Wind Versus Flood – Gulf Coast Hurricanes Spark the Debate

In the aftermath of the widespread destruction of Hurricane Katrina and Hurricane Rita, the wind versus water damage debate has once again been brought to the forefront. The latest estimates predict insured losses from Hurricane Katrina to range from $35 billion to $60 billion, and from Hurricane Rita to range from $2.5 billion to $6 billion. Insurers are expected to face a greater exposure from Hurricane Katrina than any other natural disaster in history. The wind versus flood determination is of great consequence because, typically, both commercial property and homeowners insurance policies only cover water damage caused by wind, not water damage caused by flood.

In an attempt to circumvent disputes over insurance issues caused by Hurricane Katrina, Louisiana Insurance Commissioner J. Robert Wooley called an emergency conference on September 7th attended by over 300 insurance industry representatives. While the conference was said to be “productive,” the issue of wind versus flood “was the pink elephant in the middle of the room that everybody tried to ignore,” said Wooley.

The interplay between “anti-concurrent causation” clauses and “valued policy law” will be a predominant issue in the wind versus flood debate. Anti-concurrent causation clauses operate to exclude all damages caused directly or indirectly by the excluded cause, regardless of any other cause or event contributing concurrently or in any sequence to the loss. Valued policy law is usually based upon a state statute that requires an insurance company to pay the face amount of a valued policy in the event of a total loss to a building, regardless of the actual cash value of the property which was destroyed.

A potentially problematic issue for insurers is a recent decision issued by the Fourth District Court of Appeals in Florida. In Mierza v. Florida Windstorm Underwriting Ass’n, 877 So.2d 774 (Fla. 4th Dist. Ct. App. 2004), the court was asked to decide the applicability of an anti-concurrent cause clause under Florida’s value policy law. In that case, a homeowner was insured for wind damage under one policy and flood damage under another. The wind insurance policy contained an anti-concurrent cause clause that excluded coverage for any damage other than that caused by wind. However, the insuring clause was subject to a state statute, the valued policy law (VPL).

The VPL applies where a building is insured by an insurer as to a covered peril, and is a total loss. If these requirements are met, the insurance carrier is liable for the entire face amount of the policy. Stated differently, “[i]f the insurance carrier has any liability at all to the owner for a building damaged by a covered peril and deemed a total loss, that liability is for the face amount of the policy.” The wind carrier argued that the anti-concurrent cause clause precluded liability because the total loss was caused by flood, which was excluded under the terms of the policy. The court determined that there was a conflict between the valued policy law and the anti-concurrent cause clause because the policy was silent regarding whether the wind carrier’s liability became merely pro-rata with other coverage, or whether instead the valued policy law takes precedent over the anti-concurrent cause clause. Because ambiguous insurance policies are to be construed in favor of the insured, the court remanded the case for entry of judgment in favor of the insured.

In May 2005, the Florida legislature revised the Valued Policy Law in response to the Mierza opinion — a case the legislature felt was wrongly decided. The revised statute provides that the insurer’s liability for policy limits is limited to situations where the total loss was caused by a covered peril, and cases in which the covered peril would, by itself, have been sufficient to create a constructive total loss. The new valued policy law is not without potential issues, as interpretation of the terms “amount of loss” and “peril” could be the source of future litigation.

Louisiana and Mississippi have valued policy statutes similar to Florida’s, but neither state has interpreted the statute in conjunction with an anti-concurrent cause clause. The Texas valued policy statute applies only in the event of a total loss by fire. Alabama has no valued policy statute.

It appears that the wind versus flood debate will continue to make headlines in the months to follow. The Mississippi Attorney General Jim Hood filed a civil action against the insurance industry seeking to declare the insurance contract provisions void and unenforceable, for public policy reasons. Commissioner Wooley, in Louisiana, has stated that “I think it would be dangerous to unilaterally expand coverage where there wasn’t any coverage,” said Wooley, noting that “companies didn’t receive premium for this and therefore didn’t reserve for this.” Wooley suggested that a federal answer to the problem might be favorable, such as a victim’s compensation fund similar to that put in place after the September 11, 2001 attacks.

Legislation has also been proposing allowing property owners who were without flood insurance during Hurricane Katrina to receive retroactive compensation through the National Flood Insurance Program. The proposed bill would allow property owners who did not live in floodplains, but sustained flood damage caused by the hurricanes, to be covered under the National Flood Insurance Program in exchange for the equivalent of 10 years of flood insurance premiums, with a five percent penalty. The bill would set premiums at a rate equal to the prevailing premium charged in the area prior to Hurricane Katrina. The proposed legislation would also permit property owners to deduct premium payments and the penalty from the flood insurance claim payment.

It’s too soon to tell where the wind versus flood debate will lead. What is certain is that the debate will be contentious as property owners begin to rebuild on the storm ravaged Gulf Coast. In Texas, litigation involving the scope and application of additional living expenses has already begun.