As Hurricanes End, Legal Storms Begin: the Insurance Battle Under State Valued Policy Laws

• Publication year: 2010

Georgia State University Law Review

Volume 24 , „

Article 3

Issue 4 Summer 2008

3-21-2012

As Hurricanes End, Legal Storms Begin: The Insurance Battle Under State Valued Policy Laws

Christopher T. Conway

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Recommended Citation

Conway, Christopher T. (2007) 'As Hurricanes End, Legal Storms Begin: The Insurance Battle Under State Valued Policy Laws," Georgia State University Law Review: Vol. 24: Iss. 4, Article 3. Available at: http://digitalarchive.gsu.edu/gsulr/vol24/iss4/3

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AS HURRICANES END, LEGAL STORMS BEGIN: THE INSURANCE BATTLE UNDER STATE VALUED POLICY LAWS

Introduction

"Nothing was left of John Hadden's $600,000 beachfront house when he returned to Bay St. Louis, Miss., three days after Hurricane Katrina hit."¹ Hadden did not lose hope because he insured his home for more than $700,000.² However, months after his home was destroyed he received a letter from the insurer denying him any benefit whatsoever because his insurance policy excluded water damage.³ Thousands of families face the same crisis: Their insurance companies refuse to pay for hurricane damage.⁴

This and similar situations impacted residents all along the Gulf Coast after hurricanes "bent billboard signs, damaged trees, ripped roofs off buildings and scattered debris."⁵ Since 1995, the Gulf Coast has seen a rise in deadly storms.⁶ In fact, the hurricanes of 2005 resulted in more deaths and destruction than during the previous ten years combined.

As the catastrophic hurricanes of 2004-2005 become a memory, a new storm began to rage in courtrooms all along the Gulf Coast as insurance companies rejected claims and homeowners filed suit.⁸ Because of major hurricanes, questions of coverage under standard homeowners' insurance policies are becoming more prevalent.⁹ The major issue is how Valued Policy Laws (VPLs) apply when multiple

1. Joseph Contreras, The Check's in the Mail, Newsweek, May 29,2006, at 36.

2. Id.

3. Id.

4. Id.

5. Ivan's Stormy Trek Floods Southeast, CNN.com, Sept. 16, 2004, http://v^vw.cnn.com/2004/WEATHER/09/16/hurricane.ivan/index.html.

6. Peter Whoriskey, The Gathering Winds, Wash. Post, Nov. 27, 2005, at Al (referring to hurricanes Opal (1995), Fran (1996), Floyd (1999), Iris (2001), the quartet of Charley, Frances, Ivan and Jeanne in 2004, and the 2005 storms of Katrina and Rita).

7. Id.

8. See generally Contreras, supra note 1, at 36.

9. See Nora Lockwood Tooher, Deluge of Litigation Expected Over Hurricane Flood Insurance, Law. Wkly. USA, Oct. 10,2005, available at 2005 WLNR 24503987.

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perils work together to destroy a home.¹⁰ Throughout the Gulf Coast region, homeowners are suing insurance companies with hopes of recovering on their hurricane policies.¹¹ The Attorney General of Mississippi filed suit against insurance providers supplying seventy percent of Mississippi homeowners' insurance coverage, alleging that "insurance coverage provisions that attempt to exclude damage caused by water are unenforceable." In Louisiana, the supreme court accepted a case on the state's valued policy law,¹³ while the Florida Supreme Court recently ruled that Florida's VPL only applies when a covered peril causes a total loss, overruling a lower court decision that applied Florida's VPL when any covered peril causes any damage whatsoever.¹⁴ In Alabama, the legislature has not passed a VPL, and in Texas, the VPL only applies to fire.¹⁵ As storms damage or destroy homes and claims overwhelm insurance companies, the application of VPLs to hurricane damage is brought to the forefront of public interest all along the Gulf Coast.¹⁶ With the devastation inflicted by Hurricane Katrina, "The focus of much debate ... is how much of the damage can be characterized as damage covered by windstorm insurance rather than by either nonexistent or fairly limited, flood insurance."¹⁷

This Note analyzes the application of VPLs in light of the recent hurricanes along the Gulf Coast and encourages state legislatures to

10. See generally Tina Garmon, Evaluating Valued Policy Law After Katrina, 5 No. 4 INS. Coverage L. Bull. 1 (2006).

11. Julie Triedman, Water Torture: The Stakes are High as Katrina-Related Insurance Suits Move Toward Trial, 28 Am. L. 86, 86 (2006), available at 10/2006 AM. LAW 86 (Westlaw).

12. Rhonda D. Orin, Wind vs Water: Battle Royale Over Hurricane Claims, 53 risk mgmt. 5 (2006), available at 2006 WLNR 8639068; Adam Scales, How Will Homeowners Insurance Litigation After Hurricane Katrina Play Out?, FlNDLAW, Sep. 19, 2005, http://writ.news.findlaw.com/commentary/20050919_scales.html (discussing the complaint filed by the Mississippi Attorney General against multiple insurance companies).

13. Rebecca Mowbray, Valued Policy Case Appealed: La. Supreme Court Gets Insurance Issue, Times-Picayune, Dec. 11,2007, at Money 1, available at 2007 WLNR 24445349.

14. See Fla. Farm Bureau Cas. Ins. Co. v. Cox, 967 So. 2d 815 (Fla. 2007).

15. See James A. Knox Jr., Causation, The Flood Exclusion, and Katrina, 41 tort trial & ins. Prac. L.J. 901,920 (2006); Tex. Ins. Code Ann. § 862.053 (Vemon 2006).

16. See Contreras, supra note 1, at 36.

17. Daniel B. Rubock, U.S. CMBS: Hurricane Katrina Shows Limitations of Current Flood Insurance Practices, moody's investors serv., Sept. 30, 2005, available at http://dirt.umkc.edu/CMBSKatrina.pdf.

2008] AS HURRICANES END, LEGAL STORMS BEGIN 1045

take action to protect homeowners from debilitating loss.¹⁸ Part I defines a VPL, explains the purpose of a VPL, and defines "total loss."¹⁹ Part II examines VPLs in light of public policy arguments both favoring the insurer as well as those in favor of the insured homeowner.²⁰ Part III looks at the public policy underlying homeowners insurance.²¹ Part IV discusses strategies for circumventing VPLs.²² Part V looks at how courts apply VPLs to a total loss in situations involving both single and multiple perils ²³ Part VI examines how courts interpret ambiguity in both VPLs and insurance policies.²⁴ Part VII gives an example of a recent legislative response to the judicial interpretation of a VPL.²⁵ Finally, this Note concludes by challenging state legislatures, in anticipation of future devastating hurricanes, to revise their VPLs in order to protect homeowners from devastating financial loss.²⁶

I. Background

In 1874, Wisconsin enacted the first Valued Policy Law (VPL) and since then, twenty states have adopted some form of a traditional VPL.²⁷ A "valued policy" is defined as "one in which the value of

18. See discussion infra Conclusion.

19. See discussion infra Part I.

20. See discussion infra Part II.

21. See discussion infra Part III.

22. See discussion infra Part IV.

23. See discussion infra Part V.

24. See discussion infra Part VI.

25. See discussion infra Part VII.

26. See discussion infra Conclusion.

27. States enacting Valued Policy Laws include: Arkansas, Ark. Code Ann. § 23-88-101 (1999); California, Cal. Ins. Code § 2054 (West 2005); Florida, Fla. Stat. Ann. § 627.702 (West 2005); Georgia, O.C.G.A. § 33-32-5 (1977); Kansas, Kan. Stat. Ann. § 40-905 (2005); Louisiana, La. Rev. Stat. Ann. § 22:695 (1995); Minnesota, Minn. Stat. § 65A.01 (2004); Mississippi, Miss. Code Ann. § 83-13-5 (1936); Missouri, Mo. Rev. Stat. § 379.140 (1939); Montana, Mont. Code Ann. § 33-24102 (1981); Nebraska, Neb. Rev. Stat. § 44-501.02 (1989); New Hampshire, N.H. Rev. Stat. Ann. § 407:11 (1960); North Dakota, N.D. Cent. Code § 26.1-39-05 (1997); Ohio, Ohio Rev. Code Ann. § 3929.25 (West 1992); South Carolina, S.C. Code Ann. § 38-75-20 (1987); South Dakota, S.D. Codified Laws § 58-10-10 (1999); Tennessee, Tenn. Code Ann. § 56-7-801 (West 1932); Texas, Tex. Ins. Code Ann. § 862.053 (Vernon 2003); West Virginia, W. Va. Code Ann. § 33-17-9 (West 2005); Wisconsin, Wis. Stat. Ann. § 632.05(2) (West 2004).

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property insured is agreed upon by the parties so that in the case of a total loss, it is not necessary to prove the actual value to recover under the policy."²⁸ VPLs apply when a covered peril, such as fire, wind, or flood, destroys insured property. Along the Gulf Coast, Florida, Louisiana, Mississippi, and Texas have VPLs while Alabama does not. Texas's and Mississippi's VPLs apply only to fire insurance, while the VPLs in Florida and Louisiana apply to any peril. Courts have historically held VPLs constitutional.

A. What is a Valued Policy Law?

A Valued Policy Law conclusively establishes the value of the insured property in the event of a total loss.³³ It applies when a covered peril destroys insured property.³⁴ The statutory language of VPLs range from covering only fire to covering any covered peril, which may include wind or flood. VPLs may also exclude certain perils; for example, the Arkansas VPL specifically applies to insurance policies aside from flood and earthquake policies.³⁶ A VPL may be voided by fraudulent or criminal conduct on the part of the insured homeowner such as setting fire to one's own home.³⁷

28. 44 AM. jur. 2d Insurance § 1500 (2003).

29. See id; Fla. Stat. Ann. § 627.702 (West 2005); La. Rev. Stat. Ann. § 22:667 (1995)

30. See Fla. Stat. Ann. § 627.702 (2005) (VPL enacted); La. Rev. Stat. Ann. § 22:695 (1995) (same); Miss. Code Ann. § 83-13-5 (1936) (same); Tex. Ins. Code Ann. § 862.053 (Vernon 2003) (same); Knox, supra note 15, at 920 (stating that "Louisiana, Mississippi and Alabama do not have valued policy statutes applicable to windstorm losses," then discussing Louisiana's and Mississippi's VPL but mentioning nothing of Alabama, drawing the inference that...