Insurers win as post-Hurricane Katrina issue is resolved | NOLA.com

The next time a hurricane hits, the biggest beneficiary of a person's flood insurance policy might be his homeowners insurance company.

That's because a pair of lingering Hurricane Katrina insurance cases that dealt with the biggest remaining issue about how flood and homeowners policies interact have been settled.

Known as the "flood offset" issue, the settlement favors insurers, allowing them to deduct any money the homeowner receives from his National Flood Insurance Policy from what the insurer might have to pay through the homeowners policy.

For example, if a $250,000 home that was fully insured sustained both flood and wind damage and the flood policy paid $150,000, then the wind insurer would be on the hook for no more than $100,000, even though the homeowner paid premiums to both insurers for full coverage.

Federal courts had split on the issue.

In the Hurricane Rita cases in the Western District of Louisiana, judges ruled in favor of plaintiffs that policyholders could collect the full value of both policies, meaning that they could end up with payouts totaling more than the value of the home. The idea was that people had paid premiums on two separate policies, and unless the homeowners insurer had expressly stated that it would reduce the value of the policy in event of a flood, it couldn't take a credit for any flood proceeds.

In Katrina cases, federal judges in the Eastern District of Louisiana ruled in favor of insurers, saying that insurance companies could deduct whatever the National Flood Insurance Program paid on potential settlements, meaning that companies that collected premiums on the full value of policies risked only smaller payouts if the homeowners also carried flood policies.

No cases made it to the 5th U.S. Circuit Court of Appeals to resolve the conflict, so all eyes were on a state case in St. Bernard Parish in hopes that the Louisiana Supreme Court ultimately would determine the law of the land.

The case, Shirley Frught v. Lafayette Insurance Co., encountered delays, in part because it originally had been assigned to Wayne Cresap, the judge who is now in a federal penitentiary in Illinois for a bribery scheme that let inmates walk free from the parish prison. The case was assigned to his replacement, Perry Nicosia, and went to trial in August, a week before the sixth anniversary of the storm.

But in March, a Katrina case in St. Tammany Parish, Robin and Hildrith Wegener v. Lafayette Insurance Co., went before the Louisiana Supreme Court. The Wegeners' attorney, Rick Trahant, had filed writs to the state's high court over an issue of bad faith penalties, and Lafayette did the same over the flood offset question.

In its opinion granting a new trial in the Wegener case, the state Supreme Court said that a policyholder can recover money under both policies, but not beyond the total value of the loss, because homeowners shouldn't end up with a windfall.

With that decision, the Frught case, which was supposed to provide the forum for the flood offset question, fell apart, and Lafayette Insurance Co. prevailed at trial.

Ryan Reece, lead attorney in the Frught case, said the Supreme Court's stance in Wegener did not require the St. Bernard court to rule the same way. But since it's a clear indication of what the high court thinks about the flood offset issue, as a practical matter not many trial court judges are going to ignore it.

Reece said that as a result of the decision, consumers suffering hurricane damage will now have a hard time getting their homeowners insurance claims adjusted in a timely manner, because insurers will wait to see what the National Flood Insurance Program comes up with, because they can get credit for whatever is paid.

"You've now taken away any incentive for the homeowners company to timely adjust the loss. They're going to wait and see what gets paid by flood," Reece said. He said he does not plan to pursue an appeal.

Stephen Barry, lead attorney for Lafayette Insurance Co., said the case establishes an order of payment that the flood policy should go first and the wind policy should go second.

"It's really a matter of looking at the total scope of the damages. If all of those damages were paid by insurance, then you've been made whole," Barry said. "You can't collect for the same damage twice. If you've already been paid in flood, you can't re-characterize your damages."

Rebecca Mowbray can be reached at rmowbray@timespicayune.com or 504.826.3417.

Source: http://www.nola.com/business/index.ssf/2011/10/insurers_win_as_post-hurricane.html

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