April 19, 2010

The United Sates Court of Appeals, Fifth Circuit, discussed the constructive total loss doctrine in connection with a homeowner’s flood loss. This case is Monistere v. State Farm Fire and Casualty Company, 559 F.3d 390 (2009).

The homeowners brought an action against its flood insurer seeking to recover additional amounts under the flood insurance policy for loss sustained during Hurricane Katrina. After the hurricane damaged their house, the homeowners put in a claim and the insurer paid $133,212 for the loss. The Department of Emergency Management for Jefferson Parish, Louisiana, then issued a substantial damage determination letter on the house. Under this determination, the house would have to be rebuilt to a new height before any flood insurance could be obtained. It was determined that the estimated cost for demolishing the house and building a new one that met the flood requirements was $477,692. The homeowners sought more money from the insurer under coverage A of the policy to compensate for physical loss to the premises. State Farm refused and notified the homeowners that nothing more was owed under that coverage. A lawsuit followed.

The district court after hearing all the testimony entered judgment in favor of the homeowners. State Farm appealed.

The circuit court noted that the policy’s building limit of liability, also known as coverage A, was capped at $227,000 for direct physical loss; direct physical loss is defined as loss or damage to insured property directly caused by a flood. The court also noted that the district court utilized the constructive total loss doctrine in determining the homeowners’ direct physical loss. This doctrine states that a constructive total loss occurs when a building, although still standing, is damaged to the extent that ordinances or regulations in effect at the time of the damage actually prohibit or prevent the building’s repair, such that the building has to be demolished. The district court believed that requiring the homeowners to elevate the house plus the cost to repair it would have easily exceeded the market value and so, the homeowners effectively suffered a total loss.

The circuit court did not differ with the lower court that the house was a total loss. However, the appeals court found that this total loss was due to the costs that local regulatory authorities imposed for rebuilding. Amounts paid were governed by federal regulations that set compensable payable damage under the flood policy, and the regulations did not include the cost of compliance with local laws. Therefore, since a policy of insurance issued pursuant to a federal program must be strictly construed and enforced, the homeowners were not entitled to additional payments under the flood policy. The judgment of the district court was reversed.

Editor’s Note: The loss suffered by the homeowners was not due to direct physical loss by flood according to the circuit court. And the court strictly followed the regulations issued by the federal government as to what amounts were available under the flood program for direct physical loss as opposed to what could be paid for the costs of regulatory compliance. Even though the house was a constructive total loss, that total loss was not caused by the flood and an attempt to balance equities was not, according to the circuit court, the proper jurisdiction for the courts.

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