A federal appeals court on Monday threw out a $1 million punitive damage award to a Mississippi couple who sued the nation’s largest insurance company over Hurricane Katrina damage.

The 5th U.S. Circuit Court of Appeals in New Orleans also ordered a new trial for the lawsuit that Norman and Genevieve Broussard filed against State Farm Fire and Casualty Co. after the August 2005 hurricane.

A jury in Gulfport, Miss. awarded $2.5 million in punitive damages to the Broussards in January 2007. U.S. District Judge L.T. Senter Jr. later reduced that amount to $1 million.

But a three-judge panel from the 5th Circuit vacated the entire award, saying Senter shouldn’t have allowed jurors to consider punitive damages in the case.

The appeals court also ruled that Senter erred when he took part of the case out of jurors’ hands and held State Farm liable for $223,292 in wind damage to the Broussards’ Biloxi home.

The 5th Circuit said a ‘‘rational jury’’ could have sided with State Farm and concluded that Katrina’s water destroyed the home. State Farm and other insurance companies say their homeowner policies cover damage from a hurricane’s wind but not its water.

Senter concluded State Farm acted in a ‘‘grossly negligent way’’ by denying the Broussards’ claim. The judge also said the company denied policyholders’ Katrina claims based on a new ‘‘wind-water’’ protocol that is ‘‘at odds with other express terms of the insurance contract.’’

However, the 5th Circuit said State Farm had an ‘‘arguable basis’’ for denying the couple’s claim based on observations made by one of the company’s adjusters.

‘‘Even after extensive investigations by both parties, the question of whether the Broussards’ property was first destroyed by wind or water remains an extremely close one,’’ the judges wrote in their 18-page ruling.

Hundreds of policyholders in Mississippi have sued their insurer for denying their claim. The Broussards’ case was the first to be tried before a federal jury in Mississippi.

State Farm spokesman Phil Supple said the ruling confirms the company’s belief that Senter should have allowed jurors to distinguish between damage from wind and water to the Broussards’ home.

‘‘It has also been our belief there was no basis for punitive damages, and the appellate court agreed,’’ Supple added.

William Walker, a lawyer for the Broussards, said he was disappointed but not surprised by the court’s ruling.

‘‘If we retry the case, we fully anticipate that we will be able to get a jury verdict in our favor for the entire policy limits,’’ he said.

Walker also hailed a portion of Monday’s ruling as a victory for policyholders: The 5th Circuit rejected State Farm’s claim that the Broussards had the burden of segregating covered damages, such as wind, from non-covered damages, like flood water.

‘‘It will help every other person who has to sue an insurance company in Mississippi,’’ Walker said of that finding.

The 5th Circuit also found that Senter didn’t abuse his discretion by holding the trial on the coast. State Farm, citing possible bias among potential jurors in southern Mississippi, had asked him to move the trial to the northern part of the state.

Local and state representatives of State Farm said they were not allowed to make Katrina related comments, but Supple said recent rulings have further verified what has already been ruled by federal courts in State Farm cases, that “insurance contract language that excludes flooding excludes it regardless of what its cause may be.”



Louisiana high court sides with insurers



On Tuesday the Louisiana Supreme Court ruled an insurance company isn’t obligated to pay for water damage from the failure of New Orleans area levees after Hurricane Katrina.

The Louisiana Supreme Court decision was a major victory for insurers in a case affecting thousands of homeowners.

The high court reversed a state appeals court decision that favored New Orleans property owner Joseph Sher in his suit against Lafayette Insurance Co.

In November, the 4th Circuit Court of Appeal concluded Lafayette’s homeowner policy failed to exclude all forms of flooding because its language was ambiguous.

But the state Supreme Court disagreed, and said Lafayette is entitled to limit its liability for damage from a levee breach.

John Houghtaling, a lawyer who represented the state when the 4th Circuit heard the case, said the ruling has ‘‘very troubling’’ implications for the Louisiana insurance market and deals a sharp blow to thousands of homeowners devastated by the August 2005 hurricane.

‘‘It’s a multibillion dollar windfall for the insurers,’’ Houghtaling said.

The Supreme Court’s ruling mirrors a decision last year by a federal appeals court in a separate but similar case. The 5th U.S. Circuit Court of Appeals in New Orleans also ruled that insurers aren’t obligated to cover water damage from a levee failure.

Lafayette and other insurers say their policies cover damage from wind but not flooding, including water from a levee breach.

In Katrina’s aftermath, levee failures flooded 80 percent of New Orleans. The Army Corps of Engineers is widely blamed for poorly designing and maintaining the city’s flood protection system.

A state judge also ruled Lafayette’s flood-exclusion language was ambiguous and therefore covered ‘‘man-made events.’’

However, the Supreme Court said the definition of flooding in an insurance policy doesn’t depend on whether an event is a natural disaster or man-made one. In either case, Justice Chet Traylor wrote, ‘‘a large amount of water covers an area that is usually dry.’’

Traylor also disagreed with the claim that ‘‘man’’ was responsible for flooding from the broken levees.

‘‘The flood was caused by Hurricane Katrina, not by man,’’ he wrote. ‘‘The levees did not cause the flood, they, whether through faulty design, faulty construction, or some other reason, failed to prevent the flood.’’

Four of seven Supreme Court justices signed on to Traylor’s 29-page majority opinion. Two others concurred in the result. One concurred in part and dissented in part.

Sher, a 92-year-old Holocaust survivor, owned and lived in a five-unit apartment complex that took on four feet of water after the levees broke on Aug. 29, 2005.

James Garner, one of his lawyers, argued insurers are to blame for writing policy language that confused policyholders and resulted in conflicting court opinions.