1 La. R.S. 37:4401, et al. 2 Id.

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1 HURRICANES GUSTAV AND IKE INSURANCE ISSUES INTRODUCTION In recent weeks, Hurricanes Gustav and Ike have impacted the entire Gulf Coast region. As a result, many individuals and businesses have sustained property and commercial losses. First and foremost, we have provided a brief summary of the current Emergency Rules promulgated by Louisiana s Insurance Commissioner pursuant to Gov. Jindal s executive order. Further, we have summarized recent rulings regarding various significant insurance legal issues litigated after Hurricanes Katrina and Rita. LOUISIANA EMERGENCY R ULES APPLICABLE TO INSURANCE INDUSTRY Louisiana s Insurance Commissioner has issued two emergency rules affecting the insurance industry, Emergency Rule 24 and 25. Emergency Rule 24 suspends certain policy provisions and statutes applying to various insurance policies, including casualty insurance, homeowners insurance, life insurance, vehicle insurance, fire and extended coverage, and other specific insurance. Rule 24 suspends any policy provision that imposes upon an insured a time limit to perform any act or transmit information or funds until October 1, Rule 24 further suspends any notice of nonrenewal, nonreinstatement or any other notices related to insurance and no similar notices shall be issued until October 1, Section 4411 of Rule 24 states that no policy shall be cancelled or nonrenewed because of a claim resulting from Hurricane Gustav or its aftermath. Rule 24 is limited to 36 parishes and does not have legal effect on anyone residing beyond the impacted parishes as defined. Emergency Rule 25 applies mostly to insurance related to the health care industry and to medical needs. For the purposes of this newsletter, no additional discussion is necessary. 1 La. R.S. 37:4401, et al. 2 Id.

2 IMPACT OF H URRICANE K ATRINA F LOOD L ITIGATION Hurricanes Katrina and Rita placed hazard policy flood exclusions squarely under the judicial microscope. Particularly, the U.S. Court of Appeals for the Fifth Circuit and the Louisiana Supreme Court have recently ruled on issues regarding 1) damage from flooding caused by levee failure, and 2) damage caused by flooding and wind (i.e. wind versus flood damage ). In Sher 3, the insured sued for insurance coverage for damage to his property caused by Hurricane Katrina. The Louisiana Fourth Circuit Court of Appeal held that the term flood in the policy s exclusions was ambiguous and did not apply to the type of water damage the insured suffered from Hurricane Katrina. The Louisiana Supreme Court reversed and found that the plain, ordinary and generally prevailing meaning of flood is the overflowing of water into an area that is usually dry. Critically, the Louisiana Supreme Court held that the definition of flood does not depend on whether the event is a natural or man-made disaster and determined the insured s building suffered flood damage that was excluded by the insurance policy. Similarly, in In re Katrina Breaches 4, the U.S. Court of Appeals for the Fifth Circuit found that the flood exclusion unambiguously precluded recovery. The Fifth Circuit determined that when a body overflows its normal boundaries and inundates an area of land that is normally dry, the result is a flood. Consequently, the Fifth Circuit held that, by definition, a flood occurs whenever a levee ruptures and fails to hold back floodwaters. The Fifth Circuit concluded that the rising waters in the New Orleans area following Hurricane Katrina constituted a flood within the meaning of the insurance policies exclusions. The more challenging coverage determination is property damaged by both wind and flood. Many hazard policies contain anti-concurrent cause exclusionary language which purport to bar coverage for certain perils (such as flood), even if caused in whole or in part by an otherwise covered peril. This language is significant because the typical sequence of events resulting from a hurricane is violent wind followed by excessive water. When covered perils combine with non-covered perils to cause damage, insurers rely on anti-concurrent cause provisions to deny coverage. Courts have been reluctant to strictly enforce these provisions. Historically speaking, Louisiana courts have seemingly ignored them and have awarded damages by allocating covered and non-covered perils, Smith v. Winchester, 80 So.2d 414 (La. 1955), or by finding that the dominant efficient cause of the loss was a covered peril, Picone v. Manhattan Fire and Marine Ins. Co., 50 So.2d 188 (La. 1950). Courts almost always permit the issue of causation to be decided by the trier of fact, thereby ensuring costly and protracted litigation. Importantly, the wind versus flood issue has been recently and often litigated in Louisiana and Mississippi. The prevailing rule is the doctrine of efficient proximate cause. Historically, this doctrine required the homeowner to illustrate that the covered 3 Sher v. Lafayette Ins. Co., 2008 La. LEXIS 796 (La. 2008). 4 In re: Katrina Canal Breaches Litigation Richard Vanderbrook et al., 495 F.3d 191 (5th Cir. 2007).

3 peril (i.e. wind) was the proximate or efficient cause of the loss. 5 Analyzing wind versus flood, the U.S. District Court for the Western District of Louisiana has held that an insured will be afforded coverage if he or she can prove that damage resulted from wind, regardless of whether there was concurrent or subsequent water damage. 6 The U.S. District Court for the Eastern District of Louisiana has held that an insured who sustains property damage from both flood and wind may recover his or her segregable wind and flood damages. 7 The U.S. District Court for the Southern District of Mississippi rationalized this legal premise by stating if there is wind damage covered under a homeowners policy, the right to collect the insurance applicable to that damage would come into existence at the time the damage occurred. If the insured property were later more severely damaged by flooding the insurer under the homeowner s policy would still be responsible for this wind damage. 8 To synthesize, courts will look to the time when the covered peril caused the damage and will segregate out the wind damage from the flood damage under a standard homeowner s policy. LOUISIANA V ALUED POLICY LAW The application of Louisiana Valued Policy Law ( VPL ) posed another controversial post-katrina and Rita insurance issue. Many states enacted VPLs in the late 1800s and early 1900s to curtail insurers from profiting by selling insurance policies with inflated values and then only paying actual value when the insured property was a total loss. Many insureds attempted to recover full policy value under VPL for damages caused by both wind and flood. The courts, however, have consistently held that Louisiana s VPL only requires an insurer to pay the agreed face value of the insured property if the property is rendered a total loss from a covered peril. 9 Consequently, unless the property was totally damaged from the covered peril, it does not appear that the insured can recover the full value of the property under Louisiana s VPL. POWER OUTAGE LITIGATION The U.S. Court of Appeals for the Fifth Circuit held that a homeowner s policy did not include coverage for damage to refrigerators and freezers caused by power outages occurring outside the residential premises, affirming the district court s 5 See Jackson v. Johns-Manville Sales Corp., 781 F.2d 394, 397 (5th Cir. 1986). 6 In re Cameron Parish Rita Litigation, 2007 WL (W.D. La. 2007). 7 Weiss v. Allstate Ins. Co., No , 2007 WL , at *1 (E.D.La. Mar. 21, 2007) (Vance, J.); Broussard v. State Farm Fire and Casualty Co., No , 2007 WL , at *2-3 (E.D.La. Aug. 2, 2007) (Vance, J.). 8 Mills v. State Farm Fire & Casualty Company, 2007 WL (S.D.Miss. 2007). 9 Chauvin v. State Farm Fire & Casualty Co., 2007 WL (5th Cir 2007); see also Landry v. Louisiana Citizens Property Ins. Co., 983 So.2d 66 (La. 2008) (holding that the homeowner must prove that the damage resulted from the proximate or efficient cause of a covered peril and held that an insurer can set forth alternative calculations for paying for a covered loss in a policy).

4 decision. 10 The Fifth Circuit interpreted the expanded coverage for power interruption occurring on the residence premises 11 as an exclusion of other unspecified types of loss attributable to such interruption. It determined that Hurricane Katrina caused an extensive electrical power loss and not a power outage. Hence, the electrical power loss did not occur on the residence premises, but off the premises. The Fifth Circuit, accordingly, upheld the insurer s refusal to replace the homeowner s freezer and refrigerator unites damaged by food putrefaction as a result of power outages after Hurricane Katrina. BAD F AITH C LAIMS AND P ENALTIES U NDER LOUISIANA L AW Louisiana law expressly requires all insurers to pay the amount of a claim within thirty days after the insured or any party of interest proffers a receipt of satisfactory proof of loss. La. Rev. Stat. 22:658(A)(1). Unlike a typical loss claim, in the case of a catastrophic loss, the insurer is required to initiate loss adjustment of a property damage claim within thirty days after the notification by the claimant. La. Rev. Stat. 22:658(A)(3). In addition to these stringent time response requirements, Louisiana has placed additional duties on the insurers. The insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. La. Rev. Stat. 22:1220(A). Specifically, under Louisiana law, the insurer breaches that duty if there is a: (1) misrepresentation of pertinent facts or insurance policy provisions, (2) failure to pay a settlement within thirty days after an agreement is reduced to writing, (3) denial of coverage or attempt to settle a claim on the basis of an application which the insurer knows was altered without notice to, or knowledge or consent of, the insured, (4) misleading by the insurer as to the applicable prescriptive period, or (5) failure to pay the amount of any claim due any person insured by the contract within sixty days after receipt of satisfactory proof of loss from the claimant when such failure is arbitrary, capricious, or without probable cause. 10 Maria Arias-Benn, et al v. State Farm Fire & Cas. Ins. Co., Case No (5th Cir. 08/06/2007). 11 Additional Coverage, subsection 7: Power Interruption. We cover accidental direct physical loss caused directly or indirectly by a change of temperature which results from power interruption that takes place on the residence premises. The power interruption must be caused by a Loss Insured occurring on the residence premises. The power lines off the residence premises must remain energized. This coverage does not increase the limit applying to the damaged property.

5 (6) failing to pay claims pursuant to R.S. 22:658.2 when such failure is arbitrary, capricious, or without probable cause. LA. REV. STAT. 22:1220(B)(1-6). The conduct prohibited in La. Rev. Stat. 22:658(A)(1) and 22:1220(B)(5) are virtually identical and most often litigated. 12 Essentially, both statutes forbid the untimely payment of a claim after receiving satisfactory proof of loss when that failure is arbitrary, capricious, or without probable cause. 13 Louisiana courts will evaluate the arbitrary, capricious, or without probable cause standard on a case-by-case basis. 14 The statutes each impose specific consequences if the insurer s actions do not conform to the imposed obligations. Namely, if the insurer fails to adequately respond to a claim within thirty days, the insurer will be subject to pay a penalty, in addition to the amount of the loss, of fifty percent of the damage due or up to one thousand dollars, whichever is greater. La. Rev. Stat. 22:658 (B)(1). Further, if the insurer fails to properly pay the amount of a claim within sixty days, the claimant may be awarded general and special damages associated with the breach of the imposed duty, as well as penalties up to five thousand dollars. La. Rev. Stat In addition to the penalties outlined above, Louisiana and Federal jurisprudence has held that La. Rev. Stat. 22:1220 creates a separate cause of action for general damages, which include mental anguish and distress. 15 Although Mississippi has not adopted an Unfair Claims Practices Act, insurers and adjusters can be found in bad faith if their actions are found to be both (1) without a legitimate or arguable basis and (2) willful, wanton or in reckless disregard for the rights of the insured. Under Mississippi common law, an insurer and/or adjuster can in bad faith, and damages may include, in addition to contractual remedies, prejudgment and post-judgment interest, attorney s fees, consequential damages and punitive damages. NATIONAL F LOOD I NSURANCE A CT The National Flood Insurance Act (NFIA) governs most if not all flood insurance policies. See 42 U.S.C. δ Under FEMA s administration of the National Flood Insurance Program (NFIP), Write Your Own ( WYO ) insurance companies 12 Reed v. State Farm Mutual Automobile Insurance Company., 2003-C-0107 (La. 10/21/03), 857 So.2d Calogero v. Safeway Insurance Company of Louisiana, (La. 1/19/00), 753 So.2d Scott v. Insurance Company of North America, 485 So.2d 50, 52 (La. 1986). 15 Weiss v. Allstate Ins. Co., 512 F. Supp. 2d 463 (E.D. La. 2007); see also Perrien v. State Farm, 2008 U.S. Dist. LEXIS (E.D. La. 2008).

6 issue standard government policies, collect premiums, adjust claims, pay on those claims and defend lawsuits. FEMA bears all of the financial risk in the adjustment of claims and in the defense of lawsuits. The NFIA does not expressly preempt state law; however, courts in many jurisdictions, including Louisiana, Mississippi and Florida, have ruled that federal law preempts state law in claims related to NFIP issued policies. 16 Courts in Louisiana have extended federal preemption over bad faith claims made by insureds. See West v. Harris, 573 F. 2d 873 (5 th Cir. 1978)(Barring an insured from asserting a bad faith claim based in state law due to federal preemption). Conversely, the U.S. Court of Appeals for the Fifth Circuit has ruled that state law applies to claims against WYO agents for fraudulent or negligent procurement of an NFIP policy. See Spence v. Omaha Indemnity, 996 F.2d 793 (5 th Cir. 1993). Thus, an insured may bring a claim against a WYO insurer in state court for negligent or fraudulent misrepresentation of coverage. Other states bar such actions in state law. An insured may only recover pecuniary damages under the NFIP, and pre-judgment interest is prohibited. The NFIP also bars recovery for punitive damages and for the recovery of attorney s fees. 16 See Stapleton v. State Farm Fire and Casualty Co., 11 F.Supp. 2d 1344 (M.D. Fla. 1998); Durkin v. State Farm Mutual Insurance Company, 3 F. Supp. 2d 726 (E.D. La. 1997) and Eddins v. Omega Insurance Company, 825 F. Supp. 752 (N.D. Miss. 1993). For additional information, contact: V. Thomas Clark, Jr. (225) tom.clark@arlaw.com