A typical flood exclusion excludes loss to any property resulting “directly or indirectly from…flood, surface water, waves, tidal water, or overflow of any body of water, or spray from any of these, whether or not driven by wind.” Insurers argue that policies do not provide coverage for water damage resulting from events like levee breaches or storm surge, and that such damage is encompassed by the flood exclusion due to the breadth of its language.

The majority of homeowners' policies also contain ACC clauses that exclude coverage when an excluded cause of loss was a “but for” cause of the damage. The ACC clause has been the central issue in thousands of Katrina-related lawsuits, as policyholders contend that the ACC defeats reasonable expectations of coverage and is against public policy. Insurers, however, counter that they need the clause to protect themselves from being forced to pay for floods and other widespread calamities that are beyond their scope and that they never intended to cover.

Insurers Get the Nod

Many of the major wind-water cases have been determined in favor of the insurer, as courts have upheld both the flood exclusion and the ACC clause.

One of the first such post-Katrina decisions was Buente v. Allstate Property & Casualty Insurance Co., in which the policyholder, whose house was damaged mainly due to “tidal” water from the Mississippi Sound, argued that the damage should be covered because it was “storm surge,” which was not specifically excluded. A federal district court rejected that argument, holding that the flood exclusion was clear and unambiguous and that “storm surge” fell within the policy definition of flood. Thus, the exclusion applied and barred coverage for the damage to the property caused by tidal water.

Another major case was In re Katrina Canal Breaches Litigation, at the center of which case was whether the negligence in the design and construction of the levees that allowed water to escape should be considered the operative event for insurance purposes, such that water damage resulting from it could not be said to have arisen from a “flood.”

The Fifth Circuit Court of Appeals looked to dictionary definitions of the term “flood” to conclude that it included a flood resulting from a levee breach. According to the court, water escaping through the levee's breach was still floodwater and the result a flood, and the levee's failure due to negligent design, construction, or maintenance did not change that. The court ruled that the policies' flood exclusions unambiguously precluded recovery for damages caused by breach of the levees, and it explicitly rejected the policyholders' arguments that there should be a distinction between natural and unnatural causes of flood regarding applicability of the flood exclusion.

In the seminal Leonard v. Nationwide Mutual Insurance, the Fifth Circuit ruled in Aug. 2007 that most of the damage to policyholders' property was not the result of covered wind damage, and that the ACC clause unambiguously excluded coverage for water damage even if another peril contributed concurrently or in any sequence to cause the loss. Thus, the only damage covered under the policy was damage caused exclusively by wind.

Upon finding that the ACC clause was unambiguous, the court held that the policyholders would prevail only if they could demonstrate that the clause itself was prohibited by Mississippi case law, statute, or public policy. The court found that the clause was not prohibited by any of the three.

The court also rejected the argument that the water damage was caused by a “storm surge” rather than by the excluded peril of flooding. In rejecting this argument, the court cited In Re Katrina Canal Breaches Litigation, which addressed the meaning of “flood.”

In the very recent Tuepker v. State Farm, the Fifth Circuit held that the insurer's ACC clause was unambiguous and should be enforced under Mississippi law. In relying on its decision in Leonard, the court explained that the ACC clearly stated that “excluded losses … will not be covered even if a non-excluded event or peril acts 'concurrently or in any sequence' with the excluded event to cause the loss in question.”

The court reversed that portion of the lower court's decision that found the ACC clause to be invalid to the extent that it conflicted with the efficient proximate cause doctrine. Again relying on Leonard, the court determined that the ACC clause circumvented the efficient proximate cause doctrine. Under the efficient proximate cause doctrine, when a loss is caused by both a covered and non-covered peril, if the covered risk “proximately caused the loss,” the loss would be fully covered.

The court also upheld the lower court's decision that the insurer's flood exclusion unambiguously excluded coverage for damage caused by storm surge.

But just when there seems to be a pattern, such that courts are becoming less divided and will consistently allow insurers to exclude coverage for flooding under the water damage exclusion and the ACC clause, an opinion like Sher v. Lafayette is released, serving to disrupt our evolving notions of predictability regarding how to answer the wind-water question.

In the Nov. 2007 decision, the Fourth Circuit Court of Appeals concluded that the insurer's homeowners' policies failed to exclude all forms of flooding because its language was ambiguous and “failed to specifically exclude all floods because of the ambiguity contained within the water exclusion.”

The majority ruled in favor of the policyholder, who blamed much of the damage to his apartment complex on the water that inundated New Orleans when levees failed in the aftermath of Katrina.

The Fourth Circuit's ruling in Sher differed from any of the recent decisions of the U.S. Fifth Circuit regarding the ambiguity of flood exclusions, and the court did not even touch on the policy's ACC clause.

So perhaps now the only thing certain about the wind-water issue is that it isn't going away any time soon, as questions concerning the interpretation of the flood exclusion and the ACC clause continue to be asked and courts continue to try to find a consistent theory to allocate losses between policyholders and insurers in Katrina-impacted regions.