Insurance Law

Reaction to Sher case

By David Rossmiller

I happened to be up late Monday night reading the Court of Appeal's decision, so it was fresh on my mind when the Louisiana Supreme Court handed down its decision Tuesday morning.  Here's a copy of the Supreme Court's decision, and here's a copy of the Court of Appeal decision.

Now, take a look, at the flood exclusion in the policy, it's the standard form ISO version: 

1.  We will not pay for loss or damage caused directly or indirectly by any of the following.  Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss:

g.  Water.  Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, whether driven by wind or not . . . .

OK, now let's read what the Court of Appeal, Fourth Circuit, wrote in concluding this language was ambiguous.

A review of the Policy reveals that the parties intended to cover and include all risks that were not specifically excluded or limited.  Lafayette failed to specifically exclude all floods because of the ambiguity contained within the flood exclusion.  While the Policy states that it does not cover damage caused by a "flood," it also states that it does not cover "waves, tides, tidal waves," and the "overflow of any body of water  . . . whether driven by the [sic] wind or not."  This exclusion includes "flood," but then continues to list specific natural disasters that cause inundations of water, commonly labeled as "floods."  For example, a varying cause of a flood can be man-made or natural, as documented in La. R.S. 29:762, which states that a "flood" is a "natural disaster."    

A contract must be interpreted to achieve its purpose.  La. C.C. art. 2054. The purpose of the policy was to provide insurance coverage for all risks not specifically excluded or limited. There, in case of any doubt, when interpreting a contract of a standard form, the contract must be interpreted against Lafayette as the issuer of the Policy.

As such, after a de novo review, we make the legal determination that the Policy with Lafayette is ambiguous as it relates to the water exclusion because it is unclear what types of floods are excluded.  Therefore, strictly construed against Lafayette, Mr. Sher is covered for the damage to the basement level of the Building.   

You might not believe me, so you can go check it out for yourself on pages 7 and 8 of the Court of Appeal's decision, but that is the extent of the analysis of the ambiguity of the flood exclusion. I don't care where your ideology is in this thing, can anyone honestly say they think this reasoning is strong analysis, something you'd be really proud to stand behind?   I mean, they wanted to throw this gloss of man-caused versus natural flood over the decision, but then they didn't even care enough to bother to do a decent analysis. I said the same thing when the decision came out. 

For example, who wants to defend this statement? 

This exclusion includes "flood," but then continues to list specific natural disasters that cause inundations of water, commonly labeled as "floods."    

As a matter of analysis, does that make any sense at all? No, it doesn't.  The court made no effort whatsoever to show how the words in the exclusion were incompatible with each other or how that made the word "flood" ambiguous.

As the state Supreme Court decision points out, it is "more result determinative than legally oriented," and would lead to absurd results, such as someone who is within a flood control levee being covered, but someone outside the levee structure being uncovered. Also, contrary to what the Court of Appeal said, of the words in the exclusion, only one, tides, is exclusively a "natural" event, and the flood was not caused by man, it was caused by Hurricane Katrina.  This is a good point, one that others have made: if you say a flood is man-caused because man was involved somewhere in the chain of events, all floods are man-caused and nothing is excluded. 

I've heard this decision came as a surprise to some, who expected the court to go strongly the other way.  These people, I would have to say, have waved bye-bye to reality and have given in to the attractions of ideology, wishful thinking, day dreaming and homerism.   Flood exclusions are almost always upheld, certainly as applied to infrequent, high-severity events like hurricane flooding.  This man-caused vs. natural distinction is more designed for dealing with stuff like a water main bursting, and is difficult to apply in these circumstances -- and the Court of Appeal did a poor job of doing so.  For the Supreme Court to go against the mainstream of judicial interpretation and to utterly disrupt insurance markets in the state of Louisiana, sending prices skyrocketing, would have been the really surprising development. 

Full post as published by Insurance Coverage Law Blog on April 09, 2008 (boomark / email).