Katrina Claimants Not Covered for Flood Damage

In a closely watched court case in Mississippi, a federal judge rules that a couple cannot collect damages from Hurricane Katrina's storm surge because their insurance policy excludes flood damage. The ruling could set a precedent for thousands of other cases.

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MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

A federal judge in Mississippi said today that Nationwide Insurance is not obligated to compensate a couple whose home was badly damaged by Hurricane Katrina last August. The ruling is a big victory for the insurance industry, which faces thousands of lawsuits from disgruntled policyholders who say they were wrongly denied coverage.

NPR's Jim Zarroli has covered this case and spent some time with the plaintiffs. He joins us now. Jim, this was the first Katrina-related lawsuit to go to trial. What were the facts in this case?

JIM ZARROLI reporting:

Well, the plaintiffs here are Julie and Paul Leonard of Pascagoula, Mississippi, who have a house about 500 feet away from the Gulf of Mexico. On August 29, 2005, when Katrina struck, about five feet of water washed into their home. There was about $148,000 worth of damage, although the house itself remained standing.

Now about two weeks after the hurricane, Nationwide told them that their policy did not cover flood damage, and the company gave them a check for about $1,600 for some damage caused by high winds, basically shingles that came off the roof. The Leonards sued Nationwide. The case went to a non-jury trial last month.

NORRIS: And if they weren't actually covered for flood damage, what was the basis of their claims against Nationwide?

ZARROLI: Well for one thing, the Leonards say there was much more damage to their home from wind than Nationwide says there was. The Leonards say the wind did about $47,000 worth of damage. The crux of their case, though, was that the insurance agent who sold them the Nationwide policy - his name is Jay Fletcher - misled them about whether they needed flood insurance.

Paul Leonard says he went to Fletcher after another hurricane in 1999. The agent sort of discouraged him from getting flood coverage. The Leonards' lawyers called other witnesses who said they were told the same thing, agent denied that and said he had sold flood insurance to lots of people in Pascagoula.

NORRIS: So what did the judge say in his ruling about that dispute between the Leonards and that agent?

ZARROLI: Well he said something like he doesn't know why this agent would sometimes discourage people from getting flood insurance and sometimes would sell it to them, but he essentially says, you know, the onus is on the Leonards to get flood coverage, and that if Paul Leonard walked away from these discussions with the agent thinking he was covered for wind and water damage, he was wrong. He should've asked better questions, and he has to take responsibility for not getting coverage.

The judge also denied the first part of their claim, saying basically that almost all of the damage to the house was caused by water, not wind.

NORRIS: Now this is one case and one very particular set of facts. But what kind of impact will this ruling have on some of the other cases that were filed by homeowners in the gulf against Nationwide or other insurance companies?

ZARROLI: Right. There are thousands of suits that have been filed. They still have to be heard. The Leonards' lawyer, who is Richard Scruggs, who successfully took on big tobacco companies a few years ago, represents about 3,000 policyholders himself. This case was somewhat different from the others because it hinged on the role of the insurance agent.

A lot of the others deal more directly with the wind versus water damage. In other words, someone's house was damaged during Katrina, insurance company says it's not paying because it was flood-related and the homeowner takes the company to court over that. The judge did say one thing that could prove helpful to plaintiffs.

The insurance policies have language about concurrent damage, which means that if your house is damaged in a flood and you don't have flood insurance, they can refuse to pay you anything. They don't even have to pay you for, say, non-flood damage, like damage from wind that happened at the same time. The judge said that was ambiguous, and he wouldn't allow it. Nationwide wasn't invoking that clause here, but other insurance companies have. They could be affected. But in essence, there's no question this is a big victory for the insurance companies.

NORRIS: That's NPR's Jim Zarroli speaking to us from New York. Jim, thanks so much.

ZARROLI: You're welcome, Michele.

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