Louisiana homeowners face differing standards for flood insurance offset

Here’s another of those great Rebecca Mowbray stories in the Times-Picayune on Katrina legal developments in Louisiana.  This story discusses two different schools of thought among courts in the state when analyzing a common factual scenario — someone had both a homeowners policy and federally backed flood insurance when Hurricane Katrina and Hurricane Rita damage happened.  The majority view is that any payments accepted under the National Flood Insurance Program act as an offset to claims under the homeowners policy; in other words, that there is only so much damage, and the acceptance of the flood payment is an acknowledgment that that dollar amount of loss was not due to wind, and therefore is not owed under the homeowners policy.

The minority point of view is that the two are separate contracts and acceptance of flood payments does not prejudice any rights under the homeowners contract — which allows for a double recovery, usually a position against public policy in insurance.  The intellectual attraction of this second position is a bit hard for me to fathom — it seems sort of like Eliot Spitzer arguing he is operating under two different sets of obligations in his relationships with his wife and his prostitute.

Federal judges in New Orleans, in the Eastern District of Louisiana, have followed this first view — that flood payments act as an offset.  Judges in Lake Charles, in the Western District, have gone the opposite way.  This excerpt from the story gives you a pretty good idea of what is going on:

A string of rulings from different judges last spring largely went in favor of the insurers’ position that the flood and wind policies should work in tandem, such as an April 13 ruling for Allstate in the case of New Orleans homeowner Edward Esposito.

"Esposito is entitled to recover in this lawsuit any previously uncompensated losses that are covered by his homeowners policy and which when combined with his flood proceeds do not exceed the value of his property. Esposito is not entitled to obtain a windfall double recovery by now recharacterizing as wind damage those losses for which he has already been compensated by previously attributing them to flood," Judge Jay Zainey wrote, agreeing that a flood payment was tantamount to an admission that damage was caused by flood.

In the consolidated Rita litigation against State Farm Fire and Casualty Co., plaintiffs attorney Jennifer Jones sought to make a pre-emptive strike on behalf of her 125 clients. In motions filed May 1, Jones asked Judge Patricia Minaldi in Lake Charles to declare that it would be inappropriate for State Farm to receive a credit for the amount of money her clients collected from the flood program.

Minaldi largely sided with Jones, saying that unless State Farm had expressly stated in its policy that it would reduce the value of the homeowners policy in the event of a flood, it couldn’t use the existence of a flood to limit its obligations under the homeowners policy.

"The plaintiffs entered into two distinct contracts — the homeowners policy and the NFIP policy," Minaldi wrote. "The plaintiffs paid premiums under both policies in exchange for separate coverages. . . . State Farm is therefore obligated to pay for losses which are attributable to wind damage irrespective of other policies or coverages."

By the way, here’s a post I wrote last year on one of these cases, Esposito.

Now, for this next part, bear with me.  Because the Mowbray story does not give a specific name or case identification for these St. Charles cases, I had to search blind for them on PACER.  I found three of the Judge Minaldi rulings, but each had no actual link to the memorandum decision in the case, so I don’t know what it said.  So I found, on Westlaw, a case called In re Cameron Parish Rita Litigation, WL 2066813 (July 13, 2007), which must be one of the cases mentioned, because it, like the cases in the story, featured Judge Patricia Minaldi, attorney Jennifer Jones and State Farm.

Because I don’t have an Adobe file from PACER, I can’t link to that.  I am instead going to risk the wrath and boredom of the audience by citing a considerable portion of the Cameron Parish decision ripped from the Westlaw case, the portion analyzing why there should be no offset of flood money.  You can read this, you can skim it, you can throw your mug of decaf coffee in a rage, you can skip it entirely, but here it is (I boldfaced the portion that seems most important): 

The plaintiffs have filed the instant motion to prevent State Farm from asserting that, if coverage is owed under a homeowners policy, recovery should be reduced by the amount of NFIP proceeds already received. The plaintiffs argue that such an “NFIP offset” amounts to a “corporate subsidy” to State Farm by the federal government. On the contrary, State Farm contends that the purpose of property insurance is indemnification-e.g., restoring the insured to the position he occupied prior the loss. If the court does not permit a set-off for NFIP benefits, State Farm argues that the plaintiffs would obtain double recovery.

The issue of an NFIP offset has been considered by a number of courts throughout the Gulf South in the wake of Hurricanes Rita and Katrina. The wind versus water scenario in Cameron Parish, however, is more factually similar to the Katrina cases arising on the coast of Mississippi than those resulting from the canal breaches in New Orleans. As such, the decisions of Judge Senter in the Southern District of Mississippi are particularly instructive.

In Tejador v. State Farm Fire and Casualty Co., No. 1:05cv679, 2006 WL 3257526 (S.D.Miss. Nov. 6, 2006), Judge Senter held:

[T]he Plaintiff’s actual loss is the maximum recovery he may receive from all applicable policies of insurance for both his dwelling and personal property. Insurance contracts insure only against covered losses, and it is a basic proposition that “[i]nsurance law is based on the principle of indemnification and is aimed at reimbursement. The benefit derived from insurance should be no greater in value than the loss.” These well-established principles of indemnity and insurable interests apply to all insurance claims under policies that are not “valued policies.” *3 Id. at *2 (internal citations omitted) (emphasis added).

In two subsequent decisions, Judge Senter reaffirmed that the principle of indemnification does not apply to valued policies.FN2 See SIMA/Signature Lake, L.P. v. Certain Underwriters at Lloyds London, No. 06cv186, 2006 WL 3538862, *2 (S.D.Miss. Dec. 7, 2006); Glover v. Nationwide Mut. Fire Ins. Co., No. 06cv85, 2006 WL 3780858, *1 (S.D.Miss. Dec. 21, 2006).

FN2. It is undisputed that the State Farm policies at issue in this case are valued policies.

Judge Senter’s position is supported by Louisiana’s Valued Policy Law (VPL), La.R.S. 22:695. The VPL provides, in pertinent part:

Under any fire insurance policy insuring inanimate, immovable property in this state, if the insurer places a valuation upon the covered property and uses such valuation for purposes of determining the premium charge to be made under the policy, in the case of total loss the insurer shall compute and indemnify or compensate any covered loss of, or damage to, such property which occurs during the term of the policy at such valuation without deduction or offset, unless a different method is to be used in the computation of loss…. La.R.S. 22:695(A) (emphasis added).

The VPL very clearly states that, in the case of a total loss, the insurer is bound to indemnify the insured for any covered loss without deduction or offset.

Furthermore, it is well-established that an “insurance policy is a contract between the parties and should be construed by using the general rules of interpretation of contracts set forth in the [Louisiana] Civil Code.” Louisiana Ins. Guar. Ass’n v. Interstate Fire & Cas. Co., 630 So.2d 759, 763 (La.1994). Article 1985 of the Civil Code states, “Contracts may produce effects for third parties only when provided by law.” La. C.C. Art. 1985. Comment (b) to article 1985 explains, “Because of the ever-increasing importance of third party-beneficiary contracts, this Article provides that contracts bind only the parties unless they have lawfully stipulated otherwise.” La. C.C. Art. 1985, cmt. b (emphasis added).

In this case, the plaintiffs entered into two, distinct contracts-the homeowners policy and the NFIP policy. The plaintiffs paid premiums under both policies in exchange for separate coverages. Accordingly, State Farm obligated itself to indemnify the plaintiffs for any covered losses under the homeowners policy, while the WYO companies, as agents of the federal government, obligated themselves to pay for flood losses. In the absence of an express stipulation, this case presents no occasion for State Farm to benefit as a third party to the NFIP policy.

State Farm is therefore obligated to pay for losses which are attributable to wind damage irrespective of other policies or coverages. Of course, whether the plaintiffs are entitled to additional (or any) benefits under the State Farm policy is a question of fact which depends upon, among other factors, the apportionment of loss due to wind, the value of the home, and the extent of wind coverage already paid. 

The plaintiffs will not be estopped from making a claim against their homeowners policy. However, where the flood insurer has settled an insured’s claim by paying policy limits, the insured may be estopped from recharacterizing, as wind damage, losses for which he has accepted flood insurance compensation. See SIMA/Signature, 2006 WL 3538862, at *3.

Accordingly, the plaintiffs’ motion for partial summary judgment on the inapplicability of the NFIP offset will be granted. Payments already made under the NFIP for flood damage shall have no bearing on the plaintiffs’ recovery for segregable wind damage under the State Farm policy.

This is not quite the way the story said — Judge Minaldi did allow that, if the NFIP policy paid its limits, that loss could not be claimed as wind damage.  I wonder why the distinction, however, between a flood policy paying its limits and a flood policy paying half its limits — although there are two contracts, there is only one set of facts. Either the flood damage was accurate and the acceptance of flood payments was legitimate, or the opposite is true.  If the former is true, does that not seem to preclude recategorization as wind damage? 

Incidentally and finally, I note that Judge Minaldi found the policy’s anti-concurrent cause provision ambiguous, a position which the Fifth Circuit has since reversed in Tuepker v. State Farm.  As you might expect, having seen Judge Minaldi quote Judge Senter at length, she followed the similar approach he used toward anti-concurrent cause in the Tuepker and Leonard cases, among others.  As I argued, and I think as I showed fairly decisively in my October 2007 article on anti-concurrent cause language in Appleman’s Critical Issues in Insurance Law, this view of anti-concurrent cause language is somewhat wrong, although analytically it could have been right with just a little tweaking.  By saying that, I do not mean to put these judges down, it is merely a difference of opinion on an intellectual matter. I don’t know much about Judge Minaldi, but Judge Senter is a very fine judge — it’s just that, at least in the instance of anti-concurrent cause, he was a victim of false doctrine.

One correction — I originally wrote St.Charles instead of Lake Charles.  Thanks to DCromeans in the comments for the heads up.




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5 Responses to Louisiana homeowners face differing standards for flood insurance offset

  1. DCromeans

    David, Great analysis, but one minor correction…I believe thewestern district is in LAKE Charles…not St. Charles, which also happens to be my home town.

  2. Underdog

    If my car was stolen and totaled in an accident by the thief, would I get paid twice under Louisiana law because I had it insured for both? Not quite on point but similar stupid outcome if I get two new cars out of it.

  3. Not At All Surprised

    Underdog: Sounds like a good question for the “E Guarantee”!

  4. Jonny

    You hit the nail on the head when you said that there is “only one set of facts.” To borrow from algebra if X equals wind damage and Y is flood, X+Y equals the total damage.
    However, in many instances the NFIP paid limits without requiring any proof of loss or any affirmative “claim” made by the Homeowner. It did this to lower the cost of processing these claims and instead put more money in the hands of homeowners faster. (Leaving aside the recent claims that these flood policies were overpaid to save the wind insurers money).
    Here’s the kicker – If the NFIP decided to overpay flood (say Y + 100), then its paid for damage that did not occur – it does not mean that it is paying for wind damage. In all these situations, there will be a windfall – the question that the courts are deciding is who should get the excess money paid by the NFIP, the homeowner’s insurers or the homeowners.
    As you said – there’s only one set of facts. The facts are, if a home suffered a particular amount of wind damage and the plaintiff can prove that amount of damage, the homeowner’s insurer is contractually obligated to pay for that damage. The fact that the NFIP overpaid for the flood damage is of no moment.

  5. Wolf

    It seems reasonable to me that the flood payment should be admitted as evidence of the proper amount of wind damage, but I see no reason to make it conclusive. Given that there are two separate contracts, I don’t see why the homeowners insurer should benefit, as a rule, from the fortuity of the resident having flood insurance. Put another way, the homeowners insurer owes a fiduciary duty to the resident to adjust the wind damage fairly in light of all available evidence. By treating the flood assessment as an automatic offset — i.e., assuming that the flood assessment was correct — the homeowners insurer is in effect sloughing off a portion of its adjustment duties on the NFIP adjustment