The latest example is the lawsuit filed by Mississippi Attorney General Jim Hood, seeking to disregard the flood exclusion that is a standard feature in every homeowner's policy. The industry determined a long time ago that where flood losses were most likely–such as New Orleans, a city in a bowl with water all around it–affordable insurance was simply impossible to provide without risking insolvency.

The federal government, recognizing this reality, came up with a safety net–the National Flood Insurance Program. All it takes is for people to have the common sense to buy coverage if they are at risk.

The problem is all too few accepted responsibility and bought the additional protection. Indeed, it is estimated that as few as one-quarter of homeowner policyholders in the areas hammered by Hurricanes Katrina and Rita had federal flood insurance.

So, now the heat is on private carriers to "do the right thing" by waiving flood exclusions and paying all claims, regardless of the cause of loss. Consumer gadflies are buzzing about, challenging the industry's ethics if they deny flood-related claims. A potentially catastrophic court battle looms in Mississippi.

What do the critics of the insurance industry expect carriers to do? Just open their bank accounts and pay all comers, no matter what the circumstances of their loss?

Even if insurers want to be "good guys" and shrug off the longtime exclusion, how will they reconcile such altruistic behavior with their other responsibilities?

o For one, hurricane season is far from over. What happens if carriers pay off on tens of billions in uncovered flood claims, and then another major storm hits? Will insurers be able to meet their contractual obligations to those policyholders for covered wind damage?

o Second, primary insurers that are overly generous with their claims payments can expect little sympathy from the reinsurance community. Carriers that pay claims they don't really owe are unlikely to get any reimbursement from reinsurers, leaving them even deeper in the hole.

o Third, what are publicly-held insurers supposed to tell their shareholders after they pay billions to policyholders that should be going to the company's bottom line? It's hard enough to attract capital to this low-return industry without giving away the store.

Flood exposure was no secret to the people living in the communities hit by Katrina and Rita. It was also well-established that private insurers do not cover such losses, and that federal flood insurance was available to close the gap.

The industry must pay every valid claim as quickly as possible, but carriers should not be bullied into paying what they do not owe. If anyone owes a debt here, it is the government–both federal and local–which permits far too much development in flood-prone areas and failed to properly maintain the levees.

Sam Friedman is NU's Editor-In-Chief. He may be reached at [email protected].

"No matter what an insurance policy says–especially what it excludes–when a crisis hits, public officials look to pick the industry's deep pockets."