Broussard v. State Farm Fire & Casualty Co.
523 F.3d 618, 2008 WL 921699, 2008 U.S. App. LEXIS 7419 (2008)
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Rule of Law:
Under an "open peril" insurance policy in Mississippi, the insurer bears the burden of proving that a loss was caused by an excluded peril. This burden does not shift back to the insured to segregate covered from non-covered damages once the insurer presents evidence of an excluded cause.
Facts:
- Norman and Genevieve Broussard owned a home in Biloxi, Mississippi that was insured by State Farm Fire and Casualty Co.
- The Broussards' home was completely destroyed during Hurricane Katrina, leaving only the foundation slab.
- Their State Farm homeowners policy provided "open peril" coverage for the dwelling and "named peril" coverage for personal property.
- The policy for both the dwelling and personal property explicitly excluded losses caused by water damage and contained an Anti-Concurrent Cause (ACC) clause.
- The Broussards did not have a separate flood insurance policy.
- A State Farm claims adjuster inspected the property and concluded that the damage was primarily caused by floodwater (storm surge) rather than wind.
- Based on its adjuster's findings and the policy's water damage exclusion, State Farm denied the Broussards' claim in its entirety.
Procedural Posture:
- The Broussards filed a lawsuit against State Farm in Mississippi state court for breach of contract and bad faith.
- State Farm removed the case to the U.S. District Court for the Southern District of Mississippi.
- The trial was bifurcated into a causation phase and a damages phase.
- At the end of the causation phase, the district court granted the Broussards' motion for Judgment as a Matter of Law (JMOL), finding State Farm liable under the policy.
- In the damages phase, the jury awarded the Broussards $2.5 million in punitive damages.
- The district court subsequently remitted the punitive damage award to $1 million.
- State Farm, as appellant, appealed the JMOL and the punitive damages award to the U.S. Court of Appeals for the Fifth Circuit, with the Broussards as appellees.
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Issue:
Under an "open peril" homeowners insurance policy that excludes water damage, does the burden of proof shift back to the insured to segregate covered wind damage from non-covered water damage after the insurer presents evidence that water damage occurred?
Opinions:
Majority - Judge Edith Brown Clement
No. Under Mississippi law, the burden of proof does not shift back to the insured to segregate damages. For an 'open peril' policy, once the insured establishes a loss, the insurer carries the burden to prove that an exclusion, such as water damage, applies. The court made an 'Erie guess' as to how the Mississippi Supreme Court would rule, relying on older 'named peril' cases from Hurricane Camille which rejected similar burden-shifting arguments. The court reasoned that if Mississippi rejected burden-shifting for 'named peril' policies, where the insured's initial burden is higher, it would certainly reject it for 'open peril' policies. The court emphasized that the ultimate question of causation (wind vs. water) is a question of fact for the jury and that State Farm's proposed 'shifting-back' rule would improperly take this issue away from the jury. Therefore, the district court's grant of JMOL was reversed because State Farm had presented sufficient expert testimony to create a jury question on causation. The punitive damages award was also vacated because State Farm had an 'arguable basis' in fact—its adjuster’s initial report—for denying the claim, which is sufficient to defeat a bad-faith claim under Mississippi law.
Analysis:
This decision clarifies the allocation of proof in catastrophic insurance loss cases in Mississippi, particularly for 'open peril' policies where damage may have concurrent causes. By establishing that the insurer's burden to prove an exclusion is non-shifting, the court places the significant evidentiary challenge of segregating damage on the party that drafted the policy. The ruling also reinforces the high threshold for punitive damages, protecting insurers from bad-faith liability so long as their denial rests on an 'arguable basis,' even if that basis is later challenged or proven incorrect. This provides a clear framework for resolving similar Hurricane Katrina claims and influences how insurers must approach investigations where both covered and excluded perils are present.
