Roger Schmelzer, vice president for the National Association of Mutual Insurance Companies, feared "profound, unintended consequences for Mississippians and the insurance industry in that state."

"If [it is] granted, the motion will effectively bring the entire claims paying process in Mississippi to a halt," Mr. Schmelzer said. "Taking this action may have made a great headline, but its success will only leave people more confused than ever before."

In the suit filed Sept. 15 in the Chancery Court of Hinds County, Miss., First Judicial District, the attorney general alleges that certain insurance contract provisions that attempt to exclude damage caused by water--whether or not driven by wind--are not enforceable.

Jacob Ray, a spokesperson for the attorney general, said the insurance industry would like to make the issue about the sanctity of the flood exclusion.

"But this is not Flood Katrina, this is Hurricane Katrina," he said.

Essentially, a hurricane actually lifts the Gulf up and carries it forward with the front as it moves inland creating a storm surge, rather than a flood, Mr. Ray said.

The New Orleans situation presents totally different issues, Mr. Ray added.

So far, attorneys general in Alabama and Louisiana have indicated no interest in filing a suit similar to Mr. Hood's suit.

Robert Hartwig, chief economist for the Insurance Information Institute, estimates that if the Mississippi suit is successful, losses for the industry could mount to $75 billion, assuming all states must follow suit.

"The flood exclusions are very broad and cover rising waters, regardless of the cause or circumstance," Mr. Hartwig said.

In fact, the issue has rarely arisen in past hurricanes. "These claims usually run pretty smoothly. Whether it is flood, or just flood and wind, adjusters are pretty experienced" at making the distinction, he said.

Mr. Hartwig said the fact that the chief insurance regulator in the state, George Dale, has not joined in the suit is significant.

Commenting on the suit, Mr. Dale said only that he would follow the law, but asserted the potential ramifications of the suit could be "troubling."

Insurers maintain that policies approved by Mississippi regulators should not face alteration retroactively.

But even industry leaders such as Allstate Chief Operating Officer Tom Wilson conceded there will be "issues" when trying to determine wind or flood damage.

And Mr. Hood said that when such issues arise, "provisions should be strictly construed against the insurance companies who drafted the insurance policies and their exclusions."

Vince Vitkowsky, New York-based senior partner in the insurance and reinsurance practice for Edwards & Angell, said the fact a state attorney general, as opposed to a plaintiffs' lawyer, filed the suit gives it "an additional layer of concern."

"The courts in that part of the world have been pretty good in distinguishing between perils such as hurricane, on the one hand, and flood, on the other, and typically able to do it," he said. "They have always been disciplined and treat it, for the most part, as an issue of fact."

Mr. Vitkowsky also said "what is telling about the debate is that they couch it in terms of 'equity' and 'unjust enrichment,' rather than a cause of action for a breach of contract."

"Unjust enrichment is what you use when you don't have a real contract claim," he said.

Ernst Csiszar, president of the Property Casualty Insurers Association of America, joined the chorus of industry leaders when he labeled the suit "about politics, not fairness or justice under law."

Fitch Ratings analyst James Auden said the perception of the industry's "deep pockets" could play a crucial role in determining the outcome of this case, since only about a quarter of the policyholders have purchased flood insurance, which will hinder rebuilding efforts.

"This has put the insurance industry in the center of a heated political issue," he said.

The state itself can be seen as part of that equation in that Mr. Hood's predecessor, Mike Moore, made a national name for himself in taking on the tobacco industry. In addition, while tort reform has improved the state's image from the insurance industry standpoint, it still has a reputation for not being friendly to large corporate interests.

At the federal level, Congress will face some pressure to maintain the sanctity of the flood exclusion if only to provide the coverage needed to fuel the rebuilding effort that is now a top priority in Washington. Lawmakers are also in the final stretch of the debate to extend the Terrorism Risk Insurance Act, and Katrina will only reinforce the notion that natural catastrophes are still a potent threat in the post 9/11 era and should be a part of any overall scheme for federal protection.

Last Wednesday, Standard & Poor's estimated insured losses from Katrina will be at least $35 billion. At the high end of a range of estimates predicted by modeling firms, Newark, Calif.-based Risk Management Solutions said Katrina could cost insurers anywhere from $40-to-$60 billion--of which $15-to-$25 billion is related to private insurance costs for the flooding in New Orleans (excluding National Flood Insurance Program coverage).

As those insured losses threaten to eclipse those from the 9/11 attacks, analysts are starting to ponder the impact on the industry if Mr. Hood's efforts achieve their ultimate goal.

S&P analyst Thomas Upton sees increasing pressure, regardless of the suit's outcome, on insurers to provide flood coverage for homeowners and small businesses, even when excluded, if primary and secondary cover is exhausted.

And Mr. Auden of Fitch sees downward pressure on ratings, if the rating firm can no longer rely on basic policy exclusions in their calculations of a carrier's risk profile.

"Although reinsurers are intended to 'follow the fortunes' of their primary companies, we believe it is highly likely reinsurers would dispute payment of flood related claims," he added.

Photo of Hood with caption

Filing a lawsuit in Hinds County, Miss., Attorney General Jim Hood is accusing insurers of "unjust enrichment," and seeking to compel them to pay flood claims that insurers say are not covered under their policies.

"Taking this action may have made a great headline, but its success will only leave people more confused than ever before."

Roger Schmelzer

V.P.

NAMIC