Sonnenschein Nath & Rosenthal LLP on Broussard v. State Farm: Fifth Circuit Clarifies Burdens of Proof on Wind v. Water
On April 7, 2008, the Fifth Circuit reversed a judgment for actual and punitive damages against State Farm in a Mississippi bad faith case arising out of Hurricane Katrina. Storm surge had left the Broussards’ home totally destroyed, leaving only the foundation slab. Their policy had “named peril” coverage for wind damage to their personal property and “open peril” coverage for damage to their home caused by non excluded perils. Both coverages excluded water damage. State Farm’s adjuster concluded that the “[e]vidence suggests [the] home was more damaged by flood than wind,” and denied the claim.
At trial, the Broussards contended that their home was destroyed by “tornadic” winds before the storm surge arrived. After close of the evidence on causation, the district court granted judgment as a matter of law (“JMOL”) to the Broussards. As the Fifth Circuit summarized its reasoning:
With regard to the personal property claim, the district court found that the parties had stipulated that the Broussards' property was destroyed during Hurricane Katrina, that Hurricane Katrina was a “windstorm,” and that State Farm was liable under the “named peril” personal property coverage because “windstorm” was a named peril. With regard to the dwelling claim, the district court held that State Farm bore the burden of proving that the Broussards' loss was caused by the excluded peril of flooding. The district court noted that State Farm's expert admitted that he could not distinguish between the wind and water damage to the Broussards' home with any reasonable degree of probability. In light of this admission, the district court found that “there was no sound evidence upon which the finder of fact could rationally determine that [State Farm] had met its burden of proof” and entered JMOL for the Broussards.
The jury awarded the Broussards $2.5 million in punitive damages, which the district court remitted to $1 million. The Fifth Circuit reversed the JMOL on causation, vacated the punitive damages, and remanded for a new trial on causation.
As to the personal property coverage, the Fifth Circuit held that the district court erred in concluding that “the destruction of the Broussards' personal property by Hurricane Katrina was sufficient to establish the separate assertion that the property was destroyed by ‘windstorm,’ a ‘named peril’ under the Broussards' personal property coverage.” “[A] stipulation that the Broussards' personal property was destroyed by Hurricane Katrina is insufficient to establish that it was destroyed by a windstorm, since Hurricane Katrina unleashed both wind and water forces.”
On the dwelling coverage, the Fifth Circuit held that State Farm had presented sufficient evidence to meet its burden of proving that the damage to the home was caused by storm surge:
Two of State Farm's experts, Kurt Gurley and Robert Dean, testified that the damage to the actual structure of the Broussards' home came from the storm surge. Gurley stated that it was “75% likely” that wind caused a relatively small amount of damage to the Broussards' roof before the storm surge arrived, but that Hurricane Katrina's winds were not strong enough to cause structural damage to the home. Gurley also opined that, given the data available regarding the Broussards' home, no other wind engineer could state more definitively whether there was wind damage or specify the extent of the damage more precisely.
A rational jury could have accepted that evidence, so JMOL was inappropriate.
State Farm contended that once it had produced evidence that the loss was caused by water, the burden shifted back to the Broussards to persuade the jury that the cause was actually wind. The Fifth Circuit rejected that contention, concluding that State Farm’s proposed rule often would take the causation issue away from the jury.
Punitive damages required proof that State Farm “denied the claim without an arguable or legitimate basis, either in fact or law, and (2) with malice or gross negligence in disregard of the insured's rights.” State Farm had an arguable basis:
The adjuster concluded that the damage to the trees was more consistent with flooding than with tornadic winds and stated that “[o]ur investigation shows that the insured location and surrounding neighborhood was damaged by a tidal surge and flood” and denied coverage on this ground. Although the Broussards have pointed to some facts which suggest that wind destroyed their home prior to the arrival of the tidal surge, State Farm had an arguable basis for denying their claim based on the observations of its adjuster regarding the position of the debris line and the condition of trees on and surrounding the property.
Similarly, while the Fifth Circuit rejected State Farm’s argument on burden of proof, an insurer “is not subject to punitive damages for referring a disputed legal question to the courts.”
State Farm had failed to reconsider the Broussards claim when its own experts concluded that some covered wind damage to the shingles on their roof likely occurred prior to the arrival of the storm surge. Even though that damage would have been minor, it was covered and should have been paid. But the particular facts of the case prevented this from being a proper basis for punitive damages. The Broussards had received a $2000 advance within ten days after Hurricane Katrina, and that, combined with the two-percent hurricane deductible (about $2400), sufficed to cover the kind of minor roof damage the expert found.
State Farm’s reliance on its anti-concurrent causation clause could not support bad faith, because that was a valid and enforceable clause. Even if State Farm’s investigation was negligent, a better investigation would not have established that the denial lacked arguable merit.
William T. Barker
Sonnenschein Nath & Rosenthal, LLP