In the first case of more than 3,000 individual claims against insurance companies mounting similar defenses (Mississippi Attorney General also filed a separate class action lawsuit), Federal District Judge L.T. Senter Jr, the judge who will be responsible for deciding almost all of the other cases, sided with Nationwide and held that:

"The provisions of the Nationwide policy that exclude coverage for damages caused by water are valid and enforceable terms of the insurance contract. Similar policy terms have been enforced with respect to damage caused by high water associated with hurricanes in many reported decisions."

The damage to the home in question owned by Police Lieutenant Paul Leonard and his wife Julie Leonard, is estimated at $130,000. In his decision, the judge increased the sole compensation for wind damage from $1,228 to $2,889. Notably, the Leonards were required to pay a $500 deductible before receiving their benefits.

There are a few problems with this decision.

The first is that despite his ruling, the judge specifically held that the contract's distinction between water and non-water damage was ambiguous, and that if a decision were based on the contract's its plain text, it would also have excluded all claims for any damage if water contributed to the damage in any way.

This finding implies that the insurer purposefully wrote contracts in a way that it could later argue covered nothing if water was involved in damaging the house in any manner. These types of insurance contracts are contrary to established Mississippi law.

As stated in the decision:

A windstorm is a weather condition that is specifically included in the coverage of
this policy. When the policy is read as a whole, I find that this exclusionary provision is ambiguous-the policy as a whole providing explicitly for windstorm coverage in one section and purportedly excluding the same coverage on the grounds that a windstorm, a "weather condition," and an excluded peril, a flood, occurred at approximately the same time - If this second provision were read to exclude wind damage that occurs at or near the time that any excluded water damage occurs, the result would be contrary to well-established Mississippi law.

If the judge found that this language was ambiguous to the extent that if read literally it would have such an absurd result, it is arguably so ambiguous that the distinction between water and non-water damages should be ruled null and void in its entirety.

The plaintiffs' primary argument was that a "storm surge" driven by wind, is different from the classic flood which was specifically excluded form the contract.

As identified in the complaint, the insurance company somewhat acknowledged the ambiguity:

"On September 7, 2005, nine (9) days after Hurricane Katrina, defendant Nationwide suspiciously sent Plaintiffs a "Hurricane Coverage and Deductible Provision Endorsement," which for the first time attempted to exclude damage caused by hurricane "storm surge" for the October 2005 to October 2006 policy period. This conveniently new "Hurricane Coverage and Deductible Provision Endorsement," which of course was not in effect during Hurricane Katrina, conclusively establishes that 'storm surge' damage was not an excluded form of damage."

I'm not a weather expert but, for what it's worth, storm surge has a separate definition than flood on Wikipedia.

The second major issue is that the plaintiffs repeatedly asked their insurance agent if they needed flood insurance. What is significant about the decision is the judge's finding that the evidence did not support the claim that their insurance agent "misled them by implying that their Nationwide homeowners policy would cover water damage caused by storm surge flooding."

The judge found that the insurance agent repeatedly said that there was no need to get additional insurance. Moreover, despite these inquiries and the response the repeated response that additional coverage was not needed, the judge found that the plaintiff "lept" to the conclusion that the agent had said that additional insurance was not needed because his insurance already covered all hurricane related damage.

According to the judge:

"[The insurance agent] sometimes discouraged his clients from purchasing flood insurance policies. That much is clear from the testimony of a variety of witnesses, including Fletcher's office assistant, Cindy Byrd Collins. There was enough evidence on this point to warrant the conclusion that Fletcher, as a matter of habit and routine, expressed his opinion, when he was asked, that customers should not purchase flood insurance unless they lived in a flood prone area (Flood Zone A) where flood insurance was required in connection with mortgage loans - There was no testimony from which I can discern the reason Fletcher discouraged some of his clients from purchasing flood insurance policies."

The court's primary point was that while the agent may have given bad advice, he did not affirmatively mislead the plaintiffs. This point could really go either way. The agent may have just genuinely felt that it was not necessary, but this point also raises the issue of the level of the duty of cared owed by an insurance agent to his or her clients. More importantly, the issue is also illustrative of the fact that even if the insurance agent had misled them, how would they prove it?

There are also two other side issues.

The first is that the insurance adjuster who first surveyed the damage attributable to wind later modified his report to reduce coverage for a variety of items. "The adjuster had also been reprimanded twice by the Texas Board of Professional Engineers for not following 'generally accpeted engineering practices.'"

The plaintiffs' attorney has also cited whistleblowers who have come forward to claim that insurance companies are secretively rewriting their existing contracts to excluded water related damages.

While reasonable minds can disagree about the outcome of this first of 3,000 cases, what is most distressing is the reaction of the insurance community.

In response to the ruling, the Property Casualty Insurers Association of America ("PCIAA") praised the decision and said that the decision allowed

"[I]nsurers and other businesses in the state to operate without a lingering cloud of uncertainty about the validity of their contracts, which will help energize both the insurance market and the economy of Mississippi."

"Help energize both the insurance market and the economy of Mississippi?"

Don't you need repaired homes for that? How is denying claims to rebuild destroyed homes energizing anything but the profits of insurance companies, let alone for the whole of the state?

PCIAA also said that the decision:

"[R]einforced the need for consumers to take proactive steps to prepare for disasters by making sure that their insurance polices are up to date and that they have the correct type of coverage… especially for flood insurance."

But, as previously stated, the plaintiffs in this case repeatedly asked their insurance agent if they needed additional flood insurance coverage, and were repeatedly told - - - no.

The Property Insurers of America also said that:

"A healthy insurance industry is absolutely key to a rejuvenated economy down here."

Except that without people or homes, how can the economy exist?

Is this the twilight zone?

In other news:

"Shares of most property and casualty insurers rose following the ruling, amid a generally surging stock market - - - American International Group Inc. shares added 73 cents to $62.43

Allstate Corp. shares gained 80 cents to $57.22,

St. Paul Travelers Cos. shares rose 93 cents, or 2.1 percent, to $44.02,

and Hartford Financial Services Group Inc. shares jumped $1.01 to $82.49"

and such

and so on

and on

and on

and on.

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