Post-Katrina Insurance Issues Surrounding Water Damage Exclusions in Homeowners' Insurance Policies

Publication Date: February 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Business

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Abstract:

In the aftermath of Hurricanes Katrina and Rita, homeowners in Louisiana, Mississippi, and Alabama have protested what they view as inappropriate obstacles to the payment of their property damage insurance claims. When insurance adjustors and damage experts assessed the properties damaged by the 2005 storms, they were faced with the issue of allocating damages between wind (a covered loss) and flood (an excluded loss). The delays and economic uncertainty that this activity has engendered have raised financial and legal issues for insurers, as well as homeowners and businesses along the Gulf Coast region.

The solution for some of the insureds has been to litigate with their insurers under a variety of legal theories with the objective of avoiding the standard "water damage" exclusion -- a move that would arguably allow insureds to receive coverage for water damage under their homeowners' policies. Many of these theories rely on the principle that any ambiguity in the insurance policy should be construed in favor of the policyholder. In addition, even where the water damage exclusion is enforced, difficult factual and legal disputes have arisen relating to the allocation of damage between covered wind damage and excluded flood damage.

In the aftermath of the devastating 2005 hurricane season, three broad policy issues for the 110th Congress have emerged related to post-Katrina economic uncertainties: (1) the massive insured and uninsured property losses and their impact on Gulf Coast property insurance markets and rebuilding after Katrina, (2) assertions that insurers have shifted the cost of damages onto the federal flood program and U.S. taxpayers, and (3) unreliable government flood maps that are used in decision making by homeowners for purchasing insurance.

Post-Katrina insurance claims litigation and the economic uncertainty it generates for consumers and insurers raise concerns about the volatility in the legal environment in terms of post-event judicial interpretations in the scope of insurance coverage. Questions include What should be done to mitigate the economic consequences of future floods? Are the American people and policymakers ready to address perceived weakness in the U.S. floodplain management policy? Should the nation forgo development of its floodplains (a new policy initiative) or continue along the current path embodied in the NFIP?

Finally, insurance analysts have observed that a large percentage of those eligible to buy federally subsidized flood insurance do not. What could or should be done about this? These and other policy questions might be examined in the 110th Congress. This report will be updated as events warrant.