U.S. Supreme Court Declines New Orleans Levee Flood Damages Case

February 20, 2008

The U.S. Supreme Court has declined to hear a case brought by New Orleans property owners who argued their Hurricane Katrina flood damage should be covered despite insurance policy exclusions because the flooding was caused by the failure of the city's man-made levees.

The high court dismissal of the case without comment means a Fifth Circuit Court of Appeals decision in favor of insurance carriers and their exclusions stands for now, but does not mean litigation over the issue of coverage for flooding caused by breached levees is over.

The Fifth Circuit court ruling (In re Katrina Canal Breaches Litigation, No. 07-30119) found that private insurance policies of Travelers, Allstate, State Farm, Unitrin and other insurers excluded the flood damage caused by breached levees.

Plaintiffs in the case had contended that because their properties were flooded as a result of the levee breaches, a "man-made act," the flood exclusions in the policies did not apply. They argued that "the massive inundation of water into the city was the result of the negligent design, construction, and maintenance of the levees and that the policies' flood exclusions in this context are ambiguous because they do not clearly exclude coverage for an inundation of water induced by negligence."

However, the Fifth Circuit Court decision on Aug. 2, 2007 concluded that the exclusions did apply. The opinion written by Circuit Judge Carolyn King found "that even if the plaintiffs can prove that the levees were negligently designed, constructed, or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs' policies unambiguously preclude their recovery."

The Fifth Circuit got involved after the U.S. District Court for the Eastern District of Louisiana ruled in November 2006 that ambiguous language in the water damage exclusions in some insurance policies left open the possibility that the plaintiffs could have standing to recover losses under their policies. Judge Duval refused insurers attempts to have the case dismissed. Instead, he sent the case to the Fifth Circuit Court for a review.

The inaction by the U.S. Supreme Court means attention will now turn to the Louisiana Supreme Court, which is scheduled to hear a related case on Feb. 26.

One of the plaintiffs in the appeal to the U.S. Supreme Court, Xavier University, stressed that the U.S. Supreme Court refused to hear a narrow legal issue and did not rule on the substantive claims of plaintiffs.

In a statement, Xavier University in Louisiana said it had asked the Supreme Court to consider whether it was error for the U.S. Fifth Circuit to refuse to certify an issue of Louisiana insurance law to the Louisiana Supreme Court because the Fifth Circuit had recently certified insurance issues to the Texas and Mississippi Supreme Courts.

The Louisiana issue is to be decided after the Louisiana Supreme Court hears arguments on Feb. 26 in the case Sher v. Lafayette Insurance Co., according to Xavier lawyers.

"The U.S. Supreme Court merely declined to hear the issue," the university's statement continued. "The United States Supreme Court did not consider any substantive issues and particularly did not consider whether the damages Xavier and others sustained after the levee breaches are covered by insurance. The Sher case, which was tried to a jury last March, addresses the same issue that the federal courts have thus far dealt with. The Louisiana Supreme Court will hear the issue of whether insurance wording excluding 'water' is applicable to the levee breaches, in addition to Lafayette's effort to overturn a jury verdict of bad faith in its handling of Mr. Sher's claim. The determination of these issues in the Sher case will be applicable to Xavier's claims."

The final ruling could affect thousands of property owners in the New Orleans area and an estimated $1 billion in insurance payouts.