On August 6, the Fifth Circuit Court of Appeals in New Orleans issued an important decision on the application of Louisiana’s Valued Policy Law (“VPL”) to Katrina losses by unanimously affirming a ruling in favor of insurers.  Chauvin v. State Farm Fire & Casualty Co., 2007 WL 2230724 (5th Cir. Aug. 6, 2007).

Louisiana’s VPL dates back to 1900.  It provides in relevant part:

        Under any fire insurance policy insuring inanimate, immovable property in this state, if the
         insurer places a valuation upon the covered property and uses such valuation for
        purposes of determining the premium charge to be made under the policy, in the case of 
        total loss the insurer shall compute and indemnify or compensate any covered loss of, or 
        damage to, such property which occurs during the term of the policy at such valuation 
        without deduction or offset, unless a different method is to be used in the computation of 

In Chauvin, the homeowners maintained that they were entitled to the face value of their policies under the VPL because their homes sustained some damage from wind, a covered peril, even though the remaining loss resulted from flooding, a non-covered peril.

In finding for the insurers, the Fifth Circuit determined the language of the VPL to be ambiguous.  The court next looked at the purpose behind the VPL.  The Fifth Circuit determined that the VPL only requires an insurer to pay the agreed face value of the property if the property is rendered a total loss from a covered peril.  In finding for the insurers, the court held:

        a finding that the statute requires insurers to pay the agreed face value of the property, 
        even if an excluded peril (flooding) causes the total loss, runs counter to the VPL’s effort 
        to link insurance recoveries to premiums paid.  Such an interpretation of the statute would 
        force the insurer to pay for damage resulting from a non-covered peril for which it did not 
        charge a premium.

This decision has significant implications for many of the remaining cases in Louisiana concerning Katrina-related damage.   We will continue to provide updates on these issues on InsureReinsure.com.