In a major blow to property carriers, a federal judge has confirmed an earlier decision sending a suit by Mississippi Attorney General Jim Hood back to state court. The suit contends that insurer flood exclusions do not apply to Hurricane Katrina claims if water damage was wind-driven.

Insurers were eager to have the case heard in federal court, where they expected to get a fairer shake than in the storm-devastated, plaintiff-friendly state of Mississippi. While I sympathize with the industry to an extent, they cant have it both waysat least not those who oppose federal regulation. Backers of state oversight shouldnt be able to just opt out when the going gets tough.

The point is moot, as like it or not, the case is going back to Ole Miss!

Insurance Information Institute President Bob Hartwig remains hopeful despite the grim turn of events. Insurers must have faith that the judge in this case will listen to all the evidence in an unbiased manner–as will jurors if there is a jury trial–and the evidence will lead to a dismissal of the Hood suit, he said. A good case can be made that this case should be dismissed immediately because the precedent is so strong here that there is no reason why a different principle should apply in state court.

He added that at the end of the day, what needs to be maintained is the integrity of the insurance contract. Courts or attorneys general cannot be allowed to rewrite retroactively the terms of an insurance contract–every word of which has been approved by the regulator of the state of Mississippi.

I wish I shared his optimism.

Mr. Hood is open to discussion on a settlement, and while the industry is talking tough, I'm not sure it's wise for insurers to depend on the tender mercies of a Mississippi jury. This could get ugly.

How do you folks think this will all come out???

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Flood Exclusion Springs Another Leak!

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