United States Court of Appeals

Fifth Circuit

FILED

August 30, 2007

Charles R. Fulbruge III

Clerk

REVISED SEPTEMBER 7, 2007

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 06-61130

PAUL LEONARD; JULIE LEONARD

Plaintiffs-Appellees-Cross-Appellants

v.

NATIONWIDE MUTUAL INSURANCE CO.

Defendant-Appellant-CrossAppellee

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 ofthe district court, butto do so we must work through some erroneous

reasoning that led to its conclusion.

I. Background
No. 06-61130

2

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’sPascagoula-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
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3

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:
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4

IMPORTANT INFORMATION

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
No. 06-61130

5

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.
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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 windwater 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
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7

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 caused

solely by wind. The court held that the water-damages exclusion was enforceable

and precluded coverage for any damages occasioned by water. See Leonard, 438

F. Supp. 2d at 693, 696. Significantly, however, the court struck down the ACC

clause as ambiguous and unenforceable: “Under applicable Mississippi law, in

a situation such as this, where the insured property sustains damage from both

wind (a covered loss) and water (an excluded loss), the insured may recover that

portion of the loss which he can prove to have been caused by wind.” Id. at 695

(citation omitted). The district court maintained that wind damage was

recoverable “even if [it] occurred concurrently or in sequence with the excluded

water damage.” Id. at 693 (emphasis added).

The court denied Nationwide’s partial summary judgment motion

regarding Fletcher’s oral statements, but nonetheless held that Fletcher did not

materially misrepresent the policy terms, nor did he “make any statements which

could be reasonably understood to alter” the policy terms. Id. at 691-92.

Nationwide appeals. The Leonards cross-appealed, but they subsequently

withdrew their cross-appeal.
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II. Discussion

A. Appellate Jurisdiction

Shortly before this court was scheduled to hear oral argument, the

Leonards moved to dismiss their cross-appeal and contended that, as a result,

Nationwide’s appeal must be dismissed for mootness and lack of standing. They

are incorrect. Nationwide’s appeal alone continues to present a live Article III

controversy over which we are obliged to exercise appellate jurisdiction. See 28

U.S.C. § 1291.

TheLeonards’ major premise is thatthe money judgment below represents

the entirety of the ruling inflicted on Nationwide by the district court’s decision.

Because Nationwide does not challenge the amount awarded, Nationwide

"suffered no injury or prejudice attrial," and this appeal no longer presents a case

or controversy. Their minor premise is that the district court’s dual findings that

(1) the ACC clause is ambiguous and (2) an agent’s negligent misrepresentations

can be used to challenge the enforceability of the Nationwide policy are

unappealable “dicta” which do not vest Nationwide with a cognizable Article III

injury.

“Ordinarily, only a party aggrieved by a judgment or order of a district

court may exercise the statutory right to appeal therefrom.” Deposit Guar. Nat’l

Bank v. Roper, 445 U.S. 326, 333, 100 S. Ct. 1166, 1171 (1980). Although Roper’s

discussion of an aggrieved party’s right to appeal occurred in the class-action

context, its core holding in regard to standing obtains here: If redressable on

appeal, collateral injury inflicted by a lower court’s ruling renders the injured

party “aggrieved” for purposes of Article III. Even the Roper dissenters

recognized the fundamental principle that a party may appeal any aspect of a
No. 06-61130

1 The Court reached the same conclusion outside the class-action context in Electrical

Fittings Corp. v. Thomas & Betts Co., 307 U.S. 241, 59 S. Ct. 860 (1939), when it held that

collateral issues litigated below are appealable if they have the potential to affect rights of a

party in future litigation. See id. at 242, 59 S. Ct. at 860-61 (prevailing party in patent dispute

entitled to appeal collateral ruling on the validity of a patent claim). The Supreme Court

reversed the Court of Appeals’ decision that the threat of collateral estoppel in subsequent

suits did not render the appellant a sufficiently “aggrieved party” within the meaning of Article

III. See id.; Roper, 445 U.S. at 334, 100 S. Ct. at 1172.

9

generally favorable judgment that affects him adversely, so long as the party can

satisfy the personal-interest requirement of Article III. See Roper, 445 U.S. at

345-46, 100 S. Ct. at 1178 (Powell, J., dissenting) (Article III jurisdiction on

appeal requires a “personal stake in the outcome of an action”).1

Based on Roper and Electrical Fittings, Nationwide retains its aggrieved

party status with respect to the rulings on the ACC clause and the negligent

misrepresentation issues. The district court left Nationwide with a ruling that:

(1) invalidates a key provision of its homeowner’s policy as a matter of Mississippi

law; (2) superimposes an entirely different causal matrix for the determination

of covered damages than the policy contemplated; and (3) allows the introduction

of extrinsic oral statements to “clarify” the meaning of Nationwide’s policy terms

and potentially to affect the coverage available. It stretches credulity to suggest

that these rulings, which were integral to the district court’s decisionmaking

process, do not adversely affect Nationwide’s rights or render it an aggrieved

party in this appeal.

The district court found the ACC clause ambiguous, leading it to conclude:

“Thus, [the ACC] language does not exclude coverage for different damage, the

damage caused by wind, a covered peril, even if the wind damage occurred

concurrently or in sequence with the excluded water damage. The wind damage

is covered; the water damage is not.” See Leonard, 438 F. Supp. 2d at 693. The
No. 06-61130

2 And although not discussed by the Fourth Circuit in Custer, “other potential litigants”

of course pose a Damoclean threat to the party aggrieved by collateral rulings because of the

potential for the offensive use of nonmutual collateral estoppel in future litigation. See AT&T

Corp. v. FCC, 317 F.3d 227, 237-38 (D.C. Cir. 2003) (finding standing on the basis of collateral

estoppel and holding that AT&T had an Article III stake sufficientto support appeal of a ruling

thatit was liable for termination of certain access charges but not required to make payments);

WorldCom, Inc. v. FCC, 246 F.3d 690, 695-96 (D.C. Cir. 2001) (commenting that although

petitioner favored the ultimate result reached by FCC, it may have standing to challenge an

unfavorable ruling because of the effect on its future legal rights). The instant case is

distinguishable from those in which parties appealed issues that had no effect on liability and

that would not have preclusive effect in subsequent litigation. See, e.g., ASARCO, Inc. v.

Secretary of Labor, 206 F.3d 720, 723-24 (6th Cir. 2000) (finding that prevailing party was not

aggrieved by administrative body’s ruling because it posed no threat of preclusive effect in

future litigation); Sea-Land Serv., Inc. v. Dep’t of Transp., 137 F.3d 640 (D.C. Cir. 1998); Bath

Iron Works Corp. v. Coulombe, 888 F.2d 179 (1st Cir. 1989).

10

court applied “established Mississippi law” dating from the Hurricane Camille

cases and explicitly held that a Mississippi policyholder could parse out and

recover for loss due to covered wind damage that combined with excluded water

damage in a concurrently caused peril. Consequently, as a matter of Mississippi

law, Nationwide’s ACC clause is invalid. That such rulings vitally affect

Nationwide’s rights in subsequent litigation involving its homeowner’s policy

would seem to be emphasized by the Leonards’ determination to render the

rulings unassailable on appeal.

The district court’s resolution of factual concurrent causation, as of the

negligent misrepresentation issue, did not affect the damages Nationwide must

pay in this case, but that is immaterial for purposes of the Article III standing

inquiry we undertake here. “A party may be aggrieved by a district court

decision that adversely affects its legal rights or position vis-à-vis other parties

in the case or other potential litigants.” Custer v. Sweeney, 89 F.3d 1156, 1164

(4th Cir. 1996).2 The ACC clause and negligent misrepresentation issues are

currently being litigated by Nationwide in hundreds of cases in the trial courts,
No. 06-61130

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causing Nationwide to incur considerable litigation expense and potential

enormous liability to other policyholders. The threat of additional claims for badfaith denial of coverage based on the court's rulings in this case also looms large

for Nationwide. In sum, the district court’s resolution of both the ACC clause and

negligent misrepresentation issues renders Nationwide sufficiently aggrieved by

the judgment below that it retains a stake in appealing the district court’s

damages methodology, as well as the collateral issue of the validity of

Nationwide’s homeowner’s policy in the presence of allegedly contradictory oral

representations by its agents.

B. Standard of Review

The interpretation of an insurance policy, like any contract, is a legal

question reviewed de novo, Welborn v. State Farm Mut. Auto. Ins. Co., 480 F.3d

685, 687 (5th Cir. 2007) (per curiam), as is its denial of Nationwide’s partial

summary judgment motion on the negligent misrepresentation claim.

Hamburger v. State Farm Mut. Auto. Ins. Co., 361 F.3d 875, 879 (5th Cir. 2004).

Factual findings are upheld on appeal unless clearly erroneous. Provident Life

& Accident Ins. Co. v. Sharpless, 534 F.3d 634, 641 (5th Cir. 2004). Evidentiary

rulings are reviewed for abuse of discretion. Hodges v. Mack Trucks Inc., 474

F.3d 188, 194 (5th Cir. 2006).

C. General Principles of Mississippi Insurance Law

“The initial question of whether the contract is ambiguous is a matter of

law.” Benchmark Health Care Ctr., Inc. v. Cain, 912 So. 2d 175, 182 (Miss. 2005)

(citation omitted). Mississippi courts give effect to the plain meaning of an

insurance policy’s clear and unambiguous language. Robley v. Blue Cross/Blue

Shield of Miss., 935 So. 2d 990, 996 (Miss. 2006). “No rule of construction
No. 06-61130

3 Nor does disagreement among courts necessarily indicate ambiguity. See Wooten v.

Miss. Farm Bureau Ins. Co., 924 So. 2d 519, 520-521 (Miss. 2006) (rejecting contention that

differing judicial interpretation of the phrase “incurred within one year from the date of the

accident” rendered the policy language ambiguous).

12

requires or permits [Mississippi courts] to make a contract differing from that

made by the parties themselves, or to enlarge an insurance company’s obligations

where the provisions of its policy are clear.” State Auto. Mut. Ins. Co. of

Columbus v. Glover, 176 So. 2d 256, 258 (Miss. 1965). Nor will a court resort to

extrinsic evidence or rules of contract construction if policy provisions are

unambiguous. Jackson v. Daley, 739 So. 2d 1031, 1041 (Miss. 1999).

If a court determines that ambiguity inheres in the policy language, the

familiar maxim omnia praesumuntur contra proferentem requires the court to

construe ambiguous terms in favor ofthe policyholder. J&W Foods Corp. v. State

Farm Mut. Auto. Ins. Co., 723 So. 2d 550, 552 (Miss. 1998). Ambiguity arises

when a term or provision is susceptible to more than one reasonable meaning, but

can also result from “internal conflict” between policy provisions that renders

uncertain the meaning ofthe policy as a whole. See Miss. Farm Bureau Mut. Ins.

Co. v. Walters, 908 So. 2d 765, 769 (Miss. 2005). The court must then select the

interpretation “which gives the greater indemnity to the insured.” State Farm

Mut. Auto. Ins. Co. v. Scitzs, 394 So. 2d 1371, 1372 (Miss. 1981). Nonetheless,

“[t]he mere fact that the parties disagree about the meaning of a provision of a

contract does not make the contract ambiguous as a matter of law.” Delta Pride

Catfish, Inc. v. Home Ins. Co., 697 So. 2d 400, 404 (Miss. 1997) (citing Cherry v.

Anthony, Gibbs, Sage, 501 So. 2d 416, 419 (Miss. 1987)).3

The burden of proving that coverage exists for a peril under an insurance

policy rests with the policyholder. Lunday v. Lititz Mut. Ins. Co., 276 So. 2d 696,
No. 06-61130

4 The second provision to which the court alludes – the weather-conditions clause – is

discussed in Section III.E.

13

698 (Miss. 1973). The insurer bears the burden of proving that a particular peril

falls within a policy exclusion;the insurer must plead and prove the applicability

of an exclusion as an affirmative defense. Commercial Union Ins. Co. v. Byrne,

248 So. 2d 777, 782 (Miss. 1971). Mississippi courts strictly construe policy

exclusions against the insurer. Scitzs, 394 So. 2d at 1372-73.

D. The Anti-Concurrent Causation Clause

Although the district court granted the Leonards only a meager monetary

recovery for losses proven to have been caused by wind, it also summarily

invalidated the ACC clause, stating that “[t]he provisions of the Nationwide

policy that purport to exclude coverage entirely for damages caused by a

combination of the effects of water (an excluded loss) and damage caused by the

effects of wind (a covered loss) are ambiguous.” Leonard, 438 F. Supp. 2d at 693.4

Contrary to the district court’s ruling, Nationwide’s ACC clause is not ambiguous,

nor does Mississippi law preempt the causation regime the clause applies to

hurricane claims.

Eschewing a text-based analysis, the district court opines that the clause

does not affect the coverage for other losses (covered losses), i.e.,

damage caused by wind, that occur at or near the same time. Thus,

[the ACC clause] does not exclude coverage for different damage, the

damage caused by wind, a covered peril, even if the wind damage

occurred concurrently or in sequence with the excluded water

damage. The wind damage is covered; the water damage is not.

Id. at 693 (emphasis added). This conclusion is unjustifiable when read against

the clause’s plain language:
No. 06-61130

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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.

( . . . )

2. Water or damage caused by water-borne material. . . .

(1) flood, surface water, waves, tidal waves, overflow

of a body of water, spray from these, whether or

not driven by wind.

The clause unambiguously excludes coverage for water damage “even if another

peril” – e.g., wind – “contributed concurrently or in any sequence to cause the

loss.” The plain language of the policy leaves the district court no interpretive

leeway to conclude that recovery can be obtained for wind damage that “occurred

concurrently or in sequence with the excluded water damage.” Leonard, 438

F. Supp. 2d at 693. Moreover, in the past we have not deemed similar policy

language ambiguous. See, e.g., Arjen Motor Hotel Corp. v. Gen. Accident Fire &

Life Assurance Corp., 379 F.2d 265, 268 (5th Cir. 1967) (affirming denial of

recovery when evidence “conclusively establish[ed]that wave action, an excluded

peril, at the very least contributed to the collapse of the restaurant building”).

Nationwide’s assertion that the district court “simply read the clause out of the

contract,” is not at all wide of the mark. The clause is not ambiguous.

The fatal flaw in the district court’s rationale is its failure to recognize the

three discrete categories of damage at issue in this litigation: (1) damage caused

exclusively by wind; (2) damage caused exclusively by water; and (3) damage

caused by wind “concurrently or in any sequence” with water. The classic

example of such a concurrent wind-water peril is the storm-surge flooding that

follows on the heels of a hurricane’s landfall. The only species of damage covered

under the policy is damage caused exclusively by wind. But if wind and water
No. 06-61130

15

synergistically caused the same damage, such damage is excluded. Thus, the

Leonards' money judgment was based on their roof damages solely caused by

wind. Contrary to the court's damage matrix, however, had they also proved that

a portion of their property damage was caused by the concurrent or sequential

action of water – or any number of other enumerated water-borne perils – the

policy clearly disallows recovery.

The district court seemed to fear that enforcement of the policy’s concurrent

causation exclusion would render any recovery for hurricane damage illusory.

Observing that the policy denies coverage whenever a “windstorm[] combined

with an excluded cause of loss, e.g., flooding,” the court hypothesized that “an

insured whose dwelling lost its roof in high winds and at the same time suffered

an incursion of even an inch of water could recover nothing. . . .” Leonard, 438

F. Supp. 2d at 694 (discussing the weather-conditions exclusion). That fear is

unfounded, with regard to the policy’s wind-coverage clause, which clearly

preempts the court’s scenario:

We cover accidental direct physical loss to property . . . caused by the

following perils . . .

( . . . )

2. windstorm or hail.

Direct loss caused by rain . . . driven through roof or wall

openings made by direct action of wind. . . .

If, for example, a policyholder’s roof is blown off in a storm, and rain enters

through the opening, the damage is covered. Only if storm-surge flooding – an

excluded peril – then inundates the same area that the rain damaged is the

ensuing loss excluded because the loss was caused concurrently or in sequence

by the action of a covered and an excluded peril. The district court’s unsupported

conclusions that the ACC clause is ambiguous and that the policyholder can
No. 06-61130

16

parse out the portion of the concurrently caused damage that is attributable to

wind contradict the policy language. 

Like the district court,the Leonards provide no supportfor their argument

that the ACC clause is ambiguous. Instead, they adopt the district court’s

reliance on venerable Mississippi authorities regarding proximate causation of

damage caused by hurricanes. See Leonard, 438 F. Supp. 2d at 695 (citing cases

reflecting “well-established Mississippi law”). Because the ACC clause is

unambiguous, the Leonards can prevail only if they can demonstrate that the

clause is prohibited by Mississippi caselaw, statutory law, or public policy. None

of these sources of state law restricts Nationwide’s use of the ACC clause to

preclude recovery for concurrently caused hurricane losses.

1. Caselaw

Contrary to the Leonards’ contention, Mississippi courts have not

conclusively resolved whether an insurance policy may preclude recovery for

damages caused by the concurrent action of the wind and water of a hurricane.

Accordingly, this court, applying state substantive law, must make an educated

“Erie guess” as to how the Mississippi Supreme Court would resolve the issue.

See Jackson v. Johns-Manville Sales Corp., 781 F.2d 394, 397 (5th Cir. 1986)

(citing Erie R.R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817 (1938)).

a. Mississippi’s Default Rule: Efficient Proximate

Causation

The default causation rule in Mississippi regarding damages caused

concurrently by a covered and an excluded peril under an insurance policy is that

the insured may recover if the covered peril was the “dominant and efficient

cause” ofthe loss. Evana Plantation, Inc. v. Yorkshire Ins. Co., 58 So. 2d 797, 798

(Miss. 1952). This rule is typically referred to as the doctrine of efficient
No. 06-61130

5 See In re Katrina Canal Breaches Litig., __F.3d__, 2007 WL 2200004, at *26 (5th Cir.

Aug. 2, 2007) (“The efficient-proximate-cause doctrine applies only where two or more distinct

actions, events, or forces combined to create the loss.”) (citation omitted); JEFFREY JACKSON,

MISSISSIPPI INSURANCE LAWAND PRACTICE § 15:14 (2007) [hereinafter MISS. INS.LAW&PRAC.];

7 STEVEN PLITT ET AL., COUCH ON INSURANCE § 101:45 (3d ed. 2006) (defining the efficient

proximate cause of loss as “the fundamental, efficient moving cause, i.e., the cause that is

responsible for setting any and all other causes in motion”) [hereinafter COUCH ON INS.]; id.

§ 101:55 (“The efficient proximate cause rule permits recovery under the insurance policy for

a loss caused by a combination of a covered risk and an excluded risk only if the covered

risk . . . is one that sets the other causes in motion that, in an unbroken sequence, produced

the result for which recovery is sought.”). Efficient proximate causation is distinct from two

other etiological doctrines occasionally employed in the insurance context: independent and

concurrent causation. See, e.g., id. § 101:49 (“When a loss is due to two or more independent

concurrent causes, one covered under the policy and the other expressly excluded, an insurer

is only liable for that part of the loss that is a covered loss under the terms of the policy.”); id.

§ 101:55 (The “[c]oncurrent cause rule takes the approach that coverage should be permitted

whenever two or more causes do appreciably contribute to the loss and at least one of the

causes is a risk which is covered under the terms of the policy.”).

17

proximate cause.5 To recover under the doctrine in the context of a homeowner’s

policy that covers wind damage but excludes damage by water, “it is sufficient to

show that wind [i.e., the covered peril] was the proximate or efficient cause of the

loss . . . notwithstanding other factors [i.e., excluded perils like water]

contributed. . . .” Lititz Mut. Ins. Co. v. Boatner, 254 So. 2d 765, 767 (Miss. 1971)

(quoting Kemp v. Am. Universal Ins. Co., 391 F.2d 533, 535 (5th Cir. 1968)).

The Mississippi Supreme Court frequently employed this default rule in

the welter of insurance coverage cases that surfaced in the aftermath of

Hurricane Camille. It is also the rule the district court and the Leonards contend

must apply here. See Leonard, 438 F. Supp. 2d at 694 (collecting cases).

However, although the Mississippi Supreme Court often premised recovery for

policyholders on the application ofthe efficient proximate cause rule, in actuality,

in many of the Camille cases the court did little more than uphold jury findings

that the damages suffered by policyholders were caused exclusively by wind, not
No. 06-61130

6 See, e.g., Liberty Universal Ins. Co. v. Hall, 289 So. 2d 683, 684 (Miss. 1972) (“This is

simply another one of the many cases which reached this Court involving the question of

whether the damage was caused by wind or water. The evidence on behalf of the appellees

tended to show that the damage was caused by the wind before the water even reached the

appellees’ property. . . . There was no tidal wave.”); Lititz Mut. Ins. Co. v. Buckley, 261 So. 2d

492, 495 (Miss. 1972) (“[D]amages to the house and personal property were caused by wind

and rain before the rising water.”); Grace v. Lititz Mut. Ins. Co., 257 So. 2d 217, 224 (Miss.

1972) (“[T]he jury had ample testimony to sustain the appellants’ contention that their office

building was destroyed by wind before the tidal waters reached the property.”); Lititz Mut. Ins.

Co. v. Boatner, 254 So. 2d 765, 766 (Miss. 1971) (“[T]he great weight ofthe evidence shows that

the house and its contents had already been destroyed and distributed over a large area long

before the tidal wave came ashore. . . .”); Commercial Union Ins. Co. v. Byrne, 248 So. 2d 777,

781 (Miss. 1971) (damages from rising water, an excluded cause, not covered). See also

Firemen’s Ins. Co. of Newark, New Jersey v. Schulte, 200 So. 2d 440, 442-43 (Miss. 1967)

(refusing to set aside jury verdict that the dominant cause of damage was wind from Hurricane

Betsy, not her tidal waters).

7

Insurers developed ACC clauses specifically in response to court decisions that applied

the efficient proximate cause doctrine to resolve thorny issues of policy coverage for

concurrently caused perils. See 7 COUCH ON INS. § 101:57 (“Insurers often change the terms

of their policies in periodic attempts to negate the effect of the case law regarding multiple

causation set forth by various jurisdictions which may have resulted from the prior terms

18

by concurrent wind-water action.6 Such cases thus do not support the Leonards’

argument that the Mississippi default rule in hurricane cases is always to allow

recovery for covered damages even ifthey are concurrent with excluded damages

and irrespective of contrary policy language. In fact, the Mississippi Supreme

Court intimated in one case that even if a covered peril is the efficient proximate

cause of damage, a concurrently contributing cause that is excluded under a

homeowner’s policy may preclude recovery. See Grain Dealers Mut. Ins. Co. v.

Belk, 269 So. 2d 637, 640 (Miss. 1972).

Whatever the effect of the efficient proximate cause doctrine in the

Hurricane Camille cases, those decisions do not control the current case because

none of the policies they involve contain ACC clauses similar to the one at issue

here,7 nor do those cases purport to enshrine efficient proximate causation as an
No. 06-61130

employed by insurers in their policies.”); Preferred Mut. Ins. Co. v. Meggison, 53 F. Supp. 2d

139, 142 (D. Mass. 1999) (ACC provisions have appeared in recent years in response to

concurrent-causation doctrine, under which courts have found insurers “obligated to pay for

damages resulting from a combination of covered and excluded perils ifthe efficient proximate

cause is a covered peril.” (citation omitted)); Garvey v. State Farm Fire & Cas. Co., 770 P.2d

704, 710 n.6 (Cal. 1989) (Homeowners’ policy language changed because court decisions found

coverage for losses not intended to be covered, threatening insurer insolvency in the event of

a major catastrophe.).

8 See, e.g., Eaker v. State Farm Fire & Cas. Ins. Co., 216 F. Supp. 2d 606 (S.D. Miss.

2001); Rhoden v. State Farm Fire & Cas. Co., 32 F. Supp. 2d 907 (S.D. Miss. 1998); Boteler v.

State Farm Cas. Ins. Co., 876 So. 2d 1067 (Miss. Ct. App. 2004).

19

immutable rule of Mississippi insurance policy interpretation. The Fifth Circuit

long ago explicitly recognized that efficient proximate causation does not

necessarily control Mississippi contracts for hurricane damage. See Kemp, 391

F.2d at 534-35 (“[I]n order to recover on a windstorm insurance policy, not

otherwise limited or defined, it is sufficient to show that wind was the proximate

or efficient cause of loss or damage. . . .” (emphasis added)). As discussed below,

we reach the same conclusion here as well.

b. The Earth-Movement Cases: Eaker, Rhoden & Boteler

Recent decisions involving the effect of ACC clauses and earth-movement

exclusions under Mississippi law all upheld ACC clauses that abrogated the

default efficient proximate causation rule and excluded damage occasioned by the

synergistic action of a covered and an excluded peril.8 The cases reflect the

general Mississippi contract principle that “where a clause in a contract does not

violate any statute, or public policy, and is unambiguous and certain in its

provisions, it is enforced as written.” Am. Bankers’ Ins. Co. v. White, 158 So. 346,

349 (Miss. 1935); see also Blue Cross & Blue Shield of Miss., Inc. v. Larson, 485

So. 2d 1071, 1073 (Miss. 1986) (explaining parties’ “privileged right . . . to
No. 06-61130

9

In Guice v. State Farm Fire & Casualty Co., 2006 WL 2359474 (S.D. Miss. Aug. 14,

2006), a Katrina coverage case involving a concurrent-causation provision that was before the

district court on a Rule 12(b)(6) motion, the court distinguished Eaker, Rhoden, and Boteler on

the basis that “the records in [the earth-movement] cases showed that the losses would not

have occurred in the absence of the excluded event.” Id. at *4. It is undisputed that the lion’s

share of the losses to the Leonards’ property would not have occurred but for the storm-surge

damage, a fact that reinforces the application of the earth-movement cases as persuasive

authority here.

20

contract, assuming such is not against public policy, by expressing their

intentions through the language oftheir choice”); 7COUCH ON INS. § 101:39; MISS.

INS. LAW & PRAC. § 1:11.

Rhoden and Boteler are particularly instructive on this score. In Rhoden,

State Farm excluded losses from earth movement (the excluded peril) under an

ACC provision that barred coverage “whether other causes acted concurrently or

in any sequence with the excluded event to produce the loss.” 32 F. Supp. 2d at

911. The federal district court held that the earth-movement exclusion, when

read with the ACC provision, was unambiguously designed to preclude recovery

for any loss involving earth movement, irrespective of the causal matrix that

occasioned the loss. Id. at 912-13. The court upheld the ACC clause, noting that

Mississippi courts have not adopted the efficient proximate causation doctrine.

Id. at 912; Boteler, 876 So. 2d at 1070. Boteler and Eaker echo Rhoden’s holding

that ACC clauses are enforceable, absolute bars to recovery “[w]hen a loss is

caused by a combination of a covered and specifically excluded risks.” See Eaker,

216 F. Supp. 2d at 623 (quoting Rhoden, 32 F. Supp. 2d at 911); see also Boteler,

876 So. 2d at 1069-70.9 The leading Mississippi insurance law treatise states

that the earth-movement cases are indicative of “the clear trend in Mississippi

state and federal courts . . . to treat the issue of causation in this context as one
No. 06-61130

21

controlled by the insurance policy, and not by public policy or common law.”

MISS. INS. LAW & PRAC. § 15:15.

c. Other Jurisdictions

Two federal appellate courts and many state and district courts have

endorsed using ACC clauses to circumvent default causation rules like efficient

proximate cause. For instance, in TNT Speed & Sport Center, Inc. v. American

States Insurance Co., 114 F.3d 731 (8th Cir. 1997), a vandal removed sandbags

from a levee protecting a go-cart track from the waters of the Mississippi River.

As a result, the levee collapsed and river water damaged TNT’s buildings. The

insurance policy covered losses caused by vandalism, but excluded flood losses,

and contained an ACC clause that excluded coverage for damage arising

concurrently from a covered and an excluded peril. After a review of Missouri

cases, the Eighth Circuit held that state law did not bar application of the ACC

clause, and that the “plain meaning of the [ACC clause’s] exclusionary language

was to directly address, and contract out of, the efficient proximate cause

doctrine.” 114 F.3d at 733; see id. (collecting state supreme court decisions

upholding ACC clauses). See also Front Row Theatre, Inc. v. Am. Mfrs. Mut. Ins.

Co., 18 F.3d 1343, 1347 (6th Cir. 1994) (upholding an ACC clause barring

coverage for concurrently caused water losses (citing Schroeder v. State Farm

Fire & Cas. Co., 770 F. Supp. 558, 561 (D. Nev. 1991))). A majority of states that

have considered the matter enforce ACC exclusion clauses. See 4 DAVID L.

LEITNER ET AL., LAW AND PRACTICE OF INSURANCE COVERAGE LITIGATION § 52:37

(2007); 7COUCH ON INS. § 101:45; Joseph A. Ziemianski et al., Emerging Property

and CGL Insurance Claims Trends, 742 Practising Law Institute Litigation and

Administrative Practice Course Handbook Series 251, 281 & n.111 (2006). Only
No. 06-61130

10 See Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1, 12 (W. Va. 1998) (“We hold

that, when examining whether coverage exists for a loss under a first-party insurance policy

when the loss is caused by a combination of covered and specifically excluded risks, the loss is

covered if the covered risk was the efficient proximate cause of the loss.”); Safeco Ins. Co. of

Am. v. Hirschmann, 773 P.2d 413, 416-17 (Wash. 1989) (“When an insured risk sets into

operation a chain of causation in which the last step may be an excluded risk, the exclusion

will not defeat recovery.”).

11 See Julian v. Hartford Underwriters Ins. Co., 110 P.3d 903, 904 (Cal. 2005) (“We have

construed [CAL. INS. CODE] section 530 as incorporating into California law the efficient

proximate cause doctrine, an interpretive rule for first party insurance.”); Western Nat’l Mut.

Ins. Co. v. Univ. of N.D., 643 N.W.2d 4, 13 (N.D. 2002) (efficient proximate cause doctrine

codified at N.D. CENT. CODE §§ 26.1-32-01, 26.1-32-03).

22

Washington and West Virginia do not allow abrogation of the default rule via an

ACC clause.10 California and North Dakota require efficient proximate causation

by statute.11

2. Public Policy

A general background principle of Mississippi contract law holds that

parties may decline to adopt common-law causation rules so long as the contract’s

provisions do not offend public policy. See Miss. Farm Bureau Cas. Ins. Co. v.

Britt, 826 So. 2d 1261, 1266 (Miss. 2002) (“We must give effect here to [a] valid,

clear and unambiguous contract term where there is no statutory or public policy

prohibition nullifying it.”); see also 7 COUCH ON INS. § 101:39. As Mississippi has

not adopted the efficient proximate cause doctrine as a matter of public policy,

there is no bar to Nationwide’s use of the ACC clause here. Most jurisdictions

concur that ACC clauses comport with state public policy. The Alabama Supreme

Court’s recent decision in State Farm Fire & Casualty Co. v. Slade, 747 So. 2d

293 (Ala. 1999), is representative of this trend.

Slade involved an improbable set of events in which a lightning bolt caused

the collapse of a retaining wall near the policyholders’ swimming pool. Months
No. 06-61130

23

later, cracks were observed in the interior and exterior walls of the adjacent

dwelling. State Farm refused to cover the structural damage, asserting that

lightning (a covered peril), caused subsequent earth movement (an excluded

peril), resulting in the observed damage. The homeowner’s policy contained an

ACC clause substantively indistinguishable from the one contested here. Slade

held that the occasional citation of the efficient proximate cause rule in Alabama

caselaw did not require the court to invalidate the disputed ACC clause because

the rule is not a “principle of public policy.” 747 So. 2d at 314. Instead, the court

adhered to Alabama’s “long-standing rule against rewriting unambiguous

insurance policies so long as they do not . . . contravene public policy.” Id.

(citation and internal quotation marks omitted). As Eaker, Rhoden, and Boteler

suggest, we believe that the Mississippi Supreme Court, if squarely confronted

with the issue, would follow Slade.

3. Statutory Law

Nor does any Mississippi statute mandate that insurance policies reflect

the efficient proximate causation doctrine. Mississippi insurance law, in fact,

lends some support to Nationwide. Under state law, all insurance providers are

required to file “all rates, supplementary rate information, policy forms and

endorsements” with the Mississippi Department of Insurance. See MISS. CODE

ANN. § 83-2-7(1). The state Insurance Commissioner must reject any rate or

policy form that contains “inconsistent, ambiguous, or misleading clauses or

exceptions.” Id. § 83-2-11(1)(b). Nationwide’s ACC clause was approved by the

Department.

The Mississippi Supreme Court has recently noted the public-policy import

of this approval process. See United States Fid. & Guar. Co. v. Knight, 882 So.
No. 06-61130

24

2d 85, 92 (Miss. 2004) (“[I]nsurance companies must be able to rely on their

statements of coverage, exclusions, disclaimers, definitions, and other provisions,

in order to receive the benefit of their bargain and to ensure that rates have been

properly calculated.”); see also 7COUCH ON INS. § 101:54 (“Causes that fall within

the policy coverage may be considered to be those that the insurer has assessed

in setting its premium or that the insured would have derived from the language

ofthe contract.”). Moreover, the judicial elevation of the efficient proximate cause

doctrine to a rule of contract construction after contrary policies had been

approved by the state insurance commissioner would essentially usurp the

legislature's authority to delegate authority to an agency. See Slade, 747 So. 2d

at 314. By analogy, it seems most likely that the Mississippi Supreme Court

would regard insurance policy regulation as a matter “better suited for the

Legislature to address” rather than the state judiciary. Wooten v. Miss. Farm

Bureau Ins. Co., 924 So. 2d 519, 523 (Miss. 2006).

The Leonards object to Nationwide’s citation of the filed-rate doctrine,

contending that it “has never been held to be an absolute bar to litigation” and

would constitute “an encroachment by regulatory agencies into the court system

and would deprive plaintiffs of their right to a trial by jury.” This argument

assumes that the insurance policy is ambiguous, since Mississippi courts will

refrain from tinkering with policy language if the meaning of a policy is clear on

its face. See State Auto. Mut. Ins. Co. of Columbus v. Glover, 176 So. 2d 256, 258

(Miss. 1965). Since the ACC clause is unambiguous and consistent with state

public policy, the Leonards’ argument misses the mark.

For all these reasons, we conclude that use of an ACC clause to supplant

the default causation regime is not forbidden by Mississippi caselaw (including
No. 06-61130

12 The Leonards argue based on extrinsic evidence that “storm surge” has a special

meaning apart from “flood” in hurricane-prone areas like Pascagoula. We need not opine on

the merits of this claim because a policyholder cannot cite extrinsic evidence except to explain

an ambiguity within the four corners of the policy. See Am. States Ins. Co. v. Natchez Steam

Laundry, 131 F.3d 551, 555 (5th Cir. 1998); Heartsouth, PLLC v. Boyd, 865 So. 2d 1095, 1105

(Miss. 2003). Even so, the authority cited in support of the Leonards’ proposition, Red Panther

Chem. Co. v. Ins. Co. of Penn., 43 F.3d 514 (10th Cir. 1994), is less than convincing on this

score. Red Panther applied Mississippi law to a set of Palsgrafian facts and a pollution

exclusion clause. After a general invocation that insurance policies should be “construed in

light of the circumstances in which they were issued and according to common usages,” id. at

517, the Tenth Circuit held the exclusion ambiguous. The court specified, however, that its

holding involved “unique factual circumstances” and a policy provision “not yet...the subject

of extensive litigation.” Id. at 519. In contrast, the instant water-damages clause is practically

indistinguishable from provisions used in insurance policies for two centuries, and hurricane

damage is anything but novel.

25

the Camille cases which antedate such clauses), statutory law, or public policy.

Because the ACC clause is unambiguous and not otherwise voidable under state

law, it must stand.

E. Water-Damages Exclusion

TheLeonards’ only textual argumentthattheir policy is ambiguous focuses

on the water-damage exclusion, not the ACC clause. They assert that the water

damage their house sustained was caused not by flooding – an explicitly excluded

peril – but by “storm surge,” which they characterize as a “separate, discrete peril

unique to hurricanes” and as a term commonly understood “among residents of

Pascagoula” as distinct from a flood.12 Thus, the argument goes, because “[t]he

literal wording of the ‘water damage’ exclusion does not contemplate the

exclusion of [damage from] ‘storm surge,’” recovery is available. See 11COUCH ON

INS. § 153:48 (“Because exclusions are read narrowly, a policy excluding damage

from some natural water-related perils may cover damage from other natural

water phenomena.”). This argument is unpersuasive.
No. 06-61130

13 The Third Circuit rejected a strikingly similar storm-surge argument in 1916. See

Newark Trust Co. v. Agric. Ins. Co., 237 F. 788, 788 (3d Cir. 1916) (holding that wind-driven

storm surge was an excluded peril under a flood exclusion and rejecting policyholder’s

contention that because “the water was made high, not by normal tidal influences, but by

wind, the element insured against, and that in driving the water against the foundations of

the house,the water was the passive and the wind the efficient force which proximately caused

its destruction”); see also Nat’l Fire Ins. Co. v. Crutchfield, 170 S.W. 187, 187-88 (Ky. 1914)

(policy excluding “damage occasioned directly or indirectly by...tidal wave” interpreted to

exclude “loss by water being driven by the wind during a flood,” i.e., storm surge); Wotton Hotel

Corp. v. N. Assurance Co., 57 F. Supp. 112, 113 (E.D. Pa. 1944) (water-damages exclusion

precludes coverage for damage “caused by high water driven by wind”).

14 See also Buente v. Property & Cas. Ins. Co., 2006 WL 980784, at *1 (S.D. Miss. April

12, 2006) (finding that “[water-damage] exclusions are drawn quite broadly” and clearly

include storm-surge damage); Tuepker v. State Farm Fire & Cas. Co., 2006 WL 1442489, at

*3 (S.D. Miss. May 24, 2006) (unpublished) (“‘storm surge’ [losses] are excluded from coverage

because this damage was caused by the inundation of plaintiffs’ home by tidal water”);

Russell G. Donaldson, What Is “Flood” Within Exclusionary Clause of Property Damage Policy,

78 A.L.R. 4th 817 § 2[a] (1990) (noting “little disagreement among the courts” that “storm tide”

constitutes a flood).

26

Courts have interpreted water-damage exclusions like the one found in the

Leonards’ policy to encompass the peril of wind-driven inundation by water, or

storm surge, for ages.13 Mississippi courts have upheld such exclusions before

and after Hurricane Katrina. See Leonard, 438 F. Supp. 2d at 693 (collecting

cases); Bilbe v. Belsom, 2007 WL 2042437, at *4 (E.D. La. July 12, 2007) (holding

on the basis of a nearly-identical exclusion that “Plaintiff’s argument that

‘hurricane waters’ or ‘storm surge’ do not fit within the terms set forth in the

water damage exclusion is without merit. The damage to Plaintiff’s home was

caused by the inundation of her home by what was clearly tidal water from Lake

Pontchartrain. . . .”).14 Further, this court’s most recent consideration of the term

“flood” also supports Nationwide’s contention that the term is unambiguous and

has a concrete meaning, whether or not used in the context of an insurance

policy. See In re Katrina Canal Breaches Litigation, __F.3d__, 2007 WL 2200004,
No. 06-61130

15 See, e.g., Webster’s Third New International Dictionary 2390 (1976) (defining “tidal

wave” as “an unusual rise of water alongshore due to exceptionally strong winds.”); Federal

Emergency Management Agency, Hurricane Hazards: Storm Surge, available at

http://www.fema.gov/hazard/hurricane/hu_surge.shtm (“Storm surge is simply water that is

pushed toward the shore by the force of the winds swirling around the storm. This advancing

surge combines with the normaltides to create the hurricane storm tide. . . . This rise in water

level can cause severe flooding in coastal areas.”). Additionally, this Circuit has previously

defined “flood” as “water which inundates an area of the surface of the earth where it

ordinarily would not be expected to be.” Fla. E. Coast Ry. Co. v. United States, 519 F.2d 1184,

1192 (5th Cir. 1975); see also 11 Couch on Ins. § 153:54 (defining flood).

27

at *16-*18 (5th Cir. Aug. 2, 2007) (considering the term in the context of water

damage resulting from the “failure of a structure such as a dam or dike”). No

decision of this court or any other of which we are aware endorses the Leonards’

view that storm surge is a unique meteorological phenomenon not contemplated

by water-damages exclusions like Nationwide’s.

The provision explicitly exempts from coverage damage caused by “flood . . .

waves, tidal waves, [and] overflow of a body of water . . . whether or not driven

by wind.” (Emphasis added). The phrase “storm surge” is little more than a

synonym for a “tidal wave” or wind-driven flood, both of which are excluded

perils.15 The omission of the specific term “storm surge” does not create

ambiguity in the policy regarding coverage available in a hurricane and does not

entitle the Leonards to recovery for their flood-induced damages. See In re

Katrina Canal Breaches Litig., __F.3d__, 2007 WL 2200004, at *27 (5th Cir.

Aug. 2, 2007) (stating in the context of an ACC clause that “an insured may not

avoid a contractual exclusion merely by affixing an additional label or separate

characterization to the act or event causing the loss.”(citation omitted)); 7COUCH

ON INS. § 101:39.
No. 06-61130

16 The exclusion states in pertinent part:

(2) We do not cover loss to any property resulting directly or indirectly from

the following if another excluded peril contributes to the loss:

( . . . )

c. Weather conditions, if contributing in any way with an exclusion

listed in paragraph 1. of this Section.

28

F. Weather-Conditions Exclusion

Neither party briefed or argued the applicability of the weather-conditions

exclusion16 in the district court, nor has Nationwide alleged that the exclusion

bars recovery. The district court raised the issue sua sponte in its Memorandum

Opinion, finding the provision ambiguous and unenforceable. See Leonard, 438

F. Supp. 2d at 694. Both parties agree that the district court exceeded the scope

of the inquiry necessary to resolve this case by ruling on the weather-conditions

exclusion. We accordingly do not consider that provision and vacate that portion

of the district court’s opinion.

G. Negligent Misrepresentation Claim

Finally,theLeonards claim that misrepresentations Fletcher made during

two conversations in 1989 and 1999 effected an oral modification of their policy,

enabling recovery for all Katrina-related losses. The district court allowed

litigation of the question whether Fletcher negligently misrepresented the

policy’s terms, but found that none of Fletcher’s statements “could be reasonably

understood to alter the terms of the Nationwide policy,” and that any inferences

that Paul Leonard drew from the conversations were inconsistent with the policy

exclusion for water damage. Leonard, 438 F. Supp. 2d at 692.

1. Background Principles

Under Mississippi law, a party’s reliance on representations by an

insurance agent that contradict the policy language is unreasonable. Ross v.
No. 06-61130

29

Citifinancial, Inc., 344 F.3d 458, 464 (5th Cir. 2003). The insured has an

affirmative duty to read the policy. Smith v. Union Nat’l Life Ins. Co., 286 F.

Supp. 2d 782, 788 (S.D. Miss. 2003); Gulf Guar. Life Ins. Co. v. Kelley, 389 So. 2d

920, 922 (Miss. 1980). Whether the policy was read or not, however, constructive

knowledge of its contents is imputed to the policyholder. Ross, 344 F.3d at 464

(quoting Godfrey, Bassett & Kuykendall Architects, Ltd. v. Huntington Lumber

& Supply Co., Inc., 584 So. 2d 1254, 1257 (Miss. 1991)). An agent’s oral

representations can modify the policy only if it is ambiguous; when the

contractual language is plain, there can be no modification. Am. States Ins. Co.

v. Natchez Steam Laundry, 131 F.3d 551, 555 (5th Cir. 1998).

General agency law controls the relationship between insurance companies

and their agents. Barhonovich v. Am. Nat’l Ins. Co., 947 F.2d 775, 777 (5th Cir.

1991). Under Mississippi law, an agent’s representations that purport to modify

the insurance contract can bind an insurer only if the statements were made

pursuant to actual or apparent authority. Id. Because Nationwide does not

authorize its agents to orally modify contracts, only apparent authority is

pertinent here.

Somewhat tautologically, the Mississippi Supreme Court has explained

that “[a]pparent authority exists when a reasonably prudent person, having

knowledge of the nature and usages of the business involved, would be justified

in supposing, based on the character ofthe duties entrusted to the agent,thatthe

agent has the power he is assumed to have.” Ford v. Lamar Life Ins. Co., 513 So.

2d 880, 888 (Miss. 1987). A policyholder seeking to recover based on an agent’s

apparent authority must show three things: (1) acts or conduct on the part of the

principal indicating the agent’s authority; (2) reasonable reliance on those acts;
No. 06-61130

17 The tort of “equitable fraud” differs from species of “legal fraud” like fraudulent or

negligent misrepresentation only insofar as the equitable fraud lacks a scienter requirement.

See Brown v. Ohman, 43 So. 2d 727, 744-45 (Miss. 1949).

30

and (3) a detrimental change in position as a result of such reliance. See

Barhonovich, 947 F.2d at 778 (citing Andrew Jackson Life Ins. Co. v. Williams,

566 So. 2d 1172, 1181 (Miss. 1990)). The insured is bound by policy language

that would put a reasonable person on notice of limitations to the agent’s

authority. See Union Nat’l, 286 F. Supp. 2d at 788.

2. Fletcher’s Conversations with Paul Leonard

Upon purchase of the policy in 1989, Paul Leonard alleges that Fletcher

assured him that all hurricane damage was covered; in 1999, Fletcher allegedly

assured Leonard that he did not need to purchase additional flood insurance.

The Leonards argue thatthese oral misrepresentations modified their insurance

coverage.

As a threshold matter, it is not at all clear whether the Leonards are

proceeding under a tort or a contract theory. They contend in their opening brief

that the district court failed to adjudicate their contractual “oral modification”

claim. The Leonards pled, however, only “equitable fraud”17 (Count Eight) and

fraud claims sounding in tort (Counts Nine and Ten). The complaint contains no

contract claims at all.

The Leonards attempt to obscure this discrepancy by explaining that the

allegations of their detrimental reliance on Fletcher’s statements, when coupled

with their equitable estoppel claim (Count Two), amount to “what may more

broadly be termed a claim based on ‘oral modification’ of an insurance contract.”

They argue this without ever intoning the word “oral” or “modification” in their

pleadings. Even were we to credit this explanation, the Leonards’ further
No. 06-61130

18 The cases the Leonards cite in support oftheir claim are readily distinguishable from

the instant facts. In Nichols v. Shelter Life Insurance Co., 923 F. 2d 1158, 1163 (5th Cir.

1991), the policy contained no express statement that the insurer disclaimed any

representations made by an agent that were contrary to the written policy. Moreover, both

31

allegation that the district court failed to adjudicate their modification claim is

wrong: the court explicitly stated that “Fletcher did not materially misrepresent

the terms ofthe Nationwide homeowners policy to the Leonards, andFletcher did

not make any statements which could be reasonably understood to alter the

terms of the Nationwide policy.” Leonard, 483 F. Supp. 2d at 691-92 (emphasis

added). The oral modification claim was addressed and rejected, assuming it was

ever presented in the first place. Nonetheless, whether they proceed under a

misrepresentation theory or a contract-modification theory,the Leonards lose on

both scores. The district court should never have considered the argument

because Fletcher’s statements are irrelevant to interpreting this policy as a

matter of Mississippi insurance law.

3. Negligent Misrepresentation Theory

The Leonards fail to present an actionable claim of negligent

misrepresentation because they cannot prove two of the elements required to

show apparent authority. First, Nationwide’s conduct in no way indicated that

Fletcher was authorized to orally modify policies he sold. The Form HO-23-A has

an integration clause specifically disclaiming the agent’s ability to do so:

HOW YOUR POLICY MAY BE CHANGED

( . . . )

(c) A waiver or change of a part of this policy must be in writing

by use to be valid. Our request for an appraisal or

examination does not waive our rights.

Paul Leonard admits to having read the policy. Even had he not, knowledge of

the integration clause is imputed to him under state law.18 Only “[t]hose dealing
No. 06-61130

Nichols and Scott v. Transport Indemnity Co., 513 So. 2d 889 (Miss. 1987), involve fraudulent

inducement to sign new policies, not oral modifications of existing policies. Nichols, 923 So.

2d at 1160; Scott, 513 So. 2d at 894 (holding restricted to agent’s statements “before or

contemporaneous with entering into the insurance contract”). In Andrew Jackson Life

Insurance Co. v. Williams, 566 So. 2d 1172, 1182 (Miss. 1990), “absolutely no oral or written

notice of existent policy condition or breadth of agents’ authority was provided [plaintiffs, who]

. . . were not afforded an opportunity to become properly informed through inspection of sample

policies, brochures, or anything, and discover that the agents’ offers wrongfully contravened

unrevealed policy conditions.” (emphasis in original) (internal quotation marks omitted). And

in American Income Life Insurance Co. v. Hollins, 830 So. 2d 1230, 1238 (Miss. 2002), the

insured “was not given notice of the exclusion at the time of relying on the agent’s

misrepresentation.” None of these cases supports the Leonards’ argument that their

misrepresentation claim survives notwithstanding the integration clause.

32

with agents without notice of restrictions upon the agent’s authority have a right

to presume that their authority is there.” Hollins, 830 So. 2d at 1237 (citation

omitted).

Second, the Leonards’ reliance on Fletcher’s statements was objectively

unreasonable in light of the policy language clearly excluding water damage,

including damage caused by a flood. See supra Section III.D.

And even if the Leonards can satisfy the third element of apparent

authority – detrimental change in position – their misrepresentation claim is

stale. The most recent statements the Leonards cite were uttered six years ago

in 1999. The statute of limitations for negligent misrepresentation in Mississippi

is three years. See MISS. CODE ANN. § 15-1-49. Because the policy terms are

unambiguous,theLeonards’ claim accrued at the time the misrepresentation was

made. See Oaks v. Sellers, 953 So. 2d 1077, 1082 (Miss. 2007) (action for

misrepresentation of policy terms accrues at execution); Carter v. Citigroup, Inc.,

938 So. 2d 809, 818 (Miss. 2002); Watts v. Horace Mann Life Ins. Co., 949 So. 2d

833, 835-36 (Miss. Ct. App. 2006) (claim that ambiguous policy tolled statute of
No. 06-61130

19 Although the parol evidence rule is not a bar to evidence of a subsequent contract

modification, see Dixie S. Indus. Coating, Inc. v. Miss. Power Co., 872 So. 2d 769, 772 (Miss.

Ct. App. 2004), the rule is activated only upon the discovery of ambiguity in a contract and is

thus inapplicable here. Smith v. Smith, 872 So. 2d 74, 78 (Miss. Ct. App. 2004) (“Parol

evidence of the intention of the parties may be received to clear up an ambiguity by reason of

which, such intention is not definitely expressed.” (quoting Byrd v. Rees, 251 Miss. 876, 882,

171 So. 2d 864, 867 (1965))).

20 Although Eastline also states that “[a]n oral modification may be made even where

the contract provides that modification must be in writing,” 524 So. 2d at 584, that statement

was supported by authority holding that “a course of dealing [between the parties] which

repeatedly disregards such stipulation” may amount to waiver. Id. (citation omitted). That

situation is not present here.

33

limitations rejected because policy language was plain). The claim is time-barred.

4. Oral Modification Theory

There are atleasttwo reasons why theLeonards’ contract-based claim fails

as well. First, the policy’s integration clause pretermits the claim as a matter of

law.19 See Stephens v. Equitable Life Assurance Soc’y, 850 So. 2d 78, 83 (Miss.

2003) (“Any alleged oral agreement . . . does not have any effect on the written

insurance contract. . . . [that] had a general provision that unambiguously

prohibited any oral modification.”). The Leonards do not allege that the provision

permitting only written modification of the policy has itself been modified. See,

e.g., Eastline Corp. v. Marion Apartments, Ltd., 524 So. 2d 582, 584 (Miss. 1988)

(dispositive issue “whether or not the parties waived the stipulation that all

modifications be in writing”).20 Instead, they argue that their pleading of

equitable estoppel obviates entirely the need to resort to the integration clause.

That claim ignores the rule that doctrines like equitable estoppel that allow

insureds to procure rights at variance with a written insurance policy cannot be

used to extend coverage not otherwise provided by the policy. See Kubow v.

Hartford Cas. Ins. Co., 475 F.3d 672 (5th Cir. 2007); St. Paul Fire & Marine Ins.
No. 06-61130

34

Co. v. Vest Transp. Co., 666 F.2d 932, 948 (5th Cir. 1982) (“[C]onditions going to

coverage or scope of policy of insurance, as distinguished from those furnishing

a ground for forfeiture, may not be waived by implication from conduct or

action.”); Morris v. Am. Fidelity Fire Ins. Co., 173 So. 2d 618 (Miss. 1965).

Second, Mississippi law requires that oral modification correspond to

general rules of contract formation, like the meeting-of-the-minds requirement.

See, e.g., Rottenberry v. Hooker, 864 So. 2d 266, 270 (Miss. 2003). The Leonards

do not contend that Fletcher said that the HO-23-A policy covered all hurricane

damage; instead, they contend that Fletcher stated they did not need additional

hurricane coverage because they did not live in an area classified Flood Zone A

by FEMA. From this, Paul Leonard inferred that the policy covered hurricane

damage. See Leonard, 438 F. Supp. 2d at 691. That inference does not provide

the mutual assent necessary to modify the contract. The Leonards’ additional

claim that equitable estoppel does not require mutual assent is irrelevant

because estoppel cannot operate to create hurricane coverage that does not exist

under the policy.

Whether the Leonards proceed under a contract or tort claim, their

allegation that Fletcher’s comments entitle them to additional coverage is

incorrect as a matter of Mississippi law, and requires us to reverse the district

court’s contrary holding.

5. Fletcher’s Conversations with Other Policyholders

In addition to the district court’s error regarding claims based on

statements made to the Leonards, the district court additionally abused its

discretion in considering evidence of statements made by Fletcher to

policyholders other than the Leonards. Over Nationwide’s objection, the district
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35

court admitted statements Fletcher made to five Nationwide policyholders as

“habit” evidence under Federal Rule of Evidence 406 because “there was enough

evidence . . . as a matter of habit and routine, [that Fletcher] expressed his

opinion, when he was asked, that customers should not purchase flood insurance

unless they lived in a flood prone area. . . .” Leonard, 438 F. Supp. 2d at 690.

Admission of the oral statements under Rule 406 was a clear abuse of discretion.

The Leonards failed to respond to Nationwide's briefing on this issue.

Rule 406’s use of the term “habit” suggests a “regular response to a

repeated specific situation” that has become “semi-automatic.” Reyes v. Mo. Pac.

R.R. Co., 589 F.2d 791, 794 (5th Cir. 1979); see also Pursley v. Dretke, 114 F.App’x

630, 634 (5th Cir. 2004) (unpublished) (“habit” means “a specific reaction to a

specific set of stimuli that is reflexive, repeated, and invariable in nature.”).

Fletcher has about fifteen hundred customers. Comments he purportedly made

to five of them over the course of a decade about the need for additional flood

coverage do not remotely qualify or quantify as a habit within the meaning the

Rule 406. The record demonstrates that Fletcher sold nearly two hundred NFIP

supplemental policies in the years preceding Katrina – twelve of them to

policyholders living in the Leonards’ neighborhood. Evidence was lacking to

suggest that Fletcher’s statements to other policyholders revealed an invariable,

reflexive response to his treatment of inquiries about supplemental flood

insurance. Admission of the statements under Rule 406 was an abuse of

discretion.

III. CONCLUSION

Subjectto the foregoing explanation of the trial court's errors, we AFFIRM.