Supreme Court Refuses to Hear Appeals on Key Katrina Ruling in Favor of Insurers

The nation's highest court dealt a blow Tuesday to property owners who want insurance companies to pay for damage from levee breaches after Hurricane Katrina, but the Louisiana Supreme Court is poised to tackle the issue later this month.

The U.S. Supreme Court declined to hear appeals from Xavier University and dozens of other Louisiana policyholders who sued several insurers for refusing to cover water damage from the levee breaches that flooded 80 percent of New Orleans following the August 2005 hurricane.

The plaintiffs were asking the justices to review portions of an August 2007 ruling by the 5th U.S. Circuit Court of Appeals in New Orleans that insurers are not obligated to cover water damage from a levee failure.

The 5th Circuit had refused to certify the issue as a question for the state Supreme Court to consider, and the U.S. Supreme Court declined to review that decision Tuesday.

Harvard Law School professor Charles Fried, who represented insurers in the Supreme Court appeal, said he would have been "astonished" if the justices agreed to hear the case.

"There's no important federal question, and they don't do state law. They do federal law," Fried said.

New Orleans-based plaintiffs' attorney James Garner said the Supreme Court did not consider any substantive coverage issues in declining to hear the appeal. But a spokesman for Allstate Corp. — one of several insurers named as defendants in the federal flood case — applauded the Supreme Court's decision.

"The Supreme Court's decision takes us one step closer to resolving this issue and allowing our customers to move forward with the rebuilding process," Allstate spokesman Michael Siemienas said.

The dispute between insurers and policyholders over levee failures does not end with the Supreme Court. Louisiana's highest court is scheduled to hear arguments next Tuesday in a case that is smaller in scope but parallels the issues considered last year by the federal appeals court.

"Whatever the 5th Circuit did is written in sand," Garner said. "Ultimately, it's the Louisiana Supreme Court that will decide Louisiana law."

Garner represents New Orleans apartment complex owner Joseph Sher, who sued Lafayette Insurance Co. for refusing to pay for most of the damage to his property.

Last year, a state judge ruled that Lafayette's flood-exclusion language was ambiguous and therefore covered "man-made events." The Army Corps of Engineers is widely blamed for the failure of the city's levee system.

The state's 4th Circuit Court of Appeal also sided with Sher in November, concluding that Lafayette's homeowner policies failed to exclude all forms of flooding because its language was ambiguous.

Lafayette is asking the state Supreme Court to reverse that ruling. The company argues that all flooding in New Orleans is excluded by the terms of Lafayette's homeowner policies.

"An ordinary layperson reading this provision would have no doubt that there is no coverage for damage caused by the massive flood that occurred in New Orleans," Lafayette lawyers wrote in court papers. "To the average person, it seems preposterous that lawyers have spent countless hours arguing over whether there was a 'flood.' Of course there was."

Garner counters that Lafayette and other insurers could have clarified policy language to specifically exclude water from levee breaches from coverage.

"No single case in recent times presents issues that affect more people in the State of Louisiana than this one," he wrote in his state Supreme Court brief.