Judge L.T. Senter is the sole federal judge presiding over Hurricane Katrina claims in the Southern District of Mississippi and his recent rulings in these cases could spell a world of trouble for insurers.
Judge L.T. Senter is the sole federal judge presiding over Hurricane Katrina claims in the Southern District of Mississippi and his recent rulings in these cases could spell a world of trouble for insurers. In these hurricane loss claims, much of the dispute centers around what portion of the insured’s loss is covered wind damage and what portion was caused by flooding excluded under their homeowners policies. Though not as publicized as the “hurricane winds caused the storm surge, thus all losses from the storm surge are covered under the policies as wind damage” argument made popular by Mississippi’s Governor Haley Barbour and Attorney General Jim Hood, the recent determinations by Judge Senter regarding which party bears the burden of proof regarding the amount and extent of covered and non-covered losses may prove to be much more significant.
Tuepker v. State Farm
On May 24, 2006, Judge Senter issued a ruling in Tuepker v. State Farm Fire & Cas. Co., 2006 U.S. Dist. LEXIS 34710 denying State Farm’s motion for judgment on the pleadings. The Tuepkers owned a residence in Long Beach, Mississippi insured under a State Farm homeowners policy at the time it was completely destroyed by Hurricane Katrina. Approximately one month later, State Farm denied the Tuepker’s claim on the grounds that the destruction of the property was a result of “storm surge, wave wash and flood.” As is the case with most standard homeowners policies, State Farm specifically excludes coverage for “flood, surface water, waves, tidal water, tsunami, seiche, overflow of a body of water, or spray from any of these, all whether driven by wind or not.”
Based on this exclusion, State Farm sought a motion for judgment on the pleadings. Judge Senterdenied State Farm’s motion based on the inference from Plaintiffs’ Complaint that destruction of the property was attributable, at least in part, to covered wind and rain damage. The Court also held that State Farm’s water damage exclusion was valid, but constituted an affirmative defense to insureds’ claims. Therefore, State Farm bore “the burden of proving the exclusion applies to the plaintiffs’ claims.” The Court went on to clarify that if the evidence indicates some portion of the damages were caused by the covered wind and rain and some portion caused by the excluded floods/storm surge, the determination of which was the proximate cause of the damage to the insured’s property or the proportion of the damage caused by each phenomenon would be a question of fact for the jury.
What this ruling by Judge Senter appears to spell out is that the issue of “what proportion of insured’s damages were caused by a covered event (wind and rain) as opposed to a excluded event (storm surge/flood)” is to be left to a battle of dueling experts, with the ultimate determination of causation being placed in the hands of the jury.
However, before the case was presented to a jury, Judge Senter granted State Farm’s interlocutory appeal to the Fifth Circuit Court of Appeals. Among the issues to be decided by the Fifth Circuit panel is the issue of the correct burden of proof in these types of cases.
In its brief, filed January 30, 2007, State Farm proffers, “the law is clear that once State Farm demonstrates that an excluded peril (i.e. storm surge) caused or contributed to Plaintiffs’ loss, it is Plaintiffs’ burden to show that the exclusion does not apply to some or all of their claimed damages and that, in all cases,Plaintiffs have the burden of proving the amount and extent of independent damage caused by a covered peril (i.e., wind). (Emphasis added). As opposed to the burden of proof applied by Judge Senter, State Farm proposes that once evidence of excluded water damage is shown, the insurer is entitled to judgment as a matter of law unless Plaintiffs can present evidence or expert testimony proving not only that they sustained wind damage, but also a clear segregation between that covered wind damage and the excluded water damage. The effect of such a burden of proof for State Farm, and insurers in general, is not only the significant savings of avoiding “dueling experts” at trial if insureds cannot present reasonably reliable evidence regarding the extent of their wind damage, but also the altogether avoidance of a trial in front of local citizens (themselves, too, likely affected in some way by Katrina). Judge Senter’s and State Farm’s positions regarding burden of proof inTuepker, though conflicting, each find some level of support in the law. Ultimately, the Fifth Circuit’s decision regarding the burden of proof will prove very important in shaping the nature of litigation in Hurricane Katrina claims, as well as, potentially, for other types of claims involving mixtures of covered and excluded losses.
Broussard v. State Farm
A little over six months after he issued his opinion in Tuepker, and just a few weeks before State Farm filed its brief to the Fifth Circuit in that case, Judge Senter appeared to have again shifted the burden of proof in the Hurricane Katrina claims further onto the insurer. In Broussard v. State Farm Fire & Cas. Co., 2007 U.S. Dist. LEXIS 2611, Judge Senter entered a directed verdict in favor of the insureds, stating that a “mere scintilla of evidence” regarding the extent of uncovered water damage is insufficient to submit an issue to a jury. After hearing the arguments of both sides at trial, Judge Senter did not allow the issue of liability to be submitted to the jury, instead awarding the insureds the full limits of their homeowners policy ($212,222) as a matter of law. However, he did allow the jury some participation, as he permitted them to rule on punitive damages against State Farm (the jury awarded $2.5 million, which was later reduced to $1 million).
Under the facts of the case, the parties in Broussard stipulated that the insureds sustained accidental and direct physical losses of their dwelling and its contents as a result of Hurricane Katrina, a windstorm. Based on these stipulations, Judge Senter determined that the insureds had met their initial burden of proof to establish a prima facie case supporting their claims. According to Judge Senter, it then became the insurer’s burden to prove their affirmative defense based upon the water damage exclusion. Judge Senter explained that in order to carry its burden of proof, State Farm had to establish, by a preponderance of the evidence, not only that exclusionary water damage occurred, but also what portion of the total loss is attributable to flood damage. Any amount of the loss that State Farm could not prove was caused by flooding, beyond a preponderance of the evidence, would be payable to Plaintiffs under the Policy.
Before the jury, State Farm’s expert witness could not make a determination of the extent of wind damage before the storm arrived. Therefore, Judge Senter held that no evidence had been introduced from which the jury could reasonably determine which portion of the Broussard’s loss was attributable to water as opposed to wind. Accordingly, Judge Senter ruled, as a matter of law, State Farm had to pay the amount of its policy limits to insured. In addition, despite the apparent contradiction with Tuepker, Judge Senter held that State Farm’s attempt to shift the burden of proof to insureds to prove what portion of their claimed losses were attributable to the covered wind, was unreasonable and left State Farm open to punitive damages.
Essentially, what transpired in Broussard was the worst case scenario for State Farm. Judge Senterappears to have further shifted the burden of proof onto the insurers in these Hurricane Katrina claims. Now, instead of “dueling experts” opining as to the origin of damages, as Judge Senter seems to advocate in Tuepker, the court can take the decision away from the jury if it does not believe the testimony of the insurer’s expert meets the requisite degree of certainty regarding the separation of damages. Even more significant is the ruling by the Court that an insurers denial of a claim and attempt to place the burden on insured to present evidence supporting an estimate of damages based on covered wind damage now opens insurers up to punitive damages. In Broussard, an additional $1 million in such damages for denial of a $212,222 policy.
Based on State Farm’s appeal in Tuepker, it appears likely that they will also appeal the Broussarddecision. However, the Fifth Circuit will likely have already made a decision in Tuepker relating to the appropriate burden of proof in these cases. Until then, though, insurance companies can only hold their breath and pray the Court of Appeals does not adopt Judge Senter’s shifted burden of proof… either of them.