In a major setback for insurers, a federal district court judgehas ruled that a state court should hear a suit brought byMississippi officials over property-casualty insurer denials ofHurricane Katrina claims based on flood exclusion policylanguage.

Jackson, Miss.-based District Court Judge Tom S. Lee said thatwhile there is “federal interest in the subject matter and outcomein the suit,” ultimately the issues remain state-oriented.

Mississippi Attorney General Jim Hood filed the suit on Sept. 15in Chancery Court of Hinds County in an attempt to compel insurancecompanies to cover damage created by wind-driven storm surge.

“The insurance industry is using delay tactics in hopesMississippians will give up their claims and take whatever theinsurance companies will offer,” Mr. Hood said after the federalcourt's decision came down. “I hope people will just hold on alittle bit longer and let us get a decision on this case.”

An American Insurance Association representative, Julie Pulliam,called the ruling “just the latest development in what we expect tobe a long, drawn-out legal dispute.” She blamed the attorneygeneral for giving the uninsured “false hope that there is going tobe a payoff for them fairly quickly. We don't believe there will bea payoff, and we don't believe it will be quick,” adding that thecase will likely go to the state's Supreme Court.

Defendants in the case–State Farm, Nationwide, USAA, Allstateand the Mississippi Farm Bureau–sought to remove the case tofederal court on the basis that the outcome would affect flood riskcoverage provided by the federal government through the NationalFlood Insurance Plan.

David Reddick, senior state affairs manager for the NationalAssociation of Mutual Insurance Companies, criticized the DistrictCourt judge for failing to take into consideration the impact ofthe case “on the uniformity of federal flood insurance plancoverages in states susceptible to hurricanes and their resultingdamage.”

While the defendants sought federal jurisdiction because of theNFIP issue, another motive might have been the fact that federalcourts have proven to be a generally more favorable venue forindustry defendants–but that could change as tort reform measureshave resulted in Mississippi no longer seeming to offer a haven forplaintiff attorneys.

“The key will be whether Mississippi falls back into the habitof rushing to the courthouse regarding any and all disputespost-Katrina, or whether the tort reform laws now on the books aresuccessful in keeping frivolous lawsuits out of the courts,”according to the AIA's Ms. Pulliam.

NAMIC's Mr. Reddick said the case will in all likelihood revertto Hinds County Chancery Court, where it was first filed in theaftermath of Katrina, whose whipping winds created a storm surgethat destroyed a great deal of Mississippi's coastal areas.

Mr. Hood said he will move for as swift an action aspossible.

An estimated 40 percent of homeowners who suffered severeproperty damage from Hurricanes Rita and Katrina did not have floodcoverage, which since 1968 has been offered by the federalgovernment. Standard homeowner insurance policies exclude floodexposures.

The suit does not challenge the flood exclusion as such, butasserts that wind-driven storm surge losses should not be excludedlike those from traditional floods–or even the flooding in NewOrleans resulting from a breach in the levees.

The insurance industry has vigorously contested the suit,asserting, in the words of Insurance Information Institute ChiefEconomist Robert Hartwig, that “the flood exclusions are very broadand cover rising waters, regardless of the cause orcircumstances.”