Katrina spawns storm of lawsuits against insurers

Michael Pollick
November 07, 2005

A set of Mississippi lawsuits percolating through the legal system in the wake of Hurricane Katrina has major implications for Florida.

Starting four weeks ago, class action specialist Richard "Dick" Scruggs of Mississippi began filing what will become a suite of at least six separate lawsuits.

He is filing each suit on behalf of a different residential homeowner, and against a different one of the six major property and casualty companies that cover coastal Mississippi.

Scruggs is a famous litigator. He represented 32 states and helped win a $250 billion settlement for them from the tobacco industry a few years ago.

And he has a powerful personal experience to motivate his present legal quest as well. His family home in Pascagoula was destroyed by Katrina, as were the homes of many of his friends and relatives.

At first, very few of them were interested in his novel legal approach to take on the insurance companies, preferring instead a traditional visit from the adjuster followed by a set of payments, one from the national flood insurance program and one from the insurance company itself.

But in some cases, those proposed payments have been so paltry compared with the losses incurred, Scruggs said, that he is now being besieged with calls from potential litigants.

Scruggs' first suits revolve around a set of seemingly contradictory insurance industry clauses that coastal residents have been wrestling with for decades.

The homeowner policies typically include a separate rider that specifically promises coverage for hurricanes. But in their list of exclusions, they eliminate water damage of most types, including flooding.

The basic question and potential precedent is this: If storm surge is caused by the winds of a hurricane, how can it be excluded from hurricane coverage?

Separately, Mississippi Attorney General Jim Hood has sued five major insurance companies in state court in Jackson, alleging that they are avoiding fair claims by insisting that damage to the homes is because of flooding, which is not covered under homeowner policies.

Scruggs has taken more of a divide-and-conquer strategy by suing each company separately, in hopes of getting a court to agree to a precedent.

The insurance companies "are trying to have it both ways," Scruggs said. "They say you are getting hurricane coverage and charge you a back-end premium for it, as a condition to writing your homeowner policy. Then they are saying storm surge is a flood and is excluded, because wind-driven water is in their excluded perils definition."

Scruggs points out that the National Weather Service definition of a hurricane includes storm surge.

The insurance industry takes the stance that the policy language "is cut and dried," said Robert Hartwig, senior vice president of the Insurance Information Institute. All the policies exclude "any kind of water damage, whether or not the water is driven by wind. It could not be more clear," he said.

The Scruggs lawsuit raises a legitimate question, said attorney Maureen Martin, who writes critically of Scruggs as part of a publication she edits called "Lawsuit Abuse Fortnightly."

"If the ocean surges and floods a town, is that flooding or is that hurricane damage?

"The insurance companies are going to fight this. This isn't going to go away for nuisance value," she said.

Hartwig, of the Insurance Information Institute, agreed.

"To acquiesce to his demands would be tantamount to allowing him to rewrite the contract retroactively," Hartwig said.

Scruggs is not broadcasting the rest of his plan, should he win a precedent in one of what he calls his "model cases." However, he has received inquiries about being included in future litigation from more than 4,000 Mississippi residents who feel they are being offered unjust settlements by the insurance companies.

He said the estimates he has heard are that 100,000 Mississippi homes were extensively destroyed or made untenable by Katrina. He ballparks the potential payoff for Mississippi residents at "way north of $100 billion ... That is what is in play here."

For now, Scruggs is limiting his efforts to Mississippi, but he has a bigger map in mind.

"I'm not excluding Florida, but I haven't been called by anybody who actually had damage over there," he said. "I think this runs all the way from North Carolina to Texas.

"It has resonance for all coastal residents."

If Scruggs were to prevail in the Southeast, it is questionable whether waterfront communities could even get future coverage, according to industry spokesman Hartwig.

"If this contract can be rewritten retroactively, the fact of the matter is insurance won't be available at any price."

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