A Federal judge in the Eastern District of Louisiana held that cases against certain insurers could proceed to trial for whether the plaintiffs' homeowners insurers are responsible for flooding resulting from the New Orleans levee breaches. A basic issue is what the policies' flood exclusion actually excludes. The court made a distinction between flooding caused by a natural event (hurricane--presumably covered) and one from a man made event (levee breach --not covered).
David Rossmiller makes interesting points. In addition to commenting on the length of the 85 page opinion, he notes that
[i]n a reach of logic that is difficult to swallow, the court then categorizes the New Orleans flooding as caused by human negligence -- the collapse of canal and levee walls due to human design or construction faults -- rather than by Hurricane Katrina. One could also say the flooding was caused by people building a city below sea level, but is that sound logic or mere reductionist technique?
The opinion also relies more on dictionary definitions than law or common sense. For example, no insurer offers flood insurance in anything resembling a standard homeowners policy. All insurer's attempt to exclude it. Were consumers really misled given that the Federal Flood Insurance Program has been around since 1968 and there probably hasn’t been a significant private market flood claim payout since 1968? The court used the so-called reasonable consumer expectations argument to rule that when the term is ambiguous, one should look to cover the loss consistent with the reasonable policyholder’s expectation. This is the wrong standard when the judge could take notice of the presence of the exclusion in just about every insurance policy written in the last forty years and that the Federal program was deigned to cover these types of risks.
The opinion can be found here. Rossmiller and Grace have additional commentary. Also see extended commentary in the comments on the the bigger issue of how we pay for these losses at Marginal Revolution.Please also see Ted Frank's earlier post which I missed in all of the excitement.