Brief Fact Summary.
After Hurricane Katrina struck New Orleans in 2005, many property owners (Plaintiffs) filed lawsuits against insurance companies (Defendants) who denied claims base upon policies that excluded “flood” damage. The policyowners claimed that the term “flood” did not include water damage that was caused by negligent design, construction, and maintenance of the levees breached during the storm.
Synopsis of Rule of Law.
A contract term is not ambiguous when it aligns with its prevailing meaning and where giving it another meaning would lead to illogical results.
Hurricane Katrina struck New Orleans and surrounding areas in 2005, causing widespread devastation. During the storm, several canal levees surrounding New Orleans were breached and 80 percent of New Orleans was under water. Plaintiffs sought coverage for their losses under their homeowners, renters, and commercial property all-risk insurance policies. Some of these policies excluded recovery for water damage arising from “flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these.” State Farm policies stated that “We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following….” The list of exclusions included water damage and defined that term in the same manner that the other policies had. This policy clearly stated that any water damage, regardless of the source, or combination of sources, was excluded from coverage. The Plaintiffs argued that their losses were covered by their policies, despite the exclusionary language, because the damage resulted from the negligent design, construction, and maintenance of the failed levees and the policies did not exclude coverage for inundation of water induced by negligence. Defendants declined coverage under this theory and Plaintiffs brought a series of separate state actions, which were then consolidated and removed to federal district court. The trial court found that the non-State Farm policies’ flood exclusions were ambiguous because they could be interpreted either to only exclude floods from natural causes, or could be interpreted to exclude floods from natural causes or negligent or intentional acts. As a result, the court denied the Defendant’s motion for summary judgment on these polices and held that these policies covered the Plaintiff’s losses to the extent the Plaintiffs could prove the flooding was a result of the alleged levee negligence. As to the State Farm policies, the trial court determined that the introductory language to the exclusions removed any ambiguity and clearly excluded a flood from any cause. The court dismissed the actions against State Farm. Plaintiffs and Defendants cross-appealed to the appellate court.
Is a contract term ambiguous when it aligns with its prevailing meaning and where giving it another meaning would lead to illogical results?
(King, J.) No. A contract term is not ambiguous when it aligns with its prevailing meaning and where giving it another meaning would lead to illogical results. A court must analyze an insurance policy using contract interpretation rules, as policies are contracts. As a general contract rule, words of a contract are given their prevailing meaning, and if doing so does not lead to absurd results, the words are considered unambiguous and the inquiry ends. Only where the words are ambiguous must the court look further into how the words fit into the context of the entire policy or analyze the reasonable insured’s expectations. If ambiguity still remains after these steps are taken, and two or more reasonable interpretations of the ambiguous term exists, the contract is construed against the drafter. In this case, the policies were all-risk policies, meaning that everything not excluded was covered. The issue is whether the policies unambiguously excluded flood damage. The fact that the term “flood” is not defined does not make the term ambiguous on its own. Neither does the fact that the policy could have been written to expressly exclude flooding caused by negligence. The existence of more specific flood exclusion clauses in other policies does not make the clauses at issue here ambiguous. When the scope of a policy exclusion is not readily apparent, its terms must be given their prevailing meaning. This meaning is found in dictionaries, treatises, and case law. Even when more than one meaning for the term is found in these sources, the term may not be ambiguous so long as there is a prevailing meaning that can be applied. While the sources available indicate more than one meaning of the term “flood,” the prevailing meaning found in them is an inundation of water. In light of this prevailing meaning, the flood exclusions are not ambiguous and the damage at issue here aligns with the prevailing meaning of the word “flood.” When a body of water overflows its natural boundary and inundates an area of normally dry land, that is a flood. That is what happened to New Orleans following Hurricane Katrina. Water that moves through a breached levee is still floodwater and still results in a flood, no matter the reason for the breach. Plaintiffs claim ambiguity by arguing that it is reasonable to interpret the term “flood” as only resulting from natural causes. Given the natural component of this catastrophe and the excess water associated with it, it is hard to imagine that the damage occurred only because of the non-natural cause. The non-natural aspect of this damage was only that the efforts to mitigate the effect of a natural disaster failed. If man’s failure to address a natural disaster could transform that disaster into a non-natural event that now escapes an insurance policy’s exclusion, insurers would never be able to exclude the losses from natural causes since any natural event could be characterized in some way as non-natural.
Even if the flood here could be characterized as non-natural, the term “flood” in the policies is not limited to only natural events. Plaintiffs reliance on cases involving water main breaks to back up their argument that the term “flood” is limited to natural events is misplaced because water mains are not bodies of water, the amount of water involved is not comparable, and levees, unlike water mains, are meant to interact with floodwaters. A treatise on insurance law adopts the body-of-water distinction as more useful than the natural/non-natural one. More importantly, distinguishing between floods of natural and non-natural causes would create an illogical result, because anytime floodwaters come up against a levee, a non-natural component is introduced, but the waters are still floodwaters. The result of such a distinction would be the elimination of the flood exclusion in insurance policies.
The canons of contract construction lead to the same finding. The canon of noscitur a sociis leads courts to interpret a tem by considering the meaning of the terms associated with it. The other terms associated with “flood” are not limited only to natural events. The canon of ejusdem generis tells courts that “where general words follow the enumeration of particular classes of persons or things, the general words will be construed as applicable only to persons or things of the same general nature or class as those enumerated.” This canon is inapplicable here because “flood” is a specific term in the list defining “water damage” and is not a general term. Because the term “flood” is clear and unambiguous, there is no need to look to a reasonable insured’s expectations. That is appropriate only when the term is ambiguous. The district court’s interpretation was in error and is reversed.
The trial court here looked at the dictionary definition of “flood” to find that it contemplated a natural event. The court then looked to case law regarding “water damage” in the context of broken water mains and regarding “earth movement” exclusions and saw courts apply a distinction between natural and non-naturally occurring events. Finally, the trial court rejected cases that interpreted flood exclusions as extending to inundations of water caused by the rupture of a dam or dike. Because the district court denied the Defendants’ motion to dismiss for failure to state a claim, the court of appeals reviewed the case de novo and disagreed with the district court as to each of its findings. The disparity in findings demonstrates how difficult contract interpretation can be.