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Court Declines Statutory Penalties in New Orleans Insurance Case

In a prior post, we examined the case of Berk-Cohen Associates, L.L.C. v. Landmark American Insurance Company, which concerned a dispute over an insurer’s coverage of lost revenue suffered by the Forest Isle Apartments complex in New Orleans in the aftermath of Hurricane Katrina. The district court found that the lost revenue experienced by the apartment’s owner, Berk-Cohen, was covered under the policy issued by Landmark. Based on this finding, it assessed Landmark penalties and attorney’s fees for its misinterpretation of its policy and refusal to pay Berk-Cohen for the lost revenue that it deemed covered under the policy. Landmark appealed the assessment (along with the district court’s finding on the coverage issue); although the Court of Appeals for the Fifth Circuit affirmed the district court’s holding as to insurance coverage, it reversed on the issue of the penalty.

Under Louisiana law, an insurance company generally has 30 days after receiving a demand letter and written proof of loss to pay a claim. A court can assess a penalty against an insurer that fails to pay within 30 days “when such failure is found to be arbitrary, capricious, or without probable cause.” La. Rev. Stat. Ann. § 22:1892(B)(1). The penalty is calculated as 50 percent of difference between the amount actually paid and the amount due. Attorney’s fees and costs can also be part of the assessment. No penalty is available “when there is a reasonable and legitimate question as to the extent and causation of a claim.” In the case of Louisiana Bag Co. v. Audubon Indemnity Co., the Louisiana Supreme Court assessed penalties against an insurer that failed to pay the uncontested portion of a claim and refused coverage for a loss that was clearly included in the policy. The court found that “no reasonable uncertainty existed as to the insurer’s obligation to pay,” and so its position was “arbitrary and without probable cause.”

The Fifth Circuit concluded, however, that the Forest Isle Apartments case was unlike the situation in Louisiana Bag. “The scope of the flood exclusion,” reasoned the court, “with its reference to all damage ’caused directly or indirectly’ by flooding, is susceptible to different interpretations.” Landmark, therefore, was “neither arbitrary nor capricious” in refusing to pay Berk-Cohen for lost revenue based on the favorable business conditions brought on by hurricane flooding. The court also found it important that Landmark had already paid out more than $20 million on undisputed portions of Berk-Cohen’s claims. In light of this, Landmark’s dispute over the lost revenue claim could reasonably be considered a “good-faith error” in interpreting the policy. In addition, the court noted that under Louisiana jurisprudence, an unfavorable judgment does not necessarily call for the statutory penalty. Thus, the court reversed the district court’s assessment of penalties against Landmark.

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