A Louisiana federal court judge erred in ruling that a standard insurance policy exclusion for water and flooding damage did not apply where levee breaches from Hurricane Katrina were involved, insurance trade groups said in papers filed with an appeals court.

In an amicus brief submitted to the Fifth Circuit Court of Appeals in New Orleans, insurance industry groups argued that the lower court failed to apply the "plain language" of the water exclusion developed by the Insurance Services Office and used in insurance contracts.

New Orleans U.S. District Court Judge Stanwood R. Duval ruled last year that language in policies issued by ISO, Allstate and other carriers does not "exclude water damage caused by negligent or intentional acts of man. It does not address the ambiguity of the term 'flood' and the fact that all of the listed 'causes' appear to be the result of natural occurrences, not the monumental civil engineering debacle that is alleged by plaintiffs."

Judge Duval's ruling did not extend to more detailed exclusionary language in policies issued by State Farm. "The State Farm policy does precisely what the ISO Water Exclusion Policy fails to do," he wrote.

The insurance groups said in their brief, "Extensive case law and commentary indicate that the ISO water damage exclusion bars coverage in the event of a flood such as the inundation of New Orleans in the wake of Hurricane Katrina."

The filing was made by the Wiley Rein law firm on behalf of the American Insurance Association, National Association of Mutual Insurance Companies, Property and Casualty Insurers Association of America, and the Reinsurance Association of America.

Specifically, the groups argued that the ISO exclusion does not take the cause of the flood, in this case the breach of levees, into account, but instead excludes coverage for flooding regardless of whether it occurred naturally or due to a problem with man-made structures.

"The natural vs. man-made distinction drawn by the lower court is not only unfounded in the policy language, it is also at odds with the case law on point," the groups argued.

"Numerous cases across the country have enforced a water damage exclusion even though negligence or other man-made causes may have contributed to the 'flood,'" according to the brief.

Additionally, the groups argued that the lower court failed to take into account the role the National Flood Insurance Program plays in protecting homeowners in the event of a flood.

By the time of the NFIP's enactment, the groups note that the private market had largely dried up for flood coverage. "In short, the NFIP was created precisely because typical homeowners policies do not cover flood losses in the wake of catastrophic events such as hurricanes," the brief contends.

The NFIP and Congress have both recognized that the breaching of levees in New Orleans falls under the category of flooding, the groups noted, because the NFIP has paid claims for the resulting damage using money appropriated by lawmakers for that purpose.

"The appropriation of funds for, and payment of, these claims demonstrates that the flood coverage provided by NFIP policies extended to the inundation of New Orleans--an event that plainly fell within the definition of 'flood,'" the groups said.

Finally, they argued that the court must uphold the flood exclusion under contract law or risk unsettling the entire insurance system.

"Judicial fidelity to the even-handed application of contract terms is critical to retain the confidence of the business community at large that the bargain made will be the bargain enforced," said the brief.

"Here the lower court's erroneous expansion of coverage to encompass certain flood losses was both huge and unanticipated. Unless reversed, it could severely distort the insurance system, adversely affecting both the price and availability of insurance for millions of Americans," the groups added.