Circuit's opinion here.
In its opinion, the Fifth Circuit ruled in favor of the insurers and held that the policies' flood exclusions unambiguously precluded recovery for damages caused by breach of the levees after Hurricane Katrina. In doing so, the court explicitly rejected the policyholder's argument that there should be a distinction between natural and non-natural causes of flood with respect to the applicability of the flood exclusion.
The court looked to dictionary definitions of the term "flood" to conclude that it included a flood resulting from a levee breach. The Fifth Circuit rejected the policyholders' argument that floods due to levee breaches do not fall under the scope of flood exclusion, stating "[t]hat a levee's failure is due to its negligent design, construction, or maintenance does not change the character of the water escaping through the levee's breach; the waters are still floodwaters, and the result is a flood."
As stated by the Fifth Circuit,
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 floodwaters 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 court also rejected the policyholders' argument that their Hurricane Deductible Endorsement should lead to a reasonable expectation that there would be coverage for hurricane-related damage and stated that the endorsements "do nothing more than alter the deductible for damage caused by a hurricane."
We will continue to provide updates on Katrina-related coverage litigation on InsureReinsure.com.