Hurricane Katrina Insurance Coverage and Stories
By Donald O. Johnson[1]
Hurricane Katrina ravaged the Gulf Coast of Louisiana and Mississippi in late August 2005, causing more than 1,000 deaths and more than $200 billion in property damage. Hurricane force winds blew off roofs, blew out windows, and knocked down walls. Heavy rain saturated building contents, and floods inundated whole communities, including portions of New Orleans, Louisiana. The catastrophic scale of the property damage and many property owners’ lack of flood insurance have caused some property insurance policyholders or their representatives to question the effect of the Flood Exclusion contained in most standard commercial property and homeowners insurance policies.
Standard commercial property and homeowners insurance policies cover property damage caused by wind and caused by rain that enters a building because wind or another insurance-covered peril has exposed the property to the rain. Such policies, however, usually contain a Flood Exclusion. A typical Flood Exclusion in a commercial property policy or homeowners policy states:
Property insurers include the Flood Exclusion in standard commercial property and homeowners insurance policies to avoid exposing themselves to catastrophic losses. Floods can result in extraordinarily large losses because a flood can severely damage many properties in a given area. Thus, an insurer that insures against flood damage assumes the risk that it may have to pay a large number of flood claims at the same time, the cost of which could be extremely high.
Because of a lack of insurers that were willing to insure against flood damage at a price that most property owners could afford to pay, the federal government created the National Flood Insurance Plan in 1969. Under the National Flood Insurance Program, the Federal Insurance Administration, which is part of the Federal Emergency Management Agency (FEMA), and insurance companies that participate in the Federal Insurance Administration’s Write Your Own program sell flood insurance to the public. The participating insurance companies collect the premiums, issue the policies (called the Standard Flood Insurance Policy), and handle the claims. FEMA, in turn, covers the losses and allows the participating insurers to keep part of the premiums as payment for the administrative services that the insurers render.
FEMA also creates flood insurance rate maps, which identify areas that are particularly susceptible to flooding. FEMA calls these areas special flood hazard areas. Owners of property in these areas pay higher premiums for flood insurance than do owners of property located outside of them. Federal law requires owners of property in special flood hazard areas to purchase flood insurance if they have mortgages on the property from lenders that federal agencies regulate or insure. Hurricane Katrina severely damaged property in special flood hazard areas and property outside of them. An example of the latter is the property damage that the hurricane caused in the lower Ninth Ward in New Orleans. FEMA’s flood insurance rate maps did not classify that area as a special flood hazard area. However, when the levees that separated the waters of Lake Pontchartrain from the city of New Orleans broke during Hurricane Katrina, lake water flooded the Ninth Ward. Unfortunately, many property owners in the Ninth Ward, like many other Louisiana and Mississippi property owners whose property was not located in a special flood hazard area, had not purchased flood insurance policies.
Property owners who did not have flood insurance cannot recover for their flood-related damage from FEMA under the National Flood Insurance Program. The only relief that FEMA may provide to such property owners is disaster assistance loans, which the recipients would have to repay. The only property insurance that these property owners usually have (if they have any) is standard commercial property or homeowners insurance, which, as previously noted, likely contains a Flood Exclusion. Insurance carriers that sold those policies generally agree that they are responsible for paying for the wind- and rain-related damage that Hurricane Katrina caused, but, based on the Flood Exclusion, they typically deny claims for flood-related damage.
Within this context, Mississippi’s Attorney General Jim Hood filed a complaint in state court on behalf of the State of Mississippi against several named insurance companies and other unnamed insurance companies that sold homeowners policies in Mississippi. See Jim Hood v. Mississippi Farm Bureau Ins., et al., Civil Action No. G2005-1642 R1 (Miss. Chan. Ct. 1st Jud. Dist. filed Sep. 15, 2005). The complaint alleges that Mississippi policyholders purchased homeowners policies with the expectation that the policies would insure against all hurricane damage. The complaint seeks a declaration that policies containing the Flood Exclusion are void and unenforceable based on the allegation that they violate Mississippi public policy because the insurers interpret the Flood Exclusion to preclude coverage for damage caused by water even if hurricane winds were a proximate cause of the loss. The complaint also supports its claim for relief on allegations that the policies as written are ambiguous and violate the Mississippi Consumer Protection Act.
The insurance company defendants had the case removed to federal court in Mississippi and filed an answer, denying Attorney General Hood’s allegations. See Jim Hood v. Mississippi Farm Bureau Ins., et al., Case No. 3:05-CV- 00572-TSL-AGN (S. D. Miss. Sep. 16, 2005). The insurers argue that the law is well settled that standard property insurance policies do not cover flood damage, emphasizing that Mississippi’s Insurance Department long ago approved property insurance policies containing the Flood Exclusion, as did the insurance departments in many other states.
The insurers also asserted a counterclaim that alleges that as participants in the Federal Insurance Administration’s Write Your Own program, they acted as fiscal agents of the United States government. Their counterclaim seeks a declaration that FEMA has exclusive authority under the National Flood Insurance Plan to regulate flood claims-handling practices and that any conflicting Mississippi law is preempted by federal law.
Attorney General Hood contested federal court jurisdiction and has sought to have the case remanded to state court. He contends that the complaint deals only with whether the insurers’ denial of claims under standard homeowners policies containing the Flood Exclusion is proper and that, therefore, no federal question jurisdiction exists. Given that the Flood Exclusion has been used in property insurance policies for many years, that state insurance departments, including Mississippi’s Insurance Department, have approved the use of property insurance policies containing the exclusion, and that the National Flood Insurance Program has been in existence for more than 30 years, it will be difficult for Attorney General Hood to prevail. However, given the amount of money at stake, this is an issue that commercial law attorneys should monitor closely. The results of the Mississippi litigation may impact future policy language in homeowners policies and commercial property insurance policies, and, therefore, may affect the advice that commercial law attorneys on both sides of the insurance aisle give their clients in the future.
Beyond the dispute about the effectiveness of the Flood Exclusion in homeowners insurance policies, some property owners have complained that FEMA used inaccurate flood insurance rate maps that did not include flood-prone property in the special flood hazard areas. These property owners claim that FEMA is responsible for their not having flood insurance. Based on this argument, representatives of Hurricane Katrina victims who did not have flood insurance have asked the federal government to assume responsibility for uninsured property losses. Mississippi Governor Haley Barbour, for example, has asked the Congress to provide $4 billion to help 50,000 flood victims in his state. Mississippi Commissioner of Insurance George Dale and Attorney General Hood also have asked for similar relief.
Assuming, for argument’s sake, that Attorney General Hood fails in his effort to make the insurance industry finance the reconstruction of the homes in Mississippi that were not covered by flood insurance, it is crucial that other private and public sources of funds be tapped and dedicated to rebuilding the property that Hurricane Katrina indirectly damaged in Mississippi, as well as that in Louisiana and in the other states that the hurricane hit. The affected individuals need this assistance so that they can rebuild their lives and their communities. It clearly will take the financial resources of more than one industry to help them recover from the worst natural disaster to hit the United States in the last 100 years.
Standard commercial property and homeowners insurance policies cover property damage caused by wind and caused by rain that enters a building because wind or another insurance-covered peril has exposed the property to the rain. Such policies, however, usually contain a Flood Exclusion. A typical Flood Exclusion in a commercial property policy or homeowners policy states:
This policy does not insure against loss caused by, resulting from, contributed to or aggravated by any of the following: a. flood, surface water, waves, tidal water or tidal wave overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not.
Property insurers include the Flood Exclusion in standard commercial property and homeowners insurance policies to avoid exposing themselves to catastrophic losses. Floods can result in extraordinarily large losses because a flood can severely damage many properties in a given area. Thus, an insurer that insures against flood damage assumes the risk that it may have to pay a large number of flood claims at the same time, the cost of which could be extremely high.
Because of a lack of insurers that were willing to insure against flood damage at a price that most property owners could afford to pay, the federal government created the National Flood Insurance Plan in 1969. Under the National Flood Insurance Program, the Federal Insurance Administration, which is part of the Federal Emergency Management Agency (FEMA), and insurance companies that participate in the Federal Insurance Administration’s Write Your Own program sell flood insurance to the public. The participating insurance companies collect the premiums, issue the policies (called the Standard Flood Insurance Policy), and handle the claims. FEMA, in turn, covers the losses and allows the participating insurers to keep part of the premiums as payment for the administrative services that the insurers render.
FEMA also creates flood insurance rate maps, which identify areas that are particularly susceptible to flooding. FEMA calls these areas special flood hazard areas. Owners of property in these areas pay higher premiums for flood insurance than do owners of property located outside of them. Federal law requires owners of property in special flood hazard areas to purchase flood insurance if they have mortgages on the property from lenders that federal agencies regulate or insure. Hurricane Katrina severely damaged property in special flood hazard areas and property outside of them. An example of the latter is the property damage that the hurricane caused in the lower Ninth Ward in New Orleans. FEMA’s flood insurance rate maps did not classify that area as a special flood hazard area. However, when the levees that separated the waters of Lake Pontchartrain from the city of New Orleans broke during Hurricane Katrina, lake water flooded the Ninth Ward. Unfortunately, many property owners in the Ninth Ward, like many other Louisiana and Mississippi property owners whose property was not located in a special flood hazard area, had not purchased flood insurance policies.
Property owners who did not have flood insurance cannot recover for their flood-related damage from FEMA under the National Flood Insurance Program. The only relief that FEMA may provide to such property owners is disaster assistance loans, which the recipients would have to repay. The only property insurance that these property owners usually have (if they have any) is standard commercial property or homeowners insurance, which, as previously noted, likely contains a Flood Exclusion. Insurance carriers that sold those policies generally agree that they are responsible for paying for the wind- and rain-related damage that Hurricane Katrina caused, but, based on the Flood Exclusion, they typically deny claims for flood-related damage.
Within this context, Mississippi’s Attorney General Jim Hood filed a complaint in state court on behalf of the State of Mississippi against several named insurance companies and other unnamed insurance companies that sold homeowners policies in Mississippi. See Jim Hood v. Mississippi Farm Bureau Ins., et al., Civil Action No. G2005-1642 R1 (Miss. Chan. Ct. 1st Jud. Dist. filed Sep. 15, 2005). The complaint alleges that Mississippi policyholders purchased homeowners policies with the expectation that the policies would insure against all hurricane damage. The complaint seeks a declaration that policies containing the Flood Exclusion are void and unenforceable based on the allegation that they violate Mississippi public policy because the insurers interpret the Flood Exclusion to preclude coverage for damage caused by water even if hurricane winds were a proximate cause of the loss. The complaint also supports its claim for relief on allegations that the policies as written are ambiguous and violate the Mississippi Consumer Protection Act.
The insurance company defendants had the case removed to federal court in Mississippi and filed an answer, denying Attorney General Hood’s allegations. See Jim Hood v. Mississippi Farm Bureau Ins., et al., Case No. 3:05-CV- 00572-TSL-AGN (S. D. Miss. Sep. 16, 2005). The insurers argue that the law is well settled that standard property insurance policies do not cover flood damage, emphasizing that Mississippi’s Insurance Department long ago approved property insurance policies containing the Flood Exclusion, as did the insurance departments in many other states.
The insurers also asserted a counterclaim that alleges that as participants in the Federal Insurance Administration’s Write Your Own program, they acted as fiscal agents of the United States government. Their counterclaim seeks a declaration that FEMA has exclusive authority under the National Flood Insurance Plan to regulate flood claims-handling practices and that any conflicting Mississippi law is preempted by federal law.
Attorney General Hood contested federal court jurisdiction and has sought to have the case remanded to state court. He contends that the complaint deals only with whether the insurers’ denial of claims under standard homeowners policies containing the Flood Exclusion is proper and that, therefore, no federal question jurisdiction exists. Given that the Flood Exclusion has been used in property insurance policies for many years, that state insurance departments, including Mississippi’s Insurance Department, have approved the use of property insurance policies containing the exclusion, and that the National Flood Insurance Program has been in existence for more than 30 years, it will be difficult for Attorney General Hood to prevail. However, given the amount of money at stake, this is an issue that commercial law attorneys should monitor closely. The results of the Mississippi litigation may impact future policy language in homeowners policies and commercial property insurance policies, and, therefore, may affect the advice that commercial law attorneys on both sides of the insurance aisle give their clients in the future.
Beyond the dispute about the effectiveness of the Flood Exclusion in homeowners insurance policies, some property owners have complained that FEMA used inaccurate flood insurance rate maps that did not include flood-prone property in the special flood hazard areas. These property owners claim that FEMA is responsible for their not having flood insurance. Based on this argument, representatives of Hurricane Katrina victims who did not have flood insurance have asked the federal government to assume responsibility for uninsured property losses. Mississippi Governor Haley Barbour, for example, has asked the Congress to provide $4 billion to help 50,000 flood victims in his state. Mississippi Commissioner of Insurance George Dale and Attorney General Hood also have asked for similar relief.
Assuming, for argument’s sake, that Attorney General Hood fails in his effort to make the insurance industry finance the reconstruction of the homes in Mississippi that were not covered by flood insurance, it is crucial that other private and public sources of funds be tapped and dedicated to rebuilding the property that Hurricane Katrina indirectly damaged in Mississippi, as well as that in Louisiana and in the other states that the hurricane hit. The affected individuals need this assistance so that they can rebuild their lives and their communities. It clearly will take the financial resources of more than one industry to help them recover from the worst natural disaster to hit the United States in the last 100 years.
References
[1] Donald O. Johnson, J.D., LL.M., CPCU is an attorney at D. O. Johnson Law Office, PC. He represents clients in insurance coverage and other commercial litigation. He also is General Counsel of the National African-American Insurance Association (a/k/a NAAIA), a member of the Chartered Property and Casualty Underwriters (CPCU) Society’s Diversity Committee, and a Director of the Society’s District of Columbia Chapter. Additional information about Don can be obtained at www.dojlaw.com.
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