Louisiana Valued Policy Law Dealt Blow

Aug 10, 2007

On August 6, 2007, the U.S. Fifth Circuit Court of Appeal in New Orleans issued another very important ruling in favor of the insurance industry by validating the clear intent and meaning of the valued policy law in Louisiana. 

The ruling overturns a district court ruling and reaffirms the traditional interpretation of the valued policy law–that the total loss of an insured property must be caused by a covered peril in order for the valued policy law to apply.

Generally, the valued policy law is a regulation adopted in some states to discourage insurers from selling more insurance than needed on a property. It requires that in the event of a total loss, all insurers must pay the face amount of the policy, regardless of the traditional role of indemnity–to restore on indemnitee to his or her original position–unless fraud or arson is involved.

This very favorable ruling comes just a week after the Fifth Circuit Court of Appeal overturned another district court decision in favor of insurance companies, reaffirming the flood exclusion in property insurance policies.

A copy of the State Farm Fire & Casualty v. Chauvin case is enclosed for your review.

Below is newspaper coverage of the ruling from the Aug. 8, 2007 New Orleans Times-Picayune. To read the electronic edition of the article, click here.

Should you have any comments or questions, please do not hesitate to contact this office.

La. valued policy law dealt blow
Fed appeals court backs insurance

Wednesday, August 08, 2007
By Rebecca Mowbray, Business writer

A federal appeals court dealt a major blow to Louisiana’s valued policy law Monday, unanimously affirming a ruling in favor of the insurance industry that said homeowners insurance companies do not have to pay the full value of the policy when the home was destroyed by a combination of flooding and hurricane wind damage.

The decision by the Fifth Circuit Court of Appeal in New Orleans comes after two similar cases in state court found in favor of policyholders but were later settled during appeal. Insurance companies filed appeals in those two cases — Langston v. Louisiana Citizens Property Insurance Corp. and Landry v. Louisiana Citizens Property Insurance Corp. — but settled with the policyholders before the state court system could render a decision in the appeals.

Until other cases against locally domiciled insurance companies, such as Citizens or Lafayette Insurance Co., make their way to the Louisiana Supreme Court through the state system, Monday’s decision by the federal appeals court in Chauvin v. State Farm Fire & Casualty Co. will be the major ruling on whether the 107-year-old state law applies to the ubiquitous questions of wind versus water damage that arose after Hurricanes Katrina and Rita.

State Farm, Louisiana’s largest residential insurer, hailed the ruling.

“We believe the appellate court, in affirming lower court’s decision, correctly interpreted our contract language with the policyholder,” said Fraser Engerman, a spokesman for the Bloomington, Ill., company.

Plaintiffs lawyers said they were disappointed in the Fifth Circuit, especially on the heels of last week’s ruling that insurance companies are not responsible for damage caused by manmade flooding resulting from the levee breaches.

“Just when you thought it couldn’t get any worse, there comes the Chauvin decision,” said Allan Kanner, head of the insurance section at the Louisiana Association for Justice, formerly the trial lawyers association.

The decision closes an avenue for policyholders hoping to find a way to get flood damage covered by their homeowners insurance policies, and spares major insurance companies the potential for millions of dollars of additional claims obligations.

The valued policy law says that when an insurer has any liability for a covered loss for a structure that is a total loss, the insurer is liable for the full amount of the insured value of the property, without deduction or offset, unless the company spells out a different way for calculating the loss to deduct excluded damage.

Louisiana developed its law in 1900 to deal with fire losses as part of a movement in many states to set the value of an insurance policy before a disaster strikes. The goal was to make insurance companies and policyholders agree on how much the policy is worth so that insurance companies wouldn’t overcharge customers and so that policyholders would know how much money they would receive if they lost their homes.

The valued policy law had previously been tested in court, but not in the context of hurricane wind damage, which is generally covered by homeowners insurance policies, and flood damage, which is not.

In Chauvin, a consolidation of cases involving State Farm, Allstate Insurance Co., Encompass Property and Casualty Co., Liberty Mutual Fire Insurance Co., Hartford Insurance Co. of the Midwest , Lexington Insurance Co., Metropolitan Property and Casualty Co., USAA, Travelers, AAA and Massachusetts Bay Insurance, insurers argued that the valued policy law applied only to total losses resulting from fires.

Policyholders argued that the valued policy law isn’t just restricted to fires, and that as long as the house was a total loss and some of the damage was covered, insurance companies have to pay.

In Monday’s ruling, the federal appeals court said that Louisiana’s valued policy law does not apply unless the damage is wholly attributable to a covered peril, which in this case, was wind.

Kanner said he thinks the Fifth Circuit should have deferred to the Louisiana Supreme Court since it was ruling on an issue of state law. Most insurance disputes have ended up in federal court because the companies aren’t based in Louisiana.

But Kanner is optimistic that other cases will make their way to the Louisiana Supreme Court through the local court track. “A case from the state system is going to have to work its way up to the supreme court,” Kanner said. “The state system will get it right.”

Still, the ruling is a clear victory for the state’s biggest insurance companies. “We feel that it is important ruling,” State Farm’s Engerman said.

Florida is also one of the states that has a valued policy law. A case after the 2004 hurricanes in that state found in favor of the plaintiff and upheld Florida’s law, but that law was later amended to allow for a pro-rata deduction of related losses.