Leonard v. Nationwide Mut. Ins. Co.

Citation499 F.3d 419
Decision Date30 August 2007
Docket NumberNo. 06-61130.,06-61130.
PartiesPaul LEONARD; Julie Leonard, Plaintiffs-Appellees-Cross-Appellants, v. NATIONWIDE MUTUAL INSURANCE CO., Defendant-Appellant-Cross-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Richard F. Scruggs (argued), David Zachary Scruggs (argued), B. Humphreys McGee, III, Scruggs Law Firm, Oxford, MS, for Paul and Julie Leonard.

Christopher Landau (argued), Daniel F. Attridge, Elizabeth Marie Locke, Jeffrey B. Wall, Thomas A. Clare, Kirkland & Ellis, Washington, DC, Harry Mitchell Cowan, Watkins, Ludlam, Winter & Stennis, Jackson, MS, for Nationwide Mut. Ins. Co.

Appeals from the United States District Court for the Southern District of Mississippi.

Before JONES, Chief Judge, and REAVLEY and SMITH, Circuit Judges.

EDITH H. JONES, Chief Judge:

This homeowner's policy coverage dispute arose from the destruction wrought by Hurricane Katrina along the Mississippi Gulf Coast. We affirm the judgment of the district court, but to do so we must work through some erroneous reasoning that led to its conclusion.

I. Background

The Leonards' home lies twelve feet above sea level on the southmost edge of Pascagoula, Mississippi, less than two hundred yards from the Mississippi Sound. Hurricane Katrina battered Pascagoula with torrential rain and sustained winds in excess of one hundred miles per hour. By midday, the storm had driven ashore a formidable tidal wave — also called a storm or tidal surge — that flooded the ground floor of the Leonards' two-story home.

A. The Policy

The Leonards purchased their first Nationwide homeowner's policy from Nationwide's Pascagoula-area agent, Jay Fletcher, in 1989. Although Nationwide twice revised its standard homeowner's policy language between 1989 and 2005, the Leonards' "Form HO-23-A" policy that was in force when the storm made landfall was substantially indistinguishable from the "Elite II" policy they originally purchased.

Like almost all homeowner's policies, Nationwide's Form HO-23-A is a "comprehensive," or "all-risk," policy pursuant to which all damage to dwellings and personal property not otherwise excluded is covered. Also, like almost all homeowner's policies, Nationwide's policy covers only damage caused by certain instrumentalities — or "perils" — and excludes damage caused by others. Relevant to this appeal are the policy provisions that define the scope of coverage for damage caused by (1) wind; (2) water; and (3) concurrent action of wind and water.

1. Wind

Wind damage both to a dwelling and to personal property is a peril insured against under Section I, clause 2 (the "wind-damages clause"), which along with pertinent prefatory language states:

Coverage A — Dwelling and

Coverage B — Other Structures

(. . .)

Coverage C — Personal Property

We cover accidental direct physical loss to property described in Coverage C caused by the following perils except for losses excluded under Section I — Property Exclusions:

(. . .)

2. windstorm or hail.

Direct loss caused by rain . . . driven through roof or wall openings made by direct action of wind, hail, or other insured peril is covered. . . .

The policy thus covers losses caused by rain blown through a hole in a roof, wall, or window. Exclusively wind-related damage, like a blown-off roof, or a window damaged by a wind-propelled projectile, is also covered.

2. Water

Like most homeowner's policies, the Leonards' policy unambiguously excludes damage caused by water — including flooding — in a broadly worded exemption clause (the "water-damages exclusion"):

Property Exclusions

(Section I)

(. . .)

(b) Water or damage caused by water-borne material. Loss resulting from water or water-borne material damage described below is not covered even if other perils contributed, directly or indirectly, to cause the loss. Water and water-borne material damage means:

1. flood, surface water, waves, tidal waves, overflow of a body of water, spray from these, whether or not driven by wind. . . .

When the Leonards annually renewed their policy, they received the following notice from Nationwide informing them that flood losses would not be covered, but that additional flood coverage was available upon request:


A Message From Your Nationwide Agent:

Your policy does not cover flood loss. You can get protection through the National Flood Insurance Program. If you wish to find out more about this protection, please contact your Nationwide Agent.

The Leonards never purchased additional flood coverage under the federally subsidized National Flood Insurance Program ("NFIP"). See 42 U.S.C. §§ 4001-4027.

3. Concurrent Action by Wind and Water

The prefatory language introducing the water-damages exclusion addresses situations in which damage arises from the synergistic action of a covered peril, e.g., wind, and an excluded peril, e.g., water:

1. We do not cover loss to any property resulting directly or indirectly from any of the following. Such a loss is excluded even if another peril or event contributed concurrently or in any sequence to cause the loss. . . .

Commonly referred to as an "anticoncurrent-causation clause," or "ACC clause," this prefatory language denies coverage whenever an excluded peril and a covered peril combine to damage a dwelling or personal property. The inundation of the Leonards' home was caused by a concurrently caused peril, i.e., a tidal wave, or storm surge — essentially a massive wall of water — pushed ashore by Hurricane Katrina's winds. Accordingly, argues Nationwide, losses attributable to storm surge-induced flooding are excluded under the ACC clause. The validity of the ACC clause is the key interpretive battleground of this appeal.

B. Paul Leonard's Conversations with Fletcher

Paul Leonard testified that when he first bought his policy in 1989, he asked Nationwide's agent Jay Fletcher whether the Nationwide policy covered hurricane-related losses. According to Leonard, Fletcher responded that all hurricane damage was covered. Fletcher stated in his deposition testimony that he did not recall this conversation; the district court deemed it irrelevant to the case.

Leonard claims he spoke again with Fletcher ten years later to discuss a proposed increase in the wind/hail deductible that Nationwide was instituting on its homeowner's policies. Leonard called Fletcher after seeing advertisements for additional NFIP coverage in the wake of Hurricane Georges, which struck the Mississippi coast in 1998. Fletcher allegedly assured Leonard that he did not need additional flood coverage because Leonard did not live in an area classified Zone A for flood risk by the Federal Emergency Management Agency ("FEMA"). Fletcher purportedly added that his own property was not insured under the NFIP. Leonard does not allege that Fletcher told him the Nationwide policy covered flooding caused by a hurricane; Leonard merely inferred from Fletcher's comments that such coverage existed.

At the bench trial, the district court admitted under Federal Rule of Evidence 406 what it characterized as evidence that Fletcher "as a matter of habit and routine, expressed his opinion . . . that customers [in Pascagoula] should not purchase flood insurance unless they lived in a flood prone area (Flood Zone A) where flood insurance was required in connection with mortgage loans." Leonard v. Nationwide Mut. Ins. Co., 438 F.Supp.2d 684, 690 (S.D.Miss.2006). Trial evidence demonstrated that between 2001 and Katrina's landfall in late August 2005, Fletcher sold approximately one hundred eighty-seven NFIP policies to Pascagoula-area customers, twelve of whom lived in the Leonards' waterfront neighborhood.

C. Hurricane Damage

Inspection of the Leonards' residence following the storm revealed modest wind damage. The roof suffered broken shingles and loss of ceramic granules, but its water-tight integrity was not compromised. The non-load-bearing walls of the garage and the garage door were severely damaged; doors in the house and garage had been blown open. Finally, a "golf-ball sized" hole in a ground-floor window was likely caused by a wind-driven projectile.

Water damage, in contrast, was extensive. The Leonards' neighborhood had suffered a seventeen-foot storm surge, causing the entire ground floor of their residence to become inundated under five feet of water blown ashore from the Mississippi Sound. Walls, floors, fixtures, and personal property sustained extensive damage. The second floor of the house remained unscathed.

Nationwide's adjuster evaluated the storm damage and, after applying the Leonards' five hundred dollar deductible, tendered a check for $1,661.17 — the amount determined attributable solely to wind. Nationwide informed the Leonards that damages caused by water and the storm surge's concurrent wind-water action were barred, respectively, by the water-damages exclusion and the ACC clause.

At trial, the Leonards offered expert testimony that the total damages actually exceeded $130,000, but this figure did not apportion damages caused by different perils. The Leonards' wind-specific assessment claimed $47,365.41, including costs for roof replacement and structural repairs to the garage.

D. Procedural History

Before trial, Nationwide moved for partial summary judgment, arguing that: (1) the ACC clause and water-damages exclusion unambiguously precluded coverage for any damage not solely attributable to wind, and (2) Fletcher's purported oral statements to Paul Leonard could not modify the policy's scope of coverage under Mississippi agency law. Additionally, Nationwide moved in limine to exclude evidence of any statements made by Fletcher to Nationwide policyholders other than the Leonards under Federal Evidence Rule 406. The district court carried Nationwide's motions with the case.

Following a bench trial, the district court entered judgment for the Leonards in the amount of $1,228.16 — damage determined to have been...

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