In re Katrina Canal Breaches Litigation
495 F.3d 191 (2007)
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Rule of Law:
An all-risk insurance policy's flood exclusion, which excludes damage from 'flood, surface water, [or] overflow of a body of water,' unambiguously precludes coverage for losses caused by an inundation of water from a breached levee, regardless of whether the breach was caused by third-party negligence.
Facts:
- On August 29, 2005, Hurricane Katrina struck the coast of the Gulf of Mexico.
- During the hurricane, levees along three major canals in New Orleans—the 17th Street Canal, the Industrial Canal, and the London Avenue Canal—ruptured.
- The levee breaches allowed water from the flooded canals to inundate approximately eighty percent of the City of New Orleans.
- Plaintiffs were various individuals, a corporation, and a university who held homeowners, renters, or commercial-property insurance policies.
- The plaintiffs' insured properties were damaged or destroyed by the inundation of water.
- Plaintiffs alleged that the levee breaches were the result of negligent design, construction, and maintenance by various third parties.
Procedural Posture:
- Multiple lawsuits were filed by property owners against their respective insurers in Louisiana state and federal courts.
- The cases were consolidated for pretrial purposes in the U.S. District Court for the Eastern District of Louisiana.
- The defendant insurers filed motions to dismiss or for judgment on the pleadings, arguing the claims were barred by the flood exclusions in their policies.
- The district court denied the motions for most insurers, ruling that the term 'flood' was ambiguous and did not exclude floods resulting from negligence.
- The district court granted the motion to dismiss filed by State Farm, finding that its policy's specific anti-concurrent causation language removed any ambiguity.
- The district court certified its order, which involved a controlling question of law, for an interlocutory appeal.
- The U.S. Court of Appeals for the Fifth Circuit granted the insurers' requests to hear the appeal.
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Issue:
Does a standard flood exclusion in an all-risk property insurance policy unambiguously preclude coverage for damage caused by an inundation of water from a breached levee, even when the breach is allegedly caused by third-party negligence in the levee's design, construction, or maintenance?
Opinions:
Majority - King, Circuit Judge
Yes, a standard flood exclusion in an all-risk property insurance policy unambiguously precludes coverage for such damage. Under Louisiana law, courts must enforce the clear and explicit terms of an insurance contract as written. The court determined that the event in question fits squarely within the 'generally prevailing meaning' of the term 'flood,' which is an overflowing of water onto land that is normally dry. A levee is a flood-control structure, and its failure to hold back water by definition results in a flood, regardless of the cause of the failure. The court rejected the plaintiffs' argument that 'flood' is ambiguous and should be limited to purely 'natural' events, finding the distinction between 'natural' and 'non-natural' causes unworkable and likely to lead to absurd results in this context. The court also held that the efficient proximate cause doctrine is inapplicable because there was only a single cause of the property damage—the flood itself; any alleged negligence was a cause of the flood, not a separate, concurrent cause of the property damage.
Analysis:
This decision provides a significant and binding interpretation of standard flood exclusion clauses in the context of catastrophic infrastructure failure. By holding that the term 'flood' is unambiguous and encompasses inundation from negligently breached levees, the court prevented a major potential loophole that could have exposed insurers to billions of dollars in liability under standard all-risk policies. The ruling solidifies the principle that insureds cannot avoid a specific exclusion by recharacterizing the cause of the excluded peril as a separate, covered peril like third-party negligence. This precedent reinforces the clear distinction between standard property insurance and specialized flood insurance, placing the onus on property owners to secure specific coverage for flood-related risks, regardless of their origin.
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