The Flood After the Storm: The Hurr icane Katrina Home owner s Insurance Litigation

• Author: Eugene Benick
• Position: American University Washington College of Law
• Pages: 13

Eugene Benick,is a third year student and senior editor on the Business Law Brief at American University

Page 52

With the Fifth Circuit's ruling, the insurance companies emerged victorious, and with their exposure units left intact.⁶² Yet this victory did not come cheap for the insurance companies. Whether insurance companies in the Gulf Region will continue to pursue these legal battles in the future remains unseen. Some companies have already withdrawn from the region, citing risk management as the cause.⁶³ Depending on the ultimate resolution of the Katrina Cases, insurance companies may become more hesitant to issue homeowners' insurance in areas susceptible to hurricanes and flooding.

For instance, the Allstate Corporation took a $3.7 billion pre-tax loss as a result of Hurricane Katrina.⁶⁴ State Farm, in comparison, lost between $8 to $9 billion.⁶⁵ These figures, from 2005, do not take into account attorneys fees the Hurricane Katrina cases are generating or the post-Katrina settlements and damage awards.⁶⁶ When these costs start to add up for insurance companies, business decisions will need to be made about the viability of insuring the Gulf Region. Allstate has already made this decision, cutting back its homeowners' insurance coverage along the coast from Connecticut to Texas in order to minimize its exposure.⁶⁷ As more insurers seek to minimize their exposures, the face of insurance in the Gulf Region will change, creating both business opportunities and business perils.

The Doomsday Scenario

While the Hurricane Katrina cases are beginning to reach trial, it is difficult to predict what the outcomes will be and what changes will occur in insurance law as a result. However, as the first Katrina opinions illustrate, courts are willing to look at precedent in similar disaster cases for guidance. Throughout both the In re Katrina Canal Breaches opinions, the courts relied heavily on persuasive precedent, including the Colorado Supreme Court opinion involving the failure of the Lawn Lake Dam in Colorado. ⁶⁸ When other courts address Katrina related cases, they will certainly look to the other Katrina cases for guidance. Thus, as time marches on, the precedent set in the Katrina litigation may have an exponentially greater impact.

Perhaps one of the most feared natural disasters today is a catastrophic hurricane striking New York City. While many wish to believe this scenario is impossible, it is not only possible but also probable. In fact it happened in 1938, when a category three hurricane dubbed the "Long Island Express" ravaged Long Island, New York.⁶⁹ The hurricane struck the relatively undeveloped island (compared to its state of development today) and caused millions of dollars in damage.⁷⁰ Adjusting for inflation, the "Long Island Express" was the twelfth most costly hurricane ever recorded, inflicting a total of $6 billion in damages along the Northeast.⁷¹ While researchers claim an "epic" hurricane is unlikely to hit New York, category three hurricanes have a return frequency of eighty years (compared to 200 years for a strong category three-low category four hurricane).⁷² If another category three hurricane were to hit New York City, 130 mph winds and a thirty-foot storm surge could cause both the Hudson and East Rivers to overflow.⁷³ The storm could inflict more than $100 billion.⁷⁴ in economic losses while forcing the evacuation of three million people-six times the population of pre-Katrina New Orleans.⁷⁵

As Judge Duval noted in his opinion In re Katrina Canal Breach, insurance companies have chosen not to fix areas of their policies that have been previously challenged as ambiguous.⁷⁶ While optimists hope that insurance companies will learn from the Katrina litigation, only time will tell if they actually will. If the same legal issues were to arise in the setting of another hurricane disaster, such as one striking New York City, courts in New York may look to the Katrina cases for guidance in unsettled areas of the law. While the New York City hypothetical is likely the last thing on judges' minds as they rule in the Katrina homeowners' cases before them, the hypothetical does serve as a reminder of how many more homeowners may ultimately be affected by this litigation.

_____

NOTAS

[1] Willie Drye, Hurricane Katrina:The Essential Time Line, National Geographic, Sept. 14, 2005, available at http://news.nationalgeographic. com/news/2005/09/0914_050914_katrina_timeline.html (explaining that the National Hurricane Center in Miami, Florida issued an advisory warning on what would become Hurricane Katrina on August 23, 2005 and that Hurricane Katrina made landfall in New Orleans on August 29, 2005)

[2] Lisa Habib, Katrina's statistics tell story of its wrath, The Weather Channel, Aug. 28, 2007, available at http://www.weather.com/newscenter/ topstories/060829katrinastats.html?from=hurricane_tracker; Brett Martel, Number of Deaths From Katrina Rises, Wash. Post, May 20, 2006, available at http://www.washingtonpost.com/wp-dyn/content/article/2006/05/20/ AR2006052000309.html

[3] Richard D. Knabb, Jamie R. Rhome, & Daniel P. Brown, Nat'l Hurricane Ctr., Tropical Cyclone Report Hurricane Katrina, 12 (Aug. 10, 2006), available at http://www.nhc.noaa.gov/pdf/TCR-AL122005_ Katrina.pdf ($81 million is a "preliminary estimate" from 2005)

[4] Laura A. Foggan & Katherine Van Pelt, Wiley Rein LLP, Post-Katrina Insurance-Related Litigation, Nov. 2006, http://www.wileyrein.com/publication. cfm?publication_id=12842

[5] In re Katrina...