Two recent court rulings support the insurance industry’s position on flood related claims. In an unanimous decision, the U.S. Fifth Circuit Court of Appeals in New Orleans overturned the district court decision in Chauvin v. State Farm Fire & Casualty, ruling that the valued policy law only applies if the total loss was caused by a covered peril.
The Court rejected the argument that the valued policy statute applied to a total loss caused in part by a covered peril, along with substantial damage by a peril not covered by the policy. The opinion provides strong support for the insurance industry's interpretation of the Valued Policy Law (VPL).
In another unanimous decision, Fifth U.S. Circuit Court of Appeals vacated a November ruling that opened the door for insurance companies to be held liable for flood damage that policyholders claimed was caused by negligent design, construction and maintenance of the levees.
In the Katrina Canal Breaches Litigation case, the Fifth Circuit ruled that the previous decision was incorrect in holding that the flood exclusion language of insurers' policies was ambiguous, and that ambiguity must be interpreted in favor of covering the damage done by floodwaters that flowed through the levee breaches.
The court ruled that the flooding associated with Katrina had a "sizable natural component: a catastrophic hurricane and the excess water associated with it."
However, the court also made it very clear that flooding caused by manmade disasters would also be excluded under the unambiguous water damages exclusion found in most property insurance policies.