Katrina-loss lawsuits over flood damage threaten insurance market, experts say.

Hurricane Katrina caused billions of dollars in insured losses. That alone has made insurers more cautious about hurricane-prone markets. But a slew of lawsuits against insurers over flood damage coverage threatens the Gulf Coast markets even more, insurance experts said.

"The most serious threat to the insurance market is not another hurricane but the lawsuits filed by Mr. Hood and Mr. Scruggs," said Bob Hartwig, chief economist for the Insurance Information Institute.

Mississippi Attorney General Jim Hood has filed a lawsuit against several insurers, seeking coverage of flood damage from Katrina despite long-held flood exclusions. Meanwhile, noted plaintiffs attorney Richard "Dickie" Scruggs has filed several suits seeking coverage for those whose homes were destroyed or severely damaged by Katrina's storm surge.

Beyond the some $4 billion in flood damages along the coast, Hartwig said the suits have "introduced a wild card that can't be priced" by trying to retroactively rewrite approved insurance contracts. He said those behind the suits "are willing to wash away decades worth of precedent."

Bob Detlefsen, public policy director for the National Association of Mutual insurance Companies, said uncertainty over whether courts would enforce approved contracts is "a very serious problem" and not just for insurers. If the suits are defended successfully, it would remove doubts about the legal system and make it less likely future suits would be filed, Detlefsen said.

As it stands, the courts have so far interpreted the flood exclusions as binding, which is good news for insurers, Hartwig said. But the courts have also ruled in several cases that certain policy language is unclear, which has allowed the suits to continue.

"Either you value clear and accessible language or you put a premium on language that's air-tight that could withstand a legal challenge" Detlefsen said. "You can't have both. Insurers are being attacked on both sides."

In both examples, Detlefsen said, courts have ruled in favor of the policyholders because of unclear policy language. He called it a "paradox." Detlefsen said insurers alter policy language in response to court rulings and also regulatory judgments.

"Insurers are put in the position of responding to these demands from both the regulatory environment and the courts," Detlefsen said. "The cumulative effect of this for the insurance company is to come up with policy language that is more and more legalistic. The insurer is in a no-win situation."

Top 5 Most Costly *
Hurricanes in U.S. History

($ Billions, restated into 2005 dollars)

Charley (2004)                $7.1
Wilma (2005)                  $8.4
Great New England (1938)      $9.6
Andrew (1992)                $23.1
Katrina (2005)               $38.1

Note: Table made from bar graph.

* Based on Insured Loss

Source: A.M. Best Co., ISO