Homeowner’s Insurance After Katrina: Of Winds, Waters and Agents

October 23rd, 2006 by

Judge L. T. Senter Jr. of the Federal District Court in Gulfport has ruled on the first of thousands of claims by Gulf Coast homeowners against their insurers. The judge addressed several issues related to the catastrophe: did the home owner’s policy cover flooding? He ruled it did not. Did the policy cover a combination of wind and water damage? He ruled that it might. And of interest to our many insurance agent readers, was the agent liable for failing to recommend federal flood coverage to the Leonards? The judge ruled that the agent was in the clear. (What’s that I hear – a collective sigh of relief, like air rushing from a punctured tire?)
Judge Senter said Nationwide’s home insurance policy was clear in its refusal to cover flood damage. (This type of exclusion is found in virtually all homeowner policies.) But he said the section of the policy that asserted that Nationwide had no liability for either wind or water damage when they occurred in combination or within a few hours of each other was ambiguous. The judge opened the door to claimants who could prove that the damage was both wind and water driven. (Given the nature of hurricanes, the ruling opened a very large number of doors, indeed.)
The judge said that the wind damage was covered “even if the wind damage occurred concurrently or in sequence with the excluded water damage.” He determined that most of the damage to the Leonards’ home in Pascagoula was the result of flooding, and thus Nationwide was not required to pay the full amount the Leonards were demanding.
Nationwide had paid the Leonards $1,661.17 for wind damage. Judge Senter said that, because of what he determined to be additional wind damage, they were entitled to another $1,228.16. Whoopdeedo for the Leonards. The extra bucks will buy them a couple of appliances (assuming, of course, that have a home to put them in).
Famed attorney Dickie Scruggs was disappointed, but he was able to find a silver lining in the ruling: “We didn’t bring home the full measure of damages for the Leonard family,” he said. “But they cleared a big path for all the other homeowners on the Gulf Coast.”
By the way, Dickie Scrugg’s brother in law, Trent Lott (R- MISS), lost a $600K manse in the storm and is more than a little upset with State Farm for denying his claim. He’s taking on the entire industry in a personal, and potentially far-reaching vendetta.
Agent of Destruction?
Jay Fletcher was Nationwide’s agent in the case. He had been selling insurance to the Leonards since 1989. The Leonards contended that Fletcher misled them by implying that their home-owners policy would cover water damage caused by storm surge. Paul Leonard claimed he got that impression during a conversation with Fletcher in 1999. The two met to discuss various matters, and the conversation got around to flood insurance. Leonard said the topic was on his mind because of public discussions concerning the lack of such coverage in homeowners policies, following Hurricane Georges in 1998.
The judge examined the nature of the agent’s advice: “Fletcher sometimes discouraged his clients from purchasing flood insurance policies. That much is clear from the testimony of a variety of witnesses …. There was enough evidence on this point to warrant the conclusion that Fletcher, as a matter of habit and routine, expressed his opinion, when asked, that customers should not purchase flood insurance unless they lived in a flood-prone area (Flood Zone A) …. But between 2001 and the time of Hurricane Katrina, Fletcher sold approximately 187 flood insurance policies in the Pascagoula area. Fletcher sold 12 policies in the neighborhood in which the Leonards lived.”
The agent’s inconsistency puzzled the judge, who couldn’t figure out why Fletcher discouraged some clients from buying flood insurance but went ahead and sold it to others—some quite near to the Leonards. But inconsistency is not necessarily negligence.
“There was no discussion of the reason Fletcher did not believe Leonard needed to buy a flood insurance policy. Leonard apparently inferred that Fletcher’s reason for advising him that he did not need a flood policy was that his home-owners policy would cover any and all water damage that might occur during a hurricane,” Judge Senter wrote. “This was an erroneous inference, and one that might have been avoided had either party to the conversation been more articulate in his inquiry or in his reply.”
NOTE to homeowners: push your agent for clarity. Write down the response.
NOTE to agents: Be as clear as possible with your clients. If you’re not sure what to recommend, be clear in your uncertainty.
Standard of Care
While Fletcher could have said more and could have been more explicit in his reasoning, Judge Senter did not find that he was legally obligated to do so: “This is no evidence in the record to establish the standard of care applicable to an insurance agent who is asked about the advisability of purchasing flood insurance. Absent proof of this standard of care, there is insufficient evidence to support a finding that Fletcher’s statements to Paul Leonard indicating that he … did not need to purchase a flood insurance policy breached a standard of care that governed Fletcher’s conduct as an insurance agent in these particular circumstances. Fletcher’s statement was advisory in nature, and the statement was made in circumstances in which it was reasonably foreseeable that Leonard would rely on it. But there is no evidence to support the conclusion that this statement was made negligently.”
In the post-Katrina era, we wonder whether the “standard of care” has changed – whether agents must now at least put the flood insurance option on the table, where appropriate.
Advice to Agents
This close call in federal court should serve as a wake up call to agents. No, agents don’t need to recommend flood insurance to everyone. But you do need to be clear about what you recommend and why. If coverage is a borderline call, help your clients sort out the options. Throw in a few disclaimers. And unless you are supremely confident in your ability to sort through the ever-widening exposures confronting your clients, you might look into an errors and omissions policy. Consider that some friendly advice from the Insider (with our own disclaimer, of course, that we do not sell insurance, we do not endorse any insurance products and we are not responsible for the advice provided).