At issue in Monistere v. State Farm Fire and Cas. Co., No. 07-31149 (5th Cir. Feb. 17, 2009) [here] was whether the insured homeowners recovered the appropriate amount under their flood policy for damage caused by Hurricane Katrina in August 2005.
The State Farm policy covered: (1) buildings for the amount of the "direct physical loss," up to $227,600; and (2) increased cost of compliance, which had a limit of $30,000. State Farm's adjuster initially estimated damage at $231,812.92, but this was later lowered to $133,212. State Farm paid the insured this amount, less a $500 deductible. The homeowner's submitted an estimate determining repairs would cost $154,843. This estimate was later increased to $171,638. State Farm never re-evaluated the premises nor paid any additional coverage for the building. The insureds eventually rebuilt their home for $535,000.
In January 2006, a state agency issued a "Substantial Damage Determination" letter, required the home to be rebuilt to a new height before flood insurance could be obtained. State Farm paid the full $30,000 in compliance coverage because compliance costs would far exceed this amount.
The homeowners sued in federal district court for inadequate coverage. The court had to determine the "direct physical loss", which the policy defined as "loss or damage to the insured property, directly caused by a flood." To determine "direct physical loss," the court used the judicially created "constructive total loss doctrine," and awarded the insureds their building coverage limits because there home was a constructive total loss by the flood damage. Judgment was entered on behalf of the insureds. The remainder of the amount available under the policy, or $86,787, was awarded.
The Fifth Circuit rejected use of the "constructive total loss doctrine." Although the home was a total loss, this was due to costs that regulatory authorities imposed for rebuilding, not damage to the property caused by flood. The compliance costs were capped in the policy at $30,000, and paid by State Farm. The district court could not attempt to balance the equities. Congress had determined the maximum amount that would be paid - $30,000.
Next, the court considered the amount of loss recovery to which the insureds were entitled under federal flood regulations. State Farm's adjuster testified that the insureds' repair estimates did not evaluate what amounts were paid for repairs below the floodwater level and what amounts for damage above. Other claims were also not well developed. Only "direct physical loss" caused by flood was covered. Therefore, recovery for the mold damage caused by water remaining in the home after flood waters receded was not covered. There was no basis on which the district court could have awarded a specific additional sum or even have determined that more was owed. Therefore, the Fifth Circuit reversed and judgment was rendered in favor of State Farm.
