The Gulf Coast, Still Wrecked,
Grapples With Insurance Suits

GULFPORT, Miss. -- In the federal courthouse here, U.S. District Court Judge Louis Guirola Jr. is playing an unusual role: plaintiff.

Thousands of Mississippi homeowners are suing their insurers saying they were unfairly denied compensation for destruction wreaked a year ago by Hurricane Katrina. Judge Guirola and his wife, whose two-story home was leveled during the storm, are among them.

Their case -- like that of many others -- revolves around a key issue: Was the nearly $650,000 worth of damage caused by the storm's winds, making it an event covered by most policies? Or was it caused by the wall of water that slammed ashore, something that insurers typically exclude?

Like many Mississippi homeowners, the Guirolas had no flood-insurance policy, which is usually obtained through a federally backed program. The suit says their house and possessions were "completely destroyed by hurricane wind." Their insurer, Nationwide Mutual Insurance Co., says the home was in essence washed away and denied the claim. In thousands of such cases, the courts are just starting to try to figure out who's right.

The outcomes will ultimately help determine the pace and scope of rebuilding as the Aug. 29 anniversary of Katrina nears. It will also affect the price and availability of disaster insurance, especially along this debris-clogged coastline. If they lose, insurers say rates may rise for everyone else to cover billions in unexpected liabilities. They could also decide to scale back such coverage.

Whatever the result, policy makers will likely have to consider just who should cover hurricane damages in the first place: the government, private insurers or homeowners. The current system, in which both public and private sectors cover a piece, helps create the disputes clogging the legal system.

On Tuesday, one of Judge Guirola's colleagues, Judge L.T. Senter, issued the first verdict in one of the Mississippi cases, which also involved Nationwide. Judge Senter ruled that the insurer did not have to pay most of the policyholder's claim, just the portion that could be attributed to wind damage, a tiny amount in this instance. But the precedent may be limited because the house was still standing, making evidence easier to gather, whereas many others are not. Also, the judge said the insurer was liable for the wind damage, a small portion of the claim.

In Mississippi, the cases are complicated by the fact that much of the state's legal and political leadership has chips in the game. In addition to Judge Guirola, Sen. Trent Lott, U.S. Rep. Gene Taylor and a federal magistrate judge have sued their insurers. Richard Scruggs, a prominent plaintiff's attorney whose firm represents Judge Guirola, also plans to file suit; his house near the water was damaged.

Three federal judges have already disqualified themselves from hearing Judge Guirola's case, which has since been assigned to a federal judge in eastern Michigan. One of those three was Judge Senter.

Insurance companies have settled 90% of Katrina-related cases nationwide, with 1.24 million homeowners receiving $17.6 billion, according to the Insurance Information Institute. Many of these claims were for properties located inland.

Yet in Mississippi alone, there are 3,000 cases pending in federal courts, according to Mr. Scruggs. Thousands of homeowners are also suing their insurers in Louisiana, where a higher percentage of residents, especially in New Orleans, also had flood insurance. Cases there have moved even more slowly.

One problem is lack of evidence. Many homes were, in post-Katrina parlance, "slabbed," wiped away down to their flat, concrete foundations. "There was nothing left ... but rubble" of Judge Guirola's wood-frame, brick-faced house, his suit contends. Inside the house, before the storm, sat a baby grand piano. Judge Guirola played for pocket money as a young man.

In 1968, the federal government created the National Flood Insurance Program after insurers complained that flooding was too costly and unpredictable to cover. It sells flood policies to homeowners at low rates that cover damage up to $250,000. Homeowners can purchase additional flood insurance from a private company, but that kind of coverage is relatively rare.

Wind vs. water cases existed before the flood program, but its creation helped set the stage for the current legal battles. With insurers on the hook for wind damage, they have an incentive to argue that water is to blame. When flood policies don't cover the damage, homeowners will cite the wind. In some cases, insurers that cover floods have battled insurers that cover wind.

Heart of the Cases

At the heart of many of these cases are questions of timing, cause and effect. What came first, the wind or the water? Was the flooding enabled by the wind? Can flooding damage be distinguished from that of heavy rain?

Many insurance policies, including that of Judge Guirola, contain an obscure clause that subtly widens insurers' exclusions and in effect could pre-empt wind vs. water arguments. It essentially says insurers don't have to pay when flooding happens along with other forces.

The debate over such "anti-concurrent causation" clauses intensified after Katrina destroyed and drenched the Gulf coast. Every hurricane spawns wind vs. water cases, says Randy Maniloff, an attorney for insurance companies at Philadelphia's White and Williams LLC, "but not on this scale."

Judge Guirola, 55 years old, the son of Cuban immigrants, got a law degree from the University of Mississippi and worked as an attorney before becoming a magistrate judge in Texas and later, Mississippi.

In 2000, as a Mississippi magistrate judge, he ruled against a Biloxi couple who sued their insurer after Hurricane Georges of 1998. The homeowners wanted compensation for damage to the structure. Judge Guirola found that the cause of the damage -- a settling in their underlying soil -- was excluded in the couple's insurance contract.

Three years ago, he was nominated by President Bush to a lifetime appointment as a district court judge. Judge Guirola was confirmed by the Senate 92-0.

The Guirolas' home sat along a crescent-shaped driveway in Long Beach, Miss., a community just west of Gulfport. The house where the judge lived was within walking distance of the Gulf of Mexico's sandy beaches and the Gulf Coast Highway.

As Katrina approached late last August, the Guirolas, who have three daughters, evacuated the area along with most people along the coast, leaving few witnesses to the devastation that followed.

By 5 a.m. on Aug. 29, Category 1 winds of at least 74 mph reached the waters off Long Beach, rising to at least 96 mph by about 7 a.m., according to a report citing government data prepared by an inspector hired by the Guirolas. The wind blew as high as 147 mph.

The report says the waters were less than five feet above sea level at the coast by 5 a.m. and "rapidly rose" to roughly 26 feet by 11 a.m. The mayor of nearby Biloxi, Miss., was quoted in the local newspaper calling the storm "our tsunami."

The report, based on a Nov. 5 inspection, describes uprooted trees, scattered shingles and other debris. It estimates that the Guirola residence was located 15 feet above sea level, with the second floor at 26 feet. "It is reasonable to hypothesize that flood water did not reach the ground floor elevation until about 9 a.m. and barely touched the second floor level," if at all, said the report, dated March 10.

The inspector's "firm opinion [was] that wind substantially damaged the Guirola residence prior to the time that flood water reached the elevated structure."

Less than two months after Katrina, the suit contends, a Nationwide adjuster inspected the damage and told Judge Guirola he thought the house and property were "damaged by hurricane wind and that he would 'write it up that way.' "

In papers filed in response to the suit, Nationwide disputes that recollection. It says the adjuster inspected the damage and that the Guirolas gave the adjuster "photos and documents related to the property."

On March 13, Nationwide denied the insurance claim. "It appears that your loss was caused by water or water-borne material as defined in your policy," Nationwide said in a letter filed with the court.

Nationwide said the Guirolas' policy had a version of the anti-concurrent causation clause that says such water damage is not covered even if other forces, such as wind, contributed "in any sequence." Nationwide noted in its denial that the Guirolas' policy doesn't cover losses caused by rising water in a storm.

Judge Guirola and his wife, Stephanie, filed suit about a month after Nationwide denied their claim and requested a jury trial. Their suit argues that the policy explicitly covers hurricanes and damage caused by rain if wind caused an opening that let it inside.

In court papers, Nationwide asked the suit be dismissed. It also asked the case be moved to an "impartial" venue, away from the hurricane-ravaged coast. Even though a Michigan-based judge is presiding, the case is being heard in Mississippi.

A spokesman for Nationwide, Joe Case, declines to comment on Judge Guirola's suit in particular. In general, he says: "We remain committed to vigorously defending the flood-exclusion language in our homeowners' policies." If that language were struck down, Mr. Case says, homeowners around the country could be harmed if insurers decide to scale back such coverage or raise prices.

Through his office, Judge Guirola also declines to comment, citing the pending litigation. Mr. Scruggs, whose firm represents the judge, says the Guirolas are still paying a mortgage on the destroyed house. "He agonized over it for a long time but finally felt like he had no choice," Mr. Scruggs says of Judge Guirola's decision to file the suit.

Fate of Homeowners

The fate of many Mississippi homeowners is in the hands of Judge Guirola's colleague, Judge Senter, who served for most of his career in the northern district of Mississippi, far from the coast.

Judge Senter's first pre-trial ruling, issued days before Judge Guirola filed suit, backed Allstate Corp. and a flood-damage exclusion contained in one of its policies. Though that case is still pending on other issues, the ruling was a victory for the insurance industry, which feared that a decision striking down flood exclusions would expose it to billions of dollars in liabilities.

In another case, Judge Senter issued a pre-trial ruling that gave homeowners an opportunity to pursue claims. In late May, he ruled that State Farm Fire & Casualty Co.'s anti-concurrent causation clause was "ambiguous." The ruling said damage caused by wind and rain would be covered and that caused by floodwaters would not. How much an insurer might have to pay would depend on the evidence both sides could produce at trial. In cases like Judge Guirola's, where so little is left, that presents a whole new challenge.

"Most people aren't standing around watching the damage to their house as the hurricane is rolling through," says John Elliott, an attorney at New York-based Anderson, Kill & Olick PC, who is co-lead counsel for plaintiffs in a Louisiana case that is seeking class-action status.

Meanwhile, most of the hurricane debris has been removed from Judge Guirola's street. Between their plot and the Gulf, there are mostly battered trees and weeds, and more than half a dozen for-sale signs.

Email your comments to rjeditor@dowjones.com.