Like a shot to the gut, insurers had the wind knocked out ofthem last month by a potentially monumental decision that manyinsurer flood exclusions did not, in fact, preclude payment ofclaims resulting from the failure of levees to protect New Orleansduring Hurricane Katrina.

U.S. District Court Judge Stanwood R. Duval Jr. in New Orleansruled that flood exclusion language in policies issued by Allstateand other carriers does not exclude water damage caused bynegligent or intentional acts of man. It does not address theambiguity of the term flood and the fact that all of the listedcauses appear to be the result of natural occurrences, not themonumental civil engineering debacle that is alleged byplaintiffs.

The plaintiffs in the consolidated case successfully argued thatwater damage to their properties was caused not by your standardcatastrophic flood, but because the man-made levee failed to keepwater out as it was designed to do. Therefore, the cause of loss isthird-party negligence in the building and maintenance of thelevees, not Mother Nature.

State Farm--the biggest insurer in Louisiana last year, with a35 percent share of the private marketcaught a break, as the judgeruled that its policy was unequivocally clear in excluding floodlosses regardless of the cause. The problem with the other policieswas their emphasis on natural disasters--which this loss was not,the judge determined.

Will the decision stand? Many in the industry are doubtful(although that may be wishful thinking). Some pointed out that eventhe judge himself might have doubts. After all, after concedingthat the rulings impact on individuals as well as the insuranceindustry might be considered overwhelming, he cleared the case forimmediate appeal to the 5th Circuit.

To add to the industry's woes, earlier this month a state courtjudge--Edward D. Rubin with the 15th Judicial District Court inLafayette, La.--threw out the flood exclusion in a 2005 HurricaneRita claim against the states residual insurer, Citizens PropertyInsurance Corp. Judge Rubin issued a summary judgment for theplaintiffs, suggesting that the exclusion in their homeownerspolicy should only apply in cases where properties were completelyand clearly destroyed by flooding, not wind. Citizens plans anappeal.

Meanwhile, over the summer, insurers celebrated a key victorywhen U.S. District Judge L.T. Senter upheld the flood exclusion inan individual case involving Nationwide and a Mississippihomeowner.

However, another angry Mississippi policyholderU.S. SenatorTrent Lott, a Republicancould cause the industry a lot of griefbefore this debate is over.

The incoming minority whip is pursuing his own suit againstState Farm for denying his Katrina claim. Hes represented by hisbrother-in-law--the high-powered class-action attorney RichardScruggs. (Hows that for politics making strange bedfellows, whenone considers Sen. Lotts usual support for tort reform?)

As if that wasn't enough, Sen. Lott slipped a provision into anappropriations bill requiring the U.S. Department of HomelandSecurity to investigate insurer handling of Hurricane Katrinaclaims. The agencys report, due next April 1, could provide fodderfor industry bashing at high-profile Congressional hearings nextspring.

And just to show theres no hard feelings, Sen. Lott has alsovowed to introduce a bill next year to repeal the industrys federalantitrust exemption under the McCarran-Ferguson Act.

In related news, a bill to reform the underfunded andlittle-understood National Flood Insurance Program passed the Housebut stalled in the Senate. A different version of the legislationcleared the Senate Banking Committee in July, but never made it tothe full body.

The Senate isnt thrilled with House calls for increases inmaximum coverage limits and business interruptionpaymentsprovisions not included in the Senate billbut it's hard tosay where this will end up when the Democrats take control nextyear.

In the meantime, most people claim to remain clueless abouttheir flood coverage. On the first anniversary of Hurricane Katrinathis summer, a survey of homeowners found more than one in four arenot clear if they even have flood coverage, while over one-thirdare uncertain what their insurance covered in terms of hurricanedamage.

In any case, the majority of exposed homeowners still do not buythe additional, federally-provided protection. Can anyone out thereguess as to why, and what can be done to change this culture ofeither ignorance or indifference?