REBUILD! 86 August / September 2007

Transcription

1 REBUILD! 86 August / September 2007

2 Louisiana Valued Policy Law When Total Loss Equals Total Payment? By Professor Mitchell F. Crusto Louisiana insurance attorneys should know the intricacies of Louisiana s Valued Policy Law 1 (LVPL). LVPL mandates full value recovery, without deduction or offset, where real property (inanimate immovables) was insured for a stated value and suffered a total loss. 2 For example, if a fire destroyed a property insured for a stated value, the insurer must pay the policy s stated insured value, without deduction or offset. Caveat: Despite the existence of this important, pre-emptory statute, it is rarely (if ever) recited in homeowners insurance policies. Parenthetically, while this article explores LVPL through the lens of homeowners policies, LVPL also applies to commercial property policies. How courts apply LVPL to Hurricanes Katrina and Rita (Katrina) property insurance claims is a multibillion dollar issue. 3 While many Louisiana homeowners suffered a total loss 4 due to Katrina, few have been paid their entire coverage amount. Some insurers claim that LVPL does not apply in three Katrina types of cases. 5 The first case is where the total loss was due in whole or in part to a noncovered peril (flood). The second case is where the total loss was due to mixed causation, a combination of a covered peril (wind) and a non-covered peril (flood). The third is where the total loss was offset by collateral sources such as National Federal Flood Insurance Program (NFIP) recovery, FEMA grants, SBA loans and the like. This article explores LVPL jurisprudence and addresses seriatim three contentious LVPL issues. First, is LVPL limited to fire losses and, if not, who has the burden of proof as to its application? Second, if LVPL applies beyond fire losses, does it apply where the loss results from mixed causation (covered and non-covered perils)? Third, if LVPL applies beyond fire and mixed causation, is the stated value offset by collateral sources such as NFIP payments? History, Jurisprudence and Effect of Louisiana s Valued Policy Law LVPL is seldom (if ever) recited in specific terms in property insurance policies, but applies by implication even when the specific contractual policy terms fail to reference LVPL provisions. 6 LVPL expressly allows for alternatives to value policy contracts. 7 Where LVPL applies, it pre-empts express insurance contract provisions to the contrary. 8 LVPL does not apply where the loss is due to the insured s (or her assigns ) criminal fault. 9 LVPL benefits both the insurer and the insured by adding payment certainty, the amount of payment due (the policy s stated value) in the case of a total loss. 10 Payment certainty benefits insurers as they often spread their risk to investors (reinsurance). 11 Payment certainty also protects insureds from abusive insurers seeking to artificially inflate premiums by overstating property values. 12 Under LVPL, the insurer has the burden to inspect the property and ensure its proper value. 13 When LVPL applies, in the case of a total loss, the burden of proof is on the insurer to show that LVPL does not apply. 14 It therefore appears that where LVPL applies and there is a total loss, the insurer should tender the policy s full face value or explicitly state any objection(s) to full payment. Thus it is essential that Louisiana insurance lawyers know when LVPL applies, as will be analyzed in three specific instances as follows. Louisiana Bar Journal Vol. 55, No. 2 87

3 Does LVPL Extend Beyond Fire Coverage and Who Has the Burden of Proof? A review of LVPL s judicial history shows inconsistencies in courts interpretations of the statutory definition of [u]nder any fire policy. 15 This has led to an inconsistent application of LVPL beyond total loss cases involving fires. In Real Asset Mgt., Inc. v. Lloyd s of London, the 5th Circuit opined that LVPL applied to other perils beyond fire and required the insurer to pay the face value for the property that was a total loss due to Hurricane Andrew. 16 Yet in In re Consolidated Cos., Inc., a federal district court concluded, and the 5th Circuit affirmed, summarily, without comment, that the LVPL did not apply to losses caused by non-fire perils. 17 Whatever the judicial interpretation of LVPL, one Louisiana court has restated the general insurance law standard that any ambiguities in the statute should be interpreted liberally in favor of the insured. 18 In a recent decision, Federal District Judge Vance analyzed and ruled on the meaning of LVPL. 19 Citing Louisiana law and following an exhaustive analysis of the law, Judge Vance found LVPL ambiguous relative to the meaning of fire policy, and concluded that the legislature intended homeowner s policies, so long as they cover the peril of fire, to be governed by the VPL. 20 The court then instructed that to the extent plaintiffs allege that their total loss was sustained entirely by a covered peril, they may be able to state a claim under LVPL. 21 Despite the past inconsistency in LVPL case law, there are several arguments supporting Judge Vance s finding that LVPL is not restricted to fire losses only. The first is that the statutory meaning of fire policy really means homeowners policies, or any property insurance that includes fire coverage. Thus, any policy such as HO-3 all-risk policies, covering many types of perils including the peril of fire, incorporates all of the provisions of Part XV of the Louisiana Insurance Code. 22 Furthermore, LVPL, specifically La. R.S. 22:695(D), provides that it shall not apply to certain specified policies. 23 Consequently, the canons of statutory interpretation dictate that the Legislature s expression that LVPL not apply to certain enumerated policies is an expression of legislative intent that LVPL does apply to all other insurance policies. In addition, when one looks at the statutory definition of a homeowners policy, as one that combines fire and other allied lines, 24 it seems logical that LVPL applies by reference to homeowners policies, at a minimum. In summary, LVPL applies to homeowners policies unless it is a specific policy type expressly excluded by the Legislature. Does LVPL Apply When There Is Mixed Causation? Some insurers argue that even if LVPL extends beyond fire coverage, it does not apply where the total loss results from mixed causation, that is a combination of a covered peril (wind) and a noncovered peril (flood). 25 This question was recently presented to Federal District Judge Vance in the Chauvin case. 26 There the court reviewed LVPL s statutory language, finding it ambiguous, 27 and noted that the statute could be read to require that the total loss must be caused by a covered peril. 28 The court in Chauvin stated that even if the statute were clear and unambiguous, La. Civ.C. art requires the court to avoid applications that lead to absurd consequences. 30 According to the court, the plaintiff s interpretation of the statute that it applied where 20 shingles were lost through a covered peril while the total loss resulted mainly from an excluded peril (flood) would lead to absurd consequences. 31 On the broader question of mixed causation in general, e.g.. where the causation was so mixed not to lead to absurd consequences, Judge Vance decided not to answer this pressing question, believing that needless decisions of state law should be deferred as a matter of comity. 32 Her judicial restraint was particularly suited to this case, as she noted, because LVPL is sovereign state turf, and the outcome of such a question has widespread ramifications to an important industry. 33 Following Judge Vance s recognition of the need to show judicial restraint, she went on to assess whether LVPL should apply where the total loss was essentially due to a non-covered peril (flood). She referenced La. Civ.C. art. 10, 34 which states that if a statute is subject to several meanings, the court must interpret the statute as having the meaning that best conforms to the purpose of the law. 35 As such, Judge Vance noted that LVPL was designed to fix valuation losses and was not intended to expand coverage to excluded perils. 36 Judge Vance s analysis in Chauvin relies heavily on two fundamental underpinnings: that some Katrina losses were due to flood and that flood is legally an excluded peril. Both underpinnings in Chauvin have recently been destabilized through a decision questioning the efficacy of the flood exclusion and challenging the definition of the word flood within the Katrina context. 37 In Katrina Canal, Judge Duval found that in many homeowners policies, the word flood is ambiguous, and that the flood exclusion may not exclude what might first appear to be flood losses. 38 As a result, Judge Duval s decision in Katrina Canal wraps LVPL analysis in the enigma of what is a covered peril. Analytically, if the flood exclusion found in homeowners policies does not legally exclude Katrina flood losses, then where there is a total loss, there should be total payment. In addition, there is another challenge to Judge Vance s reading of LVPL: it does not expressly reference causation. 39 The statute does not state that the total loss must be caused by a covered peril; it specifically states that where there is a total loss the insurer shall compute and indemnify or compensate any covered loss of, or damage to, such property[.] 40 Does this language mean that the insurer must pay the amount of any covered loss, regardless of cause? Such an approach 88 August / September 2007

4 is consistent with a judicial opinion that the public policy behind Valued Policy Law is very strong and the statute is intended to be interpreted liberally in favor of the insured. 41 At the very least, this language is ambiguous and should be read in favor of the insured. Another argument in favor of LVPL s broad application is that according to its express statutory language (as well as Louisiana jurisprudence), causation does not matter (except for insured s fraud): the basis for the payment of the total loss amount where there is a total loss is liquidated damages and nothing else. 42 LVPL mandates that when there is a total loss, the insurer shall compute and indemnify or compensate any covered loss of, or damage to such property... without deduction or offset. 43 Recently, another Gulf Coast jurisdiction facing interpretation of valued policy law negated the mixed or anti-concurrent causation exception by stating that the insured was required to pay the face amount of the policy for the total loss, if any portion of a total loss was caused by a covered peril under a standard policy. 44 In summary, LVPL requires that where there is a total loss, the insurer should tender the insured the stated policy amount. At the minimum, the covered loss should be tendered. As the term covered loss is ambiguous, the total loss regardless of the cause should be tendered to the insured. The burden is on the insurer to show that the loss is not covered and failure to do so results in full payment and a bad faith claim. This matter may require the attention of the Louisiana Supreme Court, but could equally be interpreted as such by a federal court. If LVPL Applies to Homeowners Policies and to Mixed Causation, Is the Stated Value Offset by Collateral Sources? LVPL expressly states that in the case of a total loss, the insurer shall compute and indemnify or compensate... without deduction or offset. 45 How should the LVPL be interpreted where the insured has received payments from the NFIP? When one reads the express language of the LVPL, it appears that the total loss payment is without deduction or offset 46 from collateral insurance sources. The LVPL statute also has some language that appears to promote the insurers argument in favor of offset from collateral sources, specifically that the insurer shall compute and indemnify or compensate 47 for property loss or damage. On the one hand, this language appears to contradict the LVPL statutory provision against deduction or offset, and is at best ambiguous. As such, it should be read in favor of the insured. On the other hand, if it is not ambiguous, its language could be read in light of the principle of indemnity, such that property insurance makes the insured whole and is not intended to serve as a windfall or profit. 48 For example, where the payments from the homeowner s insurer and the NFIP exceed the total loss or the property s total value, there is an argument that the indemnity principle is violated. (Another argument against a broad application of LVPL is that of moral hazard, whereby it may induce an owner to destroy the property for the insured value, although the express terms of LVPL addresses this possibility, and generally is not at issue in Katrina cases.) 49 Such an offset for collateral sources might carry some weight if the insurers can show that the premium pricing took into account the probability of certain covered perils, as well as the exception for certain non-covered perils. To ignore the pricing discount for noncovered perils would require insurance companies to set premiums irrespective of the non-covered perils. Hence, where the total loss results from concurrent causes, including non-covered perils such as flood, there would be support for the argument that LVPL should not apply when there is mixed causation, or should at least take into account a discount for collateral sources. Indemnity would not bar payment of the stated value of a homeowners policy where the loss exceeds that value. Where there is a total loss, then the homeowner s insurer would be required to pay the full face or stated amount of the policy. If and only if the face or stated amount of the homeowners policy plus the amount paid to the homeowner relative to the flood policy exceeds the replacement cost value of the property, then perhaps there should be a prorating of the payments. For example, if the replacement cost of the property is $300,000 and the homeowners policy was for $200,000 and the flood policy was for $100,000, then the property holder should be paid the entire $300,000. If on the other hand the property was worth $200,000, the homeowners policy was for $200,000 and the flood policy for $100,000, and flood insurer paid $100,000, then the property owner should receive another $100,000 (with the two insurers paying pro rata based on the percentage of the damage). Such an approach would preserve the indemnity principle of insurance law, while protecting the integrity of LVPL. Of course, this analysis is notwithstanding allegations that the homeowners insurers adjusters undervalued their policy losses and overvalued flood losses. 50 One critique to the NFIP offset is that it is contrary to the suspensive condition aspect of the law, as insurers agree to LVPL as a condition of issuing policies in Louisiana (although they can opt out). This agreement between the state and insurance companies includes the suspensive condition contained therein. 51 As a result, the consumer property owners are paying for and the insurance companies are charging for that specific benefit in their premium structure. Hence, in the case of a total loss (perhaps regardless of causation), the insurance company will pay the full amount of the policy to the customer, regardless of other coverage. Therefore, if it can be shown that the insurers set their premiums as if LVPL applied to any covered peril, then perhaps LVPL should apply without offset from collateral sources. In summary, it would appear that the plain language of LVPL would not allow for offset from collateral sources such as NFIP payments. LVPL s indemnify Louisiana Bar Journal Vol. 55, No. 2 89

5 language appears contradictory and ambiguous; therefore, the LVPL must be read in favor of the insured. Still, the courts should decide whether LVPL must comply with insurance indemnity principles and, if so, how does LVPL apply on a case-by-case basis. The Future of Louisiana s Valued Policy Law The courts will ultimately decide how LVPL applies to Katrina homeowners policy claims. Presently, a prima facie case entitling a homeowner to full recovery (without offset or deduction) requires a finding that LVPL extends beyond fire insurance to homeowners insurance, that there was a total loss (probably directly or proximately from a covered peril), and that the insurer did not opt out of LVPL. The insurer has the burden to prove that the LVPL does not apply to a given claim; failure to do so may be an act of bad faith (including attorneys fees). 52 Billions of Katrina insurance dollars stand in the shadow of the balance over judicial interpretations of fire policy, total loss, covered loss, indemnify and flood in light of the equities of customers reasonable expectations following policy premium payments. Clearly, there is much at stake in the judicial interpretation of LVPL. This article reviews three pivotal issues, but there are additional questions that are beyond the scope of this article such as follows: Does an insurer s (intentional, negligent, or good faith) misapplication of LVPL constitute bad faith subject to the statutory fines, penalties, and attorneys fees? Does an insurer s misapplication of LVPL constitute a colorable qui tam action under the Federal False Claims Act 53 (or the Hurricane Relief Programs Integrity Act) 54? Is the Louisiana Supreme Court the ultimate authority to interpret LVPL s jurisprudence, or should the federal courts control Louisiana s VPL jurisprudence? In addition, LVPL may face additional insurance law doctrines such as efficient proximate cause, 55 anti-concurrent cause 56 and reasonable expectations (statutory interpretation, equitable estoppel, implied warranty and duty of good faith and fair dealing). 57 Insurance attorneys for both insurer and insured must be intimately familiar with Louisiana s Valued Policy Law to professionally represent their clients interests. FOOTNOTES 1. La. R.S. 22:695(A) (1995) states in pertinent part, Under any fire insurance policy insuring inanimate, immovable property in this state, if the insurer places a valuation upon the 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 Id. 3. See, e.g., Caruso v. Allstate, (E.D. La. 2007); Chauvin v. State Farm and Casualty Co., 450 F. Supp. 660 (E.D. La. 2006); Turk v. Louisiana Citizens Property Ins. Corp., 2006 WL (W.D. La. 2006); Babineaux v. Liberty Mutual Fire Ins. Co., No (E.D. La.); Huntley v. Allstate Indemnity Co., No (E.D. La.); Wallace v. Louisiana Citizens Property Ins. Corp., 2006 WL (E.D. La.); Chehardy v. Wooley, La. Dist. Co, 19th Jud. Dist., No (filed 9/15/05); and Langston v. Louisiana Citizens Property Ins. Corp., 25th Jud. Dist., No (Sum. Judg. 2/8/07). Cf., Mierzwa v. Florida Windstorm Underwriting Ass n., 877 So.2d 774 (Fla. Dist. Ct. App. 4 Dist. 2004) (Florida leading value policy law case applied broadly to hurricanerelated losses; subsequently, Florida s Legislature restricted the case s application). 4. Under Louisiana law, a total loss exists when the cost to repair exceeds the value of the property. Real Asset Mgt., Inc. v. Lloyds of London, 61 F.3d 1223, 1228 (5 Cir 1995). See also, Dumond v. Mobile Ins. Co., 309 So.2d 776 (La. App. 3 Cir. 1975). See also, Ochippinti v. Boston Ins. Co., 72 So.2d 326 (La. App. Orl. Cir. 1954) (under constructive total loss, where an immovable is damaged to the extent that repairs are prohibited by way of condemnation, the full amount of the valued policy is payable). A court in another jurisdiction has held that when property is over 50 percent damaged or when a building has lost its structural identity, there is a total loss. St. Paul Fire & Marine Ins. Co. v. Green, 29 S.W. 2d 304 (Ark. 1930). 5. See supra note La. R.S. 22:695(A) (1995), supra note La. R.S. 22:695(A) (1995) states, [LVPL will apply where there is a stated value policy] unless a different method is to be used in the computation of loss, in which latter case, the policy, and any application therefore, shall set forth the type of equal size, the actual method of such loss computation by the insurer. 8. La. R.S. 22:695(B) (1995) states, any clause, condition, or provision of a policy contrary to [R.S. 22:695(A)] shall be null and void, and have no legal effect. 9. La. R.S. 22:695(A) (1995) states, Coverage may be voided under said contract in the event of criminal fault on the part of the insured or the assigns of the insured. 10. See Atlas Lubricant Corp. v. Federal Ins. Co., 293 So.2d 550, 556 (La. App. 4 Cir. 1974); Hart v. North British & Mercantile Ins. Co., 182 La. 551, 162 So.2d 177, 180 (La. 1935). 11. See generally, Robert H. Jerry II, Understanding Insurance (2002) at Miller v. Hartford Fire Ins. Co., 412 So.2d 662, 667 (La. App. 1 Cir. 1982). See also William Shelby McKenzie, Louisiana Civil Law Treatise, Insurance Law and Practice, 15 La. Civl. 337, p Nathan v. St. Paul Mutual Ins. Co., 68 N.W.2d 385 (Minn. 1955). 14. See Jerry, supra note 11, at 411: ( [T]he all-risk insured needs to establish only that a loss occurred, the burden then shifts to the insurer to show that the loss was caused by an exception. ) See also George J. Couch, Couch on Insurance 2d 48:142 (2d ed. Rev. 1982). 15. La. R.S. 22:695(A) (1995); supra note 1. See also Mitchell F. Crusto, The Katrina Fund: Repairing Breaches in Gulf Coast Insurance Levees, 43 Harv. J. Leg. 329 (Summer 2006) at 365. (The author s statement therein that Louisiana s valued policy statute provides for fire only reflected the plain language of the statute and was not intended to be dispositive of LVPL s application to homeowners policies.) F.3d 1223, at 1228 (5 Cir 1995). See also, Necaise v. USAA Casualty Co., 644 So.2d 253 (Miss. 1992) (wherein the court extended Mississippi s fire policy only VPL to other perils) B.R. 223 (E.D. La. 1995), aff d, 106 F.3d 396 (5 Cir. 1996). 18. Farmers-Merchants Bank & Trust Co. v. St. Katherine Ins. Co., (La. App. 3 Cir. 4/30/97), 693 So.2d 876, writ denied, (La. 10/31/97), 703 So.2d 25 (wherein the court was specifically referring LVPL). 19. See Caruso, supra note See Caruso, supra note 3, p See Caruso, supra, note 3, p August / September 2007

6 22. See Rodriguez v. Northwestern Nat l Ins. Co., 358 So.2d 1237 (La. 1978) (rejecting the argument that R.S. 22:692 applied only to a policy of fire insurance and applying the statute to a special floater policy which included coverage for fire as well as other perils, despite the statute s language limiting its application to any policy of fire insurance ). 23. See La. R.S. 22:695(D), which states: This Section shall only apply to policies issued or renewed after January 1, 1992, and shall not apply to a loss covered by a blanket-form policy of insurance nor to a loss covered by a builders risk policy of insurance. 24. See La. R.S. 22: See Chauvin, supra note Id. 27. Id. 28. Id. 29. See La. Civ.C. art. 8 ( When a law is clear and unambiguous and its application does not lead to absurd consequences, the law shall apply as written and no further interpretation may be made in search of the intent of the legislature. ). 30. Id. 31. See Chauvin, supra note 3, at Id., at p Id. 34. See La. Civ.C. art See Chauvin, supra note 3, at p See Chauvin supra, note 3, at p. 8. See also Turk v. La. Citizens Property Ins. Corp., supra note 3 (wherein the court also refused to extend LVPL to non-covered perils or even to mixed causation, although the court suggested a pro rata solution and thought the matter ripe for immediate appeal). 37. In re Katrina Canal Breaches Consolidated Litigation, C.A. No (E.D. La. 2006), Nov. 27, 2006, Judge Stanwood R. Duval, Jr. 38. Id. 39. La. R.S. 22:695(A) (1995), supra note Id. 41. Farmers-Merchants Bank & Trust Co. v. St. Katherine Ins., 693 So.2d 876 (La. App. 3 Cir. 1997). 42. See La. Civ.C. art La. R.S. 22:695(A), supra note Mierzwa, supra note 3, at 775 (Fla. Dist. Ct. App. 4 Dist 2004) (... it does not require that a covered peril be THE covered peril causing the entire loss, merely that it is A covered peril. ). But see the Florida Stat Ann., (1)(b) (West 2005), wherein the Florida state Legislature disagreed with the Mierzwa interpretation and thereby amended its VPL statute. 45. La. R.S. 22:695(A), supra note La. R.S. 22:695(A), supra note Id. 48. See generally Jerry, supra note 11, La. R.S. 22:695(A) (1995), supra note 7 states, [LVPL will apply where there is a stated value policy and no other method of loss computation.] Coverage may be voided under said contract in the event of criminal fault on the part of the insured or the assigns of the insured. 50. See Rebecca Mowbray, Insurers Bilked Flood Program, Suit Says: Adjusters Say Wind Claims Underpaid, The Times-Picayune, May 31, 2007, available at printer/primter.ssf?/base/news-8/ xml&coll+1 (last visited 5/31/07). 51. See supra note La. R.S. 22: U.S.C 3729 (2006). See also Rebecca Mowbray, supra note La. R.S. 39:2152 (2006). 55. Roach-Strayhan-Holland Post v. Continental Ins. Co., 112 So.2d 680 (La. 1959); Lorio v. Aetna Ins. Co., 232 So.2d 490 (La. 1970). 56. See Hood v. Mississippi Farm Bureau Ins. Co., No. 3:05-CV TSL-AGN (S.D. Miss. 2005) (wherein the State Attorney General seeks to negate the water damage exclusion as contrary to public policy). 57. See generally, Jerry, supra note 11, at 421. ABOUT THE AUTHOR Mitchell F. Crusto is a law professor at Loyola University Law School. He is a former law clerk to Hon. John M. Wisdom, U.S. 5th Circuit Court of Appeals. He received a BA degree in 1975 from Yale University, a BA degree in 1980 from Oxford University (England), his JD degree in 1981 from Yale Law School and an MA degree in 1985 from Oxford University. He acknowledges valuable critiques by insurance claims specialist Don Lea, insurance attorneys Rémy Voisin Starns and Maggie Madere and Loyola Law students Ginnie Blake, Brian Page, Alexis Polk and John H. Thomas, Jr. See also, Mitchell F. Crusto, The Katrina Fund: Repairing Breaches in Gulf Coast Insurance Levees, 43 Harv. J. Leg. 329 (Summer 2006). (P.O. Box , Creve Coeur, MO ) Louisiana Bar Journal Vol. 55, No. 2 91