Fifth Circuit Rejects Finding Of Coverage For Hurricane Katrina Losses Where Flooding Was Allegedly Caused By Negligence
October, 2007
The United States Court of Appeals for the Fifth Circuit holds that flood exclusions in property insurance policies preclude coverage for flood damage occurring after allegedly negligently designed/constructed/maintained levees in New Orleans ruptured in the wake of Hurricane Katrina, allowing floodwaters to inundate the city. In re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007).
Facts
On August 29, 2005, Hurricane Katrina struck along the coast of the Gulf of Mexico, devastating portions of Louisiana and Mississippi. In New Orleans, significant damage occurred when levees along three major canals ruptured, permitting water from the flooded canals to inundate the city. At one point in Katrina's aftermath, approximately eighty percent of the city was submerged in water.
The four cases involved in this appeal (Vanderbrook, Xavier, Chehardy and Humphreys) are a few of the more than forty currently pending Katrina-related cases consolidated for pretrial purposes in the Eastern District of Louisiana. Each plaintiff is a policyholder with homeowners, renters, or commercial-property insurance whose property was damaged during the New Orleans flooding. Each sought recovery for their losses despite various flood exclusions in their policies. The insureds argued that the massive inundation of water into the city was the result of the negligent design, construction, and maintenance of the levees and that the policies' flood exclusions are ambiguous in this context because they do not clearly exclude coverage for an inundation of water induced by negligence; thus, the policies must be construed to cover their losses.
The district court found the term "flood" as used in most of the subject flood exclusions ambiguous as it could refer to floods from natural causes only or floods from both natural and negligent or intentional acts. Construing the ambiguous term in the insured's favor, the district court concluded that most of the policies covered water damage caused by a ruptured levee where the rupture was due to the levee's inadequate design, construction or maintenance. However, the flood exclusions in certain State Farm policies contained a "lead in" clause stating that flood losses were not insured regardless of whether the flood event arises from natural or external forces. The district court found these exclusions clearly and unambiguously excluded coverage for the losses at issue.
The insurers appealed the district court's order concluding that the water damage resulting from the levee breaches was not excluded by their policies' flood exclusions. The Chehardy and Vanderbrook plaintiffs cross-appealed the district court's ruling in favor of State Farm.
Analysis
Applying Louisiana law, the Fifth Circuit affirmed in part, vacated in part and remanded, holding that (1) the flood exclusions barred coverage; and (2) the efficient proximate cause rule does not apply.
The Flood Exclusions Bar Coverage
The Louisiana Supreme Court has not interpreted a flood exclusion in the context of breached levees. The Fifth Circuit was accordingly required under Erie v. Tompkins to determine, in its best judgment, how that court would resolve the issue if presented with this case.
In so doing, the Fifth Circuit rejected plaintiffs' myriad contentions for coverage as unsupported by Louisiana law and/or inapplicable to the instant facts. The court's analysis focused on whether the term "flood", which is not defined in the policies, is ambiguous; and whether the flood exclusions are ambiguous because the insurers could have more explicitly excluded floods caused in part by human negligence, as other policies do. The court answered both questions in the negative.
To ascertain the "generally prevailing meaning" of the term "flood," the Court looked to dictionary definitions and treatises, which included the following definitions and descriptions:
[a]n overflowing or irruption of a great body of water over land not usually submerged; an inundation, a deluge
[a] profuse and violent outpouring of water; a swollen stream, a torrent; a violent downpour of rain, threatening an inundation
a rising and overflowing of a body of water that covers land not usu[ally] under water ... [;] an outpouring of considerable extent ... [;] a great downpour
An inundation of water over land not usually covered by it. Water which inundates area of surface of earth where it ordinarily would not be expected to be
An overflowing of water onto land that is normally dry
[I]nundation of land by the rise and overflow of a body of water. Floods occur most commonly when water from heavy rainfall, from melting ice and snow, or from a combination of these exceeds the carrying capacity of the river system, lake, or ocean into which it runs ....
... Less predictable are floods resulting from ... the bursting of a natural or man-made dam or levee
the overflow of some body of water that inundates land not usually covered with water
The Fifth Circuit also examined case law, noting that courts outside Louisiana that have considered whether flood exclusions similar to those involved here unambiguously preclude coverage for water damage resulting from the failure of a structure such as a dam or dike have uniformly held that the inundation of water falls within the language of the exclusion.
In light of these definitions and decisions, the Fifth Circuit concluded that the various flood exclusions at issue are all unambiguous in the context of this case and that what occurred here fits squarely within the generally prevailing meaning of the term "flood":
When a body of water overflows its normal boundaries and inundates an area of land that is normally dry, the event is a flood. This is precisely what occurred in New Orleans in the aftermath of Hurricane Katrina. Three watercourses-the 17th Street, Industrial, and London Avenue Canals-overflowed their normal channels, and the levees built alongside the canals to hold back their floodwaters failed to do so. As a result, an enormous volume of water inundated the city. In common parlance, this event is known as a flood.
The Court further noted that a levee is a flood-control structure; its very purpose is to prevent floodwaters from overflowing onto certain land areas, i.e., to prevent floods from becoming more widespread. Whenever a levee ruptures and fails to hold back floodwaters, the result is a more widespread flood. "That 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."
The Court expressly rejected plaintiffs' attempts to characterize the Katrina flooding in New Orleans as non-natural or to limit the subject flood exclusions to only "natural" floods:
when the inundation results from the overflow of a body of water, whether natural or artificial, the event is a flood.... Any time a flooded watercourse encounters a man-made levee, a non-natural component is injected into the flood, but that does not cause the floodwaters to cease being floodwaters. The distinction between natural and non-natural causes in this context would therefore lead to absurd results and would essentially eviscerate flood exclusions whenever a levee is involved. Consequently, we decline to follow this approach in this case.
In sum, the inundation of water into the city which damaged plaintiffs' property was a "flood" within that term's generally prevailing meaning as used in common parlance, and as such is unambiguously excluded from coverage by the flood exclusions in plaintiffs' all-risk policies.
Efficient Proximate Cause Does Not Apply
Many of the subject policies exclude "loss caused directly or indirectly by" flood "regardless of any other cause or event contributing concurrently or in any sequence to the loss." This language, which the district court referred to as an anti-concurrent-causation clause, has been recognized as demonstrating an insurer's intent to contract around the operation of the efficient proximate cause rule, which provides that where a loss is caused by a combination of a covered risk and an excluded risk, the loss is covered if the covered risk was the efficient proximate cause of the loss.
The district court concluded that the anti-concurrent-causation clauses are inapplicable here because there were not two separate causes of the plaintiffs' damage. This case does not present a combination of forces that caused damage and thus is not analogous to cases where Hurricane Katrina may have damaged property through both wind and water. Here the "cause" is the flood, meaning that the alleged negligent design, construction, or maintenance of the levees and the resulting flood were not separate causes of the plaintiffs' losses.
The Fifth Circuit agreed with the district court, finding the efficient proximate cause doctrine inapplicable because there were not two or more distinct actions, events, or forces combined to create the loss: the only force that damaged the plaintiffs' properties was flood. To the extent that negligent design, construction, or maintenance of the levees contributed to the plaintiffs' losses, it was only one factor in bringing about the flood; the peril of negligence did not act, apart from flood, to bring about damage to the insureds' properties. To the extent plaintiffs attempt to recharacterize the cause of their losses by focusing on negligence as the cause rather than water damage, their argument fails. "An insured may not avoid a contractual exclusion merely by affixing an additional label or separate characterization to the act or event causing the loss." The Court accordingly rejected any attempt by plaintiffs to avoid operation of the flood exclusion by recharacterizing the flood as negligence; the sole cause of the losses for which they seek coverage in this litigation, flood, was excluded from coverage regardless of what factors contributed to its development.
Learning Point
Negligence which merely allows a non-covered peril such as flood to cause property damage, such as an improperly constructed or maintained levee, will not serve to convert the otherwise uncovered flood loss into a covered one.
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