The money needed to rebuild Louisiana, Mississippi and Alabama will come from several sources--principally government, charity and insurance. The insurance industry has substantial experience handling property losses from hurricanes, but Katrina is like no other hurricane.

All hurricanes involve damage caused by wind and rain, but in Katrina's case, this was just the opening act. Many of the claims that are made for property damage will involve a confluence of some of the following additional factors: flood, looting, vandalism, pollution, fire (arson and other causes), power failure, governmental action, mold and further deterioration of property because it is inaccessible for weeks, if not months. The list could surely go on.

Katrina will also likely cause far more claims for business interruption than normally results from a hurricane--even a powerful one.

Given such a wide variety of causes of loss and that first-party property policies often significantly vary in their terms and conditions, it is difficult to describe a typical Katrina claim and what the insurance response might be. What's more, first-party property claims in general are often complicated by the need to determine the proximate cause of a loss.

Some of the causes of loss that will likely be at issue in Katrina claims are excluded by first-party property policies. For this reason, as claims evolve over the next few weeks and months, expect much discussion in coverage circles of the concepts of "efficient proximate cause" and "anti-concurrent causation" lead-in clauses.

The doctrine of efficient proximate cause provides that if a covered peril causes an excluded peril, coverage is available even for the damage caused by the excluded peril.

On the other hand, an anti-concurrent causation lead-in clause is designed to override efficient proximate cause by precluding coverage for a certain peril, even if caused by an otherwise covered peril.

For example, many standard forms contain the following anti-concurrent causation lead-in clause to many of its exclusions--including those for flood, power failure, earth sinking and mold: "We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss."

There will no doubt be calls for insurers to simply disregard the terms and conditions of their policies and start writing checks.

The problem with insurers ignoring the terms and conditions of their policies is that they have customers in 47 other states to whom they owe an obligation of financial preparedness for their potential losses. Not to mention that the 2005 hurricane season does not end until November.

While many property damage claims from Hurricane Katrina are going to be as unique as the storm's tales of survival, some insight into how these claims may be handled can be gained by examining court decisions that have addressed coverage for past hurricanes and floods--albeit without Katrina's many complicating factors.

One theme of these past cases--and one that will be prevalent in Katrina claims--is the interplay between damage caused by wind and wind-driven rain versus flooding. In some cases, this will determine the extent to which damage is covered or shared between private insurance and the National Flood Insurance Program.

In >Urrate v. Argonaut Great Central Insurance Company, the court reviewed a claim involving damage to Brunings Seafood Restaurant by Hurricane Georges in 1998. The restaurant was doing business in a wood-frame building on pilings over Lake Pontchartrain in Jefferson Parrish, La.

The restaurant was severely damaged, with part of the building swept away. Brunings was insured by a flood policy--which covered damages from flooding and tidal waves--and a property insurance policy issued by Argonaut, which excluded such damage.

Following a bench trial, the judge concluded that the glass damage, in excess of $35,000, was caused solely by wind and covered only by the Argonaut policy.

The judge also determined that the restaurant suffered a business loss for the last quarter of 1998 of $80,000 and attributed 25 percent of that loss to wind damage. The judge attributed 15 percent of the 1999 business loss to wind damage. The Court of Appeal of Louisiana affirmed the decision, demonstrating that allocation of property damage and lost business income between that wind and flood is fact-intensive.

The ultimate decision was far from a scientific certainty. And consider how long the process took--nearly six years from the time of the hurricane (or seven-and-a-half years when you consider that the court's decision was appealed--by both sides--to the Louisiana Supreme Court, which denied both.)

In Kish. v. The Insurance Company of North America, the Supreme Court of Washington examined claims by several insureds for damage to their homes when flood waters overtopped protective dikes surrounding the Stanwood sewage lagoon in Stanwood, Wash. Each policy contained an exclusion for loss resulting directly or indirectly from water damage--which was defined, in part, to include flood and overflow of a body of water.

The coverage case went to trial on the issue of the "efficient proximate cause" of the damage to the plaintiffs' houses, which the jury concluded was "record-breaking rainfall in the Stillaguamish basin." The Washington high court stated: "The efficient proximate cause rule applies only where two or more independent forces operate to cause the loss."

In holding that rain and flood are not distinct perils, the Kish court said: "We believe the average purchaser of insurance would expect that the term 'flood' would encompass rain-induced flood. Rain is a well-recognized and common part of a flood." The Kish court also observed: "[A]ny application of the efficient proximate cause to the facts of this case would make it difficult for any insurer to ever exclude flood damage without excluding all rain damage. This would be an unfortunate occurrence for insureds because that could result in less coverage for insureds in this state."

Another case--Southern Hotels Limited Partnership v. Lloyd's Underwriters at London Companies, et al.--dealt with damage to a hotel that was insured under a policy covering wind and water damage. Flood damage was subject to a $200,000 deductible (the hotel was insured under a NFIP policy for $200,000).

The court noted that "the plaintiff (Southern Hotels) has the burden of proving both the damage and the causal connection between the damage and the covered cause of loss. This proof must be shown by a reasonable preponderance of the evidence, and with some detail and specificity. A mere possibility of causation and damage are insufficient."

In a Mississippi case, Ludlow Corp. v. Arkwright-Boston Manufacturers Mutual Insurance Company, the insured claimed losses of approximately $2 million. The insurer argued that the damage was not covered because it resulted from flood, tidal waves, wave wash, or water damage to property situated below the flooded high-water mark. The jury returned a verdict in the amount of $108,000.

While the issues in Ludlow were principally related to evidentiary rulings by the trial court, the Mississippi Supreme Court held that the inadequacy of the verdict, from the insured's perspective, was a direct result of the failure of the proof to establish an insured loss to the property.

As illustrated, when courts are required to allocate between damage caused by flood and by wind and wind-driven rain, the decisions are highly fact-intensive, are admittedly non-scientific, and sometimes take several years from the time that it stopped raining.

Coincidentally, less than one month before Katrina hit, the Louisiana Court of Appeal denied rehearing of its June 2005 decision in Jean Boudreaux and the Victims of the Flood on April 6, 1983 on the Tangipahoa River v. The State of Louisiana, Department of Transportation, et al., in which it addressed claims for damages brought against the State of Louisiana after a 1983 flood.

It was alleged that the state designed and built the Interstate 12 Bridge over the Tangipahoa River in such a negligent and improper manner that it disrupted the natural flood plain, causing the river's rising waters to flood the plaintiffs' properties. Twenty-two years after the flood, the Louisiana Court of Appeal issued a decision addressing and upholding various property damage determinations made by the trial court.

Needless to say, somebody, somewhere, is already thinking about potential litigation over the breaches in the New Orleans levee system.

A fuller version of this article and additional information on past cases are available at "FC&S Online," a product of the National Underwriter Company, parent of this magazine. FC&S subscriptions may be obtained at http://www.nationalunderwriter.com/nucatalog.

Randy J. Maniloff is an attorney in the Business Insurance Practice Group at White and Williams, LLP in Philadelphia.

Caption for photo of Katrina flood damage:

With many policies excluding or limiting flood coverage, expect court battles lasting months or even years over "efficient proximate cause" and "anti-concurrent causation" lead-in clauses.

Quotebox (if we get a mug):

"There will no doubt be calls for insurers to simply disregard the terms and conditions of their policies and start writing checks."

Randy J. Maniloff