The decision was widely greeted by the US insurance market with a number of actions set to be filed on the outcome of the trial.

Insurers in the US have hailed a state court decision which sided with the insurer in a key debate over the “wind versus water” hurricane damage debate. But while they have won the battle they may well lose the war against federal legislators.

Mississippi court Judge L T Senter has upheld the exclusion for damage caused by water and water-borne materials in an insurance contract in the Paul Leonard and Julie Leonard v. Nationwide Mutual case which has been seen at the litmus test for future claims arising from the 2005 hurricane season.

The issue hinged on the Leonard’s claims for damage arising from the hurricane and the resultant floods which had been caused by the extreme winds. Nationwide Mutual countered that the Leonard’s insurance policy covered damaged caused by windstorm and not the subsequent flood and water damage.

Under the terms of the original lawsuit the Leonards claimed against Nationwide, and their agent, who they claim had given them wrong advice on the type of policy they required. However a Federal court had earlier ruled that the personal claims against the agent, Jay Fletcher should be dismissed.

However the case against Nationwide proceeded.

The court heard that the insurer had paid the Leonards $1,660 for wind damage to their home that resulted from Hurricane Katrina in August 2005. However Nationwide said that the Leonards did not have flood cover and therefore they should not be liable for the estimated damage to the house which the Leonards had put at in excess of $130,000. The couple sued the insurer for $158,000 which they said was for the additional cost of the damage, the cost of the case and interest. They had claimed that Fletcher had told the couple they did not need flood insurance cover.

In his ruling Judge Senter decided that the insurer had met the required level of proof to show that the majority of the "damage to the Leonard's property was caused by water and water-borne materials within provision 1(b) of the Property Exclusions section of the Nationwide policy."

However he decided that while the majority of the damage had been caused by flood water, there had been additional windstorm damage over and above that which had already been identified and reimbursed by Nationwide. He ordered the insurer to pay the Leonards a further $1,200.

The decision was widely greeted by the US insurance market with a number of actions set to be filed on the outcome of the trial.

Nationwide issued its own statement after the decision in which it urged policyholders to check the terms of their cover.

It said: “We are very pleased that the court ruled in our favor and upheld the long-standing flood exclusion language which is foundational to traditional homeowner policies across the country. We are also pleased the court found no misrepresentation on the agent's part. The facts clearly demonstrated the damage the Leonards' home incurred was overwhelmingly due to floodwaters. This is clearly the type of damage covered by flood insurance provided through the National Flood Insurance Program.

“The court found that it would be inappropriate to re-write our contract after-the-fact.

“While it is unfortunate that the Leonards did not choose to purchase flood coverage, insurance carriers have an obligation on behalf of all policyholders to adjust claims based on factual evidence that supports coverage payments. We will continue to adjust claims on a case-by-case basis.

“This ruling underscores just how important it is for all policyholders to carefully read and understand the terms of the coverage they purchase.”

The President and chief executive of the Property Casualty Insurers Association of America (PCI) said the ruling was a blow to those who were set to launch similar actions.

“In the insurance coverage debate over wind vs. water, Judge Senter’s ruling has taken much of the wind, literally and figuratively out of the plaintiff attorney’s argument,” he said. “Judge Senter has made it very clear that the flood exclusion applies to storm surge.”

The PCI added: “The damage resulting from Hurricane Katrina was unprecedented and insurers have great empathy for all the victims of this storm. In responding to this natural disaster, insurers have paid out tens of billions of dollars to policyholders in the Gulf and settled well over 90 percent of the claims. However, insurers can not pay claims for coverage the policyholder did not purchase.

“This ruling is important for several reasons. It upholds the integrity of contracts and demonstrates that, notwithstanding the problems and emotions confronting this obviously devastated region, contracts can still get a fair reading in the courts. The ruling allows insurers and other businesses in the state to operate without a lingering cloud of uncertainty about the validity of their contracts, which will help energize both the insurance market and the economy of Mississippi. It also reinforces the need for consumers to take proactive steps to prepare for disasters by making certain that their insurance policies are up to date and that they have the correct type of coverage in place – especially coverage for flood insurance, which is available from the National Flood Insurance Program.”

Cecil Pearce, vice president, American Insurance Association (AIA) Southeast Region said in a statement: "The Leonard v. Nationwide decision validates the sanctity not only of insurance contracts in Mississippi, but all legal contracts in the state. This is a significant step forward for insurers and others committed to rebuilding after Katrina.”

However the ruling has caused some angry debate on Capital Hill with Democrats in the House of Representative already publicly supporting moves which will change the country’s insurance laws to ensure companies offering hurricane cover cannot differentiate between the damage caused by wind or water in future claims.

Democratic leader in the House, Nancy Pelosi, said the campaign to change the current system would begin.

“Insurers are central to the efforts of survivors to rebuild their lives,” she told reporters. “Insurance policies should not make arbitrary distinctions between wind and water damage.”

This Special item appeared in issue 108 of JTW News - September 2006

Author: Jon Guy - JTW News