NORMAN and Genevieve Broussard are among the hundreds, maybe thousands, of people in coastal Mississippi who returned to their homes following Hurricane Katrina and found nothing but a foundation. When they filed a claim with their insurer, State Farm, they were told they were out of luck because the loss was caused by storm surge, an excluded peril.

The Broussards decided to get a lawyer and take the matter to court. Last month, Judge L.T. Senter Jr., who sits on the Federal District Court for Southern Mississippi, ruled for them big time. Not only did he issue a directed verdict against the carrier requiring it to pay the entire dwelling and contents loss, which came to $232,292, but he also allowed a jury that had been hearing the evidence to consider the Broussards' claim for punitive damages. Within hours, the jury awarded them $2.5 million.

State Farm is appealing. Meanwhile, it decided to settle a private lawsuit covering about 640 claims handled by big-time plaintiff attorney Richard "Dickie" Scruggs, and to reopen some 35,000 previously closed claims and attempt to settle them in a way that Judge Senter will find acceptable. He took a look at State Farm's first effort and essentially told the carrier to try again.

I guess we can say that the second shoe has dropped in Mississippi. The first fell back in August when Judge Senter, in Leonard v. Nationwide Mutual Insurance Co., threw out all but a small part of a $158,000 Katrina claim against the carrier. Many in the insurance industry praised the decision because it upheld the standard flood-insurance exclusion in homeowners policies. (It also contained a fascinating account of how a Nationwide agent narrowly escaped the cross hairs of an E&O claim.)

As it turns out, the far more significant part of Judge Senter's ruling was his finding that the "concurrent causation" wording in the Nationwide policy's property exclusion was ambiguous. As we all know, the legal definition of "ambiguous" is, "You've got coverage."

Concurrent causation provisions, broadly speaking, are intended to spare insurers the cost of covering a loss caused by an excluded peril (e.g., flood or storm surge) even if a covered peril (e.g., windstorm) contributes to it. But the way Judge Senter read the provisions in the Nationwide policy, they could prevent an insured from collecting for the loss of a roof that was blown away by a windstorm in which concurrent flooding left an inch of water on the floor.

After tossing out the concurrent causation language, Judge Senter said that to collect, the Leonards had to prove only that their house was hit by a covered peril--in this case a windstorm. After that, Nationwide had the burden of proving what damage was caused solely by flood or storm surge, which it wouldn't have to cover.

The circumstances of the Leonards' case helped hide the implications of Judge Senter's ruling for the insurance industry. The Leonards had no problem proving they were hit by a windstorm, but their house was more or less intact. Consequently, Nationwide had little difficulty showing that the great bulk of the damage resulted from the water that rose of a level of five feet in the first floor. Judge Senter awarded the Leonards $1,228 for a little wind damage, which was on top of $1,661 Nationwide already had paid the couple, and sent them on their way.

But when the Broussards' case arrived in front of Judge Senter, the true scope of his previous ruling became apparent. Once again, the insureds had no problem proving a windstorm hit the house; State Farm even stipulated to it. But when the burden of proof shifted to the insurer to show how much of the loss was attributable solely to an excluded peril, State Farm was in a bind. In fact, Judge Senter said the insurer failed to prove any was.

Now we come to the heart of the problem: the near impossibility of separating wind from water damage when a hurricane hits, particularly in coastal areas exposed to storm surge. When nothing is left but a slab, what can an adjuster do but throw up his hands?
The insurance industry's response to these bleak cases has been to use the flood insurance exclusion and concurrent causation to wall them off. Judge Senter has knocked the props out from under that defense, and unless an appeals court overrules him, the insurance industry has a problem.

Not that it didn't have a role in creating it. I put it to you: Is it really equitable for an insurer to collect wind-damage premiums for a house but pay nothing if hurricane winds first blow the house off its foundation and storm surge then wipes the site clean? Judge Senter obviously doesn't think it is, and it's hard not to have some sympathy for that point of view. To me, the situation cries out for some kind of good-faith compromise, which appears to be what Judge Senter is pushing for. In fact, he obviously let the jury whack State Farm for punitive damages over what he saw as its intransigence. As he noted in his opinion, State Farm had failed to make "any unconditional tender of policy benefits for the wind damage." Given the "undisputed fact" that the plaintiffs had sustained a windstorm loss, Judge Senter said, "State Farm was unreasonable in attempting to shift its burden of proof to the plaintiffs, and leaving the plaintiffs no alternative to seeking legal redress through this court."

So now it's negotiating time in the Deep South, and I say it's high time. I don't deny that we all have a tremendous problem--and by "we" I mean the government, private citizens and the insurance industry. What are we going to do about hurricanes in the Southeast, where development keeps expanding and states expect insurers to underwrite it at what they consider a reasonable cost? Right now, no one seems to have a good answer. But until we do, Judge Senter says a "fuggedaboutit" approach to the "slab" cases won't cut it.