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It should not surprise anyone, least of all those in the insurance industry, that settling the many thousands of Hurricane Katrina-related homeowners’ claims would not be as simple and straightforward as the language of their claims suggests. But one particular legal decision has produced another sort of hurricane that is already unsettling carriers and has the potential to damage homeowners as well. The eye of that storm is directly over the state of Mississippi, and it has knocked a critical clause in the standard homeowners’ policy right off its foundation.

In Aug. 2006, Judge L.T. Senter of the Federal Court for the Southern District of Mississippi ruled on a lawsuit brought by Paul and Julie Leonard against Nationwide, which had issued their homeowner’s policy. The case essentially came down to the question of whether or not the carrier was legally obliged to compensate the plaintiffs for flood damage (they did not have federal flood insurance coverage). The judge found that the terms of the policy “specifically exclude coverage for damage caused by water (with the specific and limited exception of water damage caused by rain that enters an insured structure after its watertight integrity has been lost through the action of the wind).” And he concluded, as a matter of law, that this and related provisions “are valid and enforceable terms of the insurance contract.”

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