Illinois Insurance - Katrina Court Rejects Usual Policyholder Arguments For Ambiguity, Finds For Insurers On Flood Exclusion And Approves Illinois Law On “Plain and Ordinary Meaning” Of Flood Exclusion In Homeowner’s Policies
In Re: Katrina Canal Breaches Litigation (No. 07-30119, 5th Cir. August 2, 2007)
The United States Court of Appeals for the Fifth Circuit, relying partly on Illinois law, recently handed down another insurance coverage opinion relating to Hurricane Katrina. After numerous insurers denied coverage for damage caused
by canal breaches in New Orleans pursuant to flood exclusions, multiple declaratory judgment actions were filed and consolidated in In Re: Katrina Canal Breaches Litigation.
The policyholders asserted that the efficient proximate causes of the damage were windstorm, acts of negligence relating to the design, construction or maintenance of levees and storm surge. The insurers asserted that the losses
were caused directly or indirectly by flood. The trial court found the flood exclusions to be clear and unambiguous.
On appeal, the policyholders urged the Fifth Circuit to conclude that the term “flood” was ambiguous in the context of the levees in New Orleans breaking. The policyholders first argued that the term “flood”
was not defined in the policy and therefore was ambiguous. The Fifth Circuit refused to find that the absence of the definition made the term “flood” ambiguous. In so ruling, the court stated that any rule that rigidly
presumes ambiguity from the absence of a definition would be illogical and unworkable because, effectively, every word in the policy would then have to be defined.
The policyholders then asserted that the insurers could have explicitly excluded floods caused in part by negligence and the failure to exclude negligence created an ambiguity in the flood exclusion. Again, the Fifth Circuit rejected
this argument and stated that the mere fact that an exclusion could be worded more explicitly does not make the exclusion ambiguous.
The policyholders then argued that, where the scope of an exclusion is not readily apparent, the exclusion should be construed in favor of coverage. The Fifth Circuit disagreed and held that the words must be given their “generally
prevailing meaning.” The Fifth Circuit then looked at dictionary definitions and state court decisions interpreting the term “flood,” including Wallis v. Country Mutual Insurance Company, 723 N.E.2d
376 (Ill. App. Ct. 2000). The Fifth Circuit found the Wallis decision persuasive. In Wallis, the Illinois Appellate Court stated that the “plain and ordinary meaning” of “flood” is “water
that escapes from a watercourse in large volumes and flows over adjoining property in no regular channel ending up in an area where it would not normally be expected.” Id. at 383. Under this definition, it is immaterial
whether the particular waterway was man-made or natural, as long as it had a defined bed, visible banks and a recurrent water flow.
The Fifth Circuit found that the flood exclusions in the homeowners’ policies were not ambiguous and applied whenever a body of water overflows its natural boundary and inundates an area of land that is normally dry. The Fifth
Circuit noted also that a levee was a “flood-control structure,” the very purpose of which was to prevent flood waters of a watercourse from overflowing onto land areas.
Finally, the Fifth Circuit reviewed the doctrine of efficient proximate cause and the use of anti-concurrent-causation clauses in policies. Under the efficient proximate cause doctrine, where a loss is caused by a combination of
a covered risk and an excluded risk, the loss is covered if the covered risk was the efficient proximate cause of loss. To combat this theory, many insurers exclude “loss caused directly or indirectly by” a particular
peril; the so-called anti-concurrent-causation clause. The Fifth Circuit declined to address whether insurers can contract around the efficient proximate cause rule with an anti-concurrent-causation clause. Instead, the Fifth Circuit
found that the efficient proximate cause doctrine did not apply because there were not two separate or distinct perils that caused the policyholders’ loss. To the extent that negligent design, construction or maintenance of
the levees contributed to the losses, this was considered to be only one factor in bringing about the flood and not an independent act apart from the flood.