So, while the attention of the Mississippi legal and insurance communities has been focused on the Scruggs circus, it looks like a bit of work has still been going on elsewhere in the state. For example, consider
this story at Insurance Journal:
California-based law firm Irell & Manella reports it has won a partial summary judgment on behalf of national gaming operator Pinnacle Entertainment Inc., in an insurance coverage case arising out of Hurricane Katrina.[...]
In August 2005, Pinnacle’s facility in Biloxi, Miss., sustained property damage and business interruption loss.
According to Irell & Manella, two of Pinnacle’s insurers, Allianz Global Risks U.S. Insurance Co. and RSUI Indemnity Co. (together providing more than $100 million of excess coverage), took the position that coverage for all storm surge damage falling within their policy layers was precluded by flood exclusions contained within their policies.[...]
After a two-hour oral argument on the motion, Judge Sandoval took the motion and cross-motions under submission. On March 26, he issued his ruling in Pinnacle’s favor.
The IJ article reads like this is a case of a Mississippi judge rewriting property insurance contracts after the fact. However, while that is an attractive thought to someone in the industry…I don’t think that is actually the case here. IJ skipped over a key paragraph in Irell and Manella’s press release:
According to Pinnacle’s CEO Dan Lee, “Pinnacle has always maintained that it has coverage for flood and other related damage caused by Hurricane Katrina. We specifically bought $400 million of coverage for Weather Catastrophe Occurrences like Katrina, including any resulting flood. We have been extremely disappointed that it has taken a lawsuit to convince our excess insurers of this fact.”
The phrase “Weather Catastrophe Occurrences” is the telling phrase here. A “Weather Catastrophe Occurrence” peril is a feature of some property insurance contracts written by London brokers. It’s my understanding that, at least at the time of Katrina, it was not uncommon for London to exclude Flood but provide coverage for the specific peril of “Weather Catastrophe Occurrence”, which in the case of a hurricane, arguably includes storm surge.
I’ll make an educated guess that the excess property carriers, Allianz and RSUI, issued “follow-form” excess contracts. They probably provided their own exclusions of the flood peril…but didn’t exclude WCO since WCO isn’t a peril you normally see on primary contracts written by American insurers.
The insurers likely tried to argue that the flood exclusion was unambiguous and superseded all other perils. However, I’d bet that either “flood” was not redefined in the excess contracts, or that the judge thought the flood exclusion was ambiguous when it comes to WCO. Ambiguity tends to be interpreted in a manner favorable to the party with the shallower pockets.
Moral of the story: If you’re an excess insurer, you need to be familiar with the language of the forms you’re following, and either price or exclude accordingly.