April 8, 2008

Broussard v. State Farm: Fifth Circuit Reverses Punitive Damages in Dispute over Insurance Coverage for Damage Caused by Hurricane Katrina

The Fifth Circuit tossed out the $1 million punitive damages award in Broussard v. State Farm, a lawsuit involving a home damaged by Hurricane Katrina. State Farm had taken the position that the damage to the plaintiffs' home was not covered under their homeowners policy because the policy did not cover damage caused by flooding. The insureds argued that their home was damaged by wind before it was damaged by water, and that their policy expressly covered damage caused by a "windstorm." They sued State Farm for breach of contract and bad faith.

The district court granted judgment as a matter of law for the plaintiffs on liability and submitted the case to a jury to award damages. The jury awarded $2.5 million in punitive damages, which the district court reduced to $1 million. (The Fifth Circuit's opinion does not appear to mention the amount of the compensatory damages award, which did not figure into the court's analysis.)

On appeal, the Fifth Circuit reversed the grant of judgment as a matter of law on the liability issues, finding there was sufficient evidence to create a triable issue of fact as to whether the plaintiffs' property was destroyed by water as opposed to wind. That's a simplified version of the court's liability analysis, which is really beyond the scope of this blog. More relevant to our purposes, the court held that, regardless of the outcome of the retrial, State Farm could not be liable for punitive damages. The Fifth Circuit said the district court should have decided as a matter of law that State Farm had at least an arguable basis for denying the plaintiffs' claim, and therefore could not be liable for punitive damages, which are available against insurers only when they deny a claim (1) without an arguable basis, and (2) with malice or gross negligence in disregard of the insured's rights. The court's analysis here is akin to California's "genuine dispute doctrine," recently adopted by the California Supreme Court in Wilson v. 21st Century, under which an insurer cannot be liable for tort damages if the insurer takes an objectively reasonable coverage position, even if the insurer's coverage position later turns out to be wrong.

For further discussion of the Broussard case, see here and here.