Insurance Ruling A Plus For Industry

By MICHAEL KUNZELMAN The Associated Press

Published: Aug 16, 2006

GULFPORT, MISS. - A federal judge ruled Tuesday that an insurance company's policies do not cover damage from floodwaters or storm surge in a decision that could affect hundreds of upcoming cases related to property damage from Hurricane Katrina.

U.S. District Judge L.T. Senter Jr. ruled that a Mississippi Gulf Coast couple cannot collect damages from storm surge caused by Katrina because Nationwide Mutual Insurance Co.'s policies do not cover wind-driven water damage.

Senter said Paul and Julie Leonard of Pascagoula could be compensated for damage that they could prove was caused by high winds, however.

"Almost all the damage to the Leonard residence is attributable to the incursion of water," Senter wrote in the 13-page decision.

Insurers already have paid $17.6 billion for damage to homes from Katrina that was attributed to wind only.

But this was a victory for the companies because they could have been forced to pay out untold billions more if they had been required to cover damage from flooding caused by the storm.

Several hundred thousand homes were damaged or destroyed by Katrina.

Silver Lining For Storm Victims

It was not a total victory, however. The judge rejected the insurer's attempts to cancel coverage for wind damage when it occurred in combination with the flooding.

That aspect of his decision, in the first trial over disputed claims of damage from the hurricane, favored storm victims and could cost the insurers hundreds of millions of dollars.

Now homeowners whose claims have been denied may have the opportunity to present proof in court that at least some of the damage resulted from wind - which is the main protection provided by home insurance policies in hurricanes.

For the Leonards, the ruling means that they will receive about $3,000 to cover damage to their home, rather than the more than $130,000 they were seeking.

But their lawyer, Richard Scruggs, said the ruling was "going to open the door for recovery for thousands of Mississippi homeowners."

Lawyers for the insurers and the plaintiffs saw good news in the decision.

"We're gratified that the major provisions of the standard homeowners insurance policy were upheld," said Robert Hartwig, chief economist for the Insurance Information Institute, a trade group in New York.

Hartwig said the issue of paying for combined wind and water damage "will probably be the subject of further judicial review."

Scruggs said he disagreed with the decision that exempted insurers from flood coverage in general. But he said the ruling against the insurers had "so much upside for the homeowners on the Gulf of Mexico.

Homeowners and the insurance industry had watched the case closely as the first test of whether insurers are responsible for paying for damages caused by both wind and water.

The insurers had claimed their policies ruled out coverage for flooding.

Lawyers representing homeowners argued that in selling home insurance with many references to windstorms and hurricanes, the insurance companies led customers to believe that any hurricane damage - from wind or water - would be covered.

The ruling therefore upholds a longstanding practice of insurers of not covering flood damage, which typically is insured through the federal government.

Potentially Far-Reaching Impact

Senter's ruling could set a precedent for hundreds of other court challenges to the insurance industry for denying billions of dollars in claims after the Aug. 29 hurricane ravaged the coasts of Louisiana and Mississippi.

The ruling applied directly to Nationwide Mutual Insurance, which had been sued by the Leonards.

Senter presided over the trial as judge and jury. And he is presiding over nearly all of the hundreds of lawsuits pending in federal court in Gulfport over insurance claims from Katrina.

His ruling in the Nationwide case is expected to guide his handling of the other disputes. Hundreds of other cases are pending in state court.

"For other judges hearing these cases, this is obviously going to be the most important decision they look to," said Adam Scales, who teaches insurance law at the Washington and Lee University School of Law.

Randy Maniloff, a lawyer who represents insurance companies, said that while many would see the verdict as a victory for insurers, "Senter has also laid the ground work for homeowners to do very well in these cases."

Senter said Nationwide's home insurance policy was clear in its refusal to cover flood damage. But he said the section that asserted that Nationwide had no liability for either wind or water damage when they occur in combination or within a few hours of each other was ambiguous.

Information from The New York Times was used in this report.