State Farm raised the white flag and cut a deal on water-related Hurricane Katrina claims with Mississippi Attorney General Jim Hood. This one is going to be hard for the industry to swallow, but what choice did State Farm have, with hostile juries lined up hear flood exclusion disputes, and a grand jury being coaxed into handing down criminal indictments?

Once State Farm got hit with a $2.5 million punitive damage award for just one disputed Katrina claim, it was just a matter of time before the carrier struck a deal to make all the other claims go away. This promises to send shock waves through the entire industry, as Mr. Hood said he hopes the deal serves as a template for other carriers to follow suit. That's exactly what I expect the others to do.

It seems like a lousy deal to pay claims you truly believe are excluded. But given the stacked deck against carriers in Mississippi courts, and with the odd circumstances of wind-driven water claims, insurers are likely to literally cut their losses and get this nightmare behind them.