Victims of Katrina Dealt A Final Blow

The United States Supreme Court has declined to hear an appeal by Katrina flood victims after the Court of Appeals for the Fifth Circuit ruled they had no coverage under their policies of insurance. The policyholders in Vanderbrook v. Unitrin Preferred Insurance Co. (In re Katrina Canal Breaches Litigation) sought recovery under their policies for damage arising from flooding caused by breaches or overtopping of levees during Hurricane Katrina.  Though the policies all expressly excluded losses caused by flood, the plaintiffs creatively argued that the flood exclusions did not apply because the levee breaches releasing the water were caused by the negligent design, construction or maintenance. The friendly district court had found the term “flood” ambiguous because it was not clear whether it referred to natural events or those caused by negligent or intentional acts. While this argument at first blush might seem a sure loser, courts have commonly found that the earth movement exclusion applied only to natural causes and not to manmade events.

The Fifth Circuit, however, found that the flood exclusions were unambiguous and, whether or not the negligent design, construction or maintenance of the levees contributed to their failure after Hurricane Katrina, the water inundation of New Orleans fit within the definition of “flood.”  In particular, the court rejected the argument that, in the context of the levee breaks, the policies’ flood exclusions do not unambiguously exclude coverage for loss caused by water inundation where the damage occurred in part because the levee was negligently designed.  The court noted that the plaintiffs’ approach “would lead to absurd results,” recognizing that “[a]ny 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 court thus upheld the application of commonly-used flood exclusions in homeowners and commercial insurance policies, meaning that, under the terms of these policies, there is no coverage for water damage resulting from the failure of the levees surrounding New Orleans after Hurricane Katrina, even if those levees never should have failed if they had been properly constructed.

The result is a sad end to the hopes of Katrina victims seeking indemnification under policies they thought provided coverage in the event of such a preventable disaster.

Leily Schoenhaus