Today, the Fifth Circuit Court of Appeals is hearing oral argument on the appeal of a Katrina-related coverage decision by U.S. District Court Judge Stanwood R. Duval, Jr.,  issued in November 2006.  In re Katrina Canal Breaches Consolidated Litigation, 2006 WL 3421012 (E.D. La. Nov. 27, 2006).

In the November decision, Judge Duval ruled on various substantive motions brought by several insurers.  He held that a flood exclusion contained in several insurance policies (which used the standard ISO form) that did not define the term “flood” could reasonably be interpreted to cover only water damage caused by a natural event, but not a man-made event such as a breach of levees caused by negligence.  Therefore, if the plaintiff policyholders could demonstrate that the water that flooded New Orleans after Katrina resulted from negligent design, construction or maintenance of the levees, the flood exclusion would not be triggered.

However, the judge held that the flood exclusion in State Farm’s policies, which expressly excludes flood damage from coverage regardless of the cause of the excluded event, would serve to exclude coverage for both damage caused by both natural and man-made floods.  Similarly, he held that floods, regardless of cause, are excluded under policies issued by Hartford Insurance Company that define the term “flood” to include the release of water held by a levee or flood control device.

In the appeal, policyholders are arguing that Judge Duval properly concluded that the definition of “flood” in policies is limited to “naturally occurring events.”  The insurers disagree, arguing that their homeowner policies do not cover damage from any type of flooding, regardless of whether the levees broke from natural or man-made causes.  Some of the insurers have countered with arguments that insurers should not be punished for failing to define common terms like “flood” and that a pro-policyholder decision would lead to longer policies that are even less comprehensible to most policyholders than their current policies.