Hurricane Katrina leaves her mark on insurance law

17 September 2007 Gareth Stokes

A couple of weeks ago we attended the 2007 Annual Insurance Law Seminar presented by Deneys Reitz Inc. The seminar covered a number of recent developments in local and international insurance law. FAnews Online was keen to learn more about the principles guiding lawmakers in making their determinations.

Apart from their obvious function in drafting contracts and facilitating statutory processes, the legal profession makes a living out of resolving conflict. When two parties reach a point in a particular dispute where neither party is prepared to back down some form of litigation usually ensues.

In our experience a major contributor to such disputes is that of unclear or misinterpreted communication, either written or verbal. And a quick look at any insurance policy document will provide some clue as to why insurance law is such a popular field. There are plenty of words, terms and phrases which are open for interpretation. The result is that both insurer and insured have plenty of opportunity to draw battle lines and face each other in a court of law.

Plenty of room for chance takers

Two years ago a massive storm struck the Gulf of Mexico wreaking havoc in Louisiana and along the Mississippi. The storm, christened Hurricane Katrina, caused massive flooding in the US city of New Orleans. Natural disasters of this magnitude are what insurers and insurance underwriters lose sleep over. They inevitably lead to a raft of insurance claims with subsequent payouts, rejections and litigation.

In today's newsletter we discuss some points raised in a paper presented by Heather Wilmot, associate with Deneys Reitz's litigation department. Wilmot investigated the impact of the US 5th Circuit Court of Appeal Hurricane Katrina Judgment on South African Insurance Law.

In the aftermath of Hurricane Katrina, a number of insurance policyholders had claims for damage to their properties rejected. Unhappy with the decisions, these plaintiffs launched a series of legal actions which in some cases went as high as the Federal Appeal Court. The insured contended that "the massive inundation of water into the city was the result of negligent design, construction and maintenance of the levees and that their policies' flood exclusions were ambiguous in that context." These policyholders wanted to overrule the insurers claim rejection based on ambiguity in policy wordings.

Courts stamp out the ambiguity attack

The US Federal Appeal Court ruled that the "flood exclusions in the plaintiffs policies were unambiguous in the context of the facts of the case." The insurance companies were thus justified in rejecting these claims and the insureds "were not entitled to recover under the policies."

We have skipped the lengthy debate which led to this ruling. It is sufficient to point out that the case was argued around the insured's assertion that the flood exclusion was ambiguous. To get to the bottom of this matter the court considered a hierarchy of primary interpretation rules. These, said Wilmot included: "that words receive their ordinary grammatical meaning, that words should be read in the context of the contract as a whole and that every word should receive effect." The same basic principals apply to South African law.

These cases highlight many of the difficulties that can occur in the interpretation of policy wordings. It often takes more than one level of judicial review to secure a fair and equitable interpretation of a contract. Does the final consumer or his financial intermediary really have a hope of correctly interpreting some of the insurance policy wording?

Perhaps the risk was uninsurable

It seems a number of US policyholders simply hoped the courts would be lenient and side with them in a show of sympathy for their plight.

While the legal system is left debating the issue of ambiguity and the interpretation of insurance policies, the rest of us wonder how anyone living in a low lying area surrounded by a system of levees and continually battered by violent storms would choose to exclude floods and related damage from their policies. Perhaps an investigation into miss selling is required; or perhaps we are dealing here with an uninsurable risk.

Either way, the word is out. Make sure your client understands the policy documents and make sure they understand what is included or excluded.

Editor's thoughts:
The policy wording in insurance contracts can be confusing and ambiguous at the best of times. An ordinary consumer is unlikely to infer the same meaning from a clause or term as a court determining the meaning using the contract principles mentioned in this article. The result is a great deal of litigation and a number of unexpected outcomes. We would love to hear any stories you have about short-term insurance claims that ended up in court. Send your comments and observations to
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