While Hurricane Katrina related litigation is generally winding down, there are still some cases which are making their way through the Louisiana appellate process.  In the most recent decision coming out of the Louisiana Fourth Circuit Court of Appeal, a causation dispute led to an award in favor of an insured for consequential damages and bad faith penalties against an insurer.

In Burke v. Lafayette Insurance Company, et al., Docket No. 2011-CV-0755, 2012 La. App. Unpub. LEXIS 255 (Apr. 18, 2012)1, the Plaintiff’s home sustained damage as a result of Hurricane Katrina.  The loss was reported to its property insurer, Lafayette Insurance Company.  Following an inspection of the home, Lafayette initially estimated covered building replacement cost damage at approximately $25,000, and contents replacement cost damage at approximately $16,315.  Based on the insured’s contents estimate, Lafayette agreed to pay the insured $20,637 for contents damage.  Thereafter, the insured reported additional damage.  Lafayette’s second inspection revealed $16,872 in additional covered property damage, $6,623 for additional contents damage and $4,472 for additional living expenses, all of which the insured was paid for.  The Plaintiff eventually gutted her home, believing that it needed to be done due to the existence of mold.  She spent approximately $168,659 in repair costs.  Lafayette refused to pay any additional amounts to the Plaintiff, other than the cost of a mold air test, claiming that the home improvements and modifications were not related to Hurricane Katrina.

An initial trial took place in September 2007, however, it resulted in a mistrial.  A second trial took place in November 2010, after which the trial court awarded the insured a total of $110,096.32 for property and contents damage, and additional living expenses.  The trial court also found that Lafayette had acted in bad faith, and its conduct was arbitrary, capricious or without probable cause in violation of La. R.S. 22:1973.  The trial court also found that the insured had sustained $200,000 in consequential damages a result of the violation, as well as awarding the insured an additional $200,000 in penalty damages for that violation.

On appeal, Lafayette submitted six assignments of error to the Court of Appeal of Louisiana, Fourth Circuit.  In one of its more substantive assignments of error, Lafayette argued that the trial court erred in allowing the insured’s public adjuster to testify about the causation of damages to the insured’s home because (1) the public adjuster never examined the home prior to it being gutted and repaired, (2) the public adjuster did not offer an opinion as to causation until the day before trial started, and (3) even when he did, he did not decipher between damages caused by mold versus damages caused by wind.  The Court found that since the public adjuster had met Daubert qualifications in the first trial, and since he had conducted some type of investigation, the trial court had not abused its discretion in accepting the public adjuster as an expert witness to testify on causation.  This holding from the Court may pave the way for insureds in future litigation to potentially rely on their public adjusters as expert witnesses with respect to causation.  This would obviate the need for insureds to retain more qualified professionals to testify on causation.  However, it remains to be seen how far courts will let insureds go with this issue, as courts are still constrained by Daubert.

Three of the assignments of error before the Court related to the finding of bad faith against Lafayette.  Lafayette argued that it had “good faith” coverage defenses, and furthermore, absent the public adjuster’s testimony, the insured did not offer any evidence that the full extent of her damages were related to Hurricane Katrina.  The Court agreed that Lafayette had acted in bad faith, noting that the damage to the insured’s home was substantial, and the insured was left with unpaid expenses and unable to fully repair her home for a substantial period of time.  The Court further held that Lafayette had failed to prove at trial that a reasonable doubt existed as to the severity of the damages to the insured’s home, as there was ample evidence in the trial record which described the damage to the home, and the costs to repair the damage.  Therefore, the Court agreed that Lafayette’s failure to pay within the statutory time period was arbitrary and capricious, in violation of La. R.S. 22:1973.  Moreover, the Court found that the trial record supported an award of $200,000 in consequential damages, because the insured suffered “mentally at the hands of Lafayette and her anguish was proven at trial and therefore punishable under the theory of consequential damages.”  Id. at *20.  It appears that the “mental anguish” referred to by the Court may have been nothing more than general complaints of frustration by the insured with the insurance claim handling process, which courts generally do not consider sufficient to establish such a claim for damages.  In this respect, the decision may be inconsistent with other authority in Louisiana and elsewhere.

Lastly, Lafayette appealed the trial court’s finding as to the amount of bad faith penalty damages, arguing that at most the insured could be awarded under La. R.S. 22:1973 was $5,000.  The Court disagreed, finding that the statute clearly set forth the guidelines for penalties to be “assessed against the insurer in an amount not to exceed two times the damages sustained or five thousand dollars, whichever is greater.”  La. R.S. 22:1973.  The Court noted that an award of $200,000 in penalties did not shock the conscious nor did the award go against established Louisiana precedent.  Therefore, the Court refused to disturb the jury’s findings absent a clear abuse of discretion.

While the question of whether an insurer has acted in bad faith in the context of an insurance claim must be determined on a case-by-case basis, this decision is useful to property insurers in that it will remind insurers that they need to be able to provide sufficient evidence, during both the claim adjustment period, and during any subsequent litigation, to substantiate any claim defenses that they may have.  As noted by Judge Belsome in his concurring opinion, the record apparently was void of any evidence to support Lafayette’s position that most of the insured’s repair costs were related to property improvement and modifications, or that the mold exclusion applied when the insurer made no mention of mold.  More thorough substantiation of its position during the claim handling process might have aided the insurer in defending the lawsuit here.

1 Reproduced by Robinson & Cole LLP with the permission of LexisNexis. Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.  All rights reserved.  No copyright is claimed as to any portion of the original work prepared by a government officer or employee as part of that person’s official duties.