It’s easy to understand how Ms. Melissa Landy is appalled over the $17 million settlement from Orleans, East Jefferson and Lake Borgne Levee Districts. Further, this settlement might give an illusion or an appearance of the levee districts taking responsibility for the flooding during Hurricane Katrina.

However, in a case like this, a settlement is not evidence of wrongdoing. And a judge does not have to believe a plaintiff’s contentions have merit to approve a settlement.

The settlement money came from insurance proceeds resulting from policies the levee districts held on the levees. So naturally, one might wonder why the insurance companies would pay if the claims are not true. Here’s why.

Insurance companies have a risk of being found in bad faith for refusing a bona fide settlement offer within or at policy limits. Explained more simply, if an insurer refuses to pay a proposed settlement they could potentially become liable for the full amount of any future settlement or a judgment even if it exceeds their policy limits.

The total damages claimed by the plaintiffs for the levee and floodwall failures designed and built by the Army Corps of Engineers were many billions of dollars. In this case, the insurers each had the choice to pay $5 million or roll the dice and possibly end up bankrupt. (Twenty million divided by four because a post Katrina flood authority was also named in the suit.) If the insureds win, they save the $5 million each minus the legal expenses of a trial. And if they lose, the insurer could potentially face a possible bad faith judgment for billions of dollars.

It’s not hard to see why a rational insurer would choose to settle. In other words, the insurance companies have no choice. A settlement is just that, and nothing more.

Sandy Rosenthal


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