“Most of the government programs we participate in, including the National Flood Insurance Program, already have longstanding auditing procedures. We understand that is part of the process and we intend to cooperate fully with any additional inquiries that may come our way,” he said.

Still, Sen. Lott could be opening a Pandora's Box for insurers, with the resulting bad press destroying what's left of the industry's reputation.

The probe will undoubtedly draw hundreds, if not thousands of unhappy insureds out of the woodwork, all complaining about the injustice of the industry's longstanding flood exclusion–or at the very least challenging its application.

But the feds also are likely to spotlight many with legitimate claims who still had a rough time–people such as Carl Van, a professional claims trainer (and frequent speaker at NU-sponsored meetings) who had his own horror stories to tell after his home was hammered by Katrina. (See last week's edition for details.)

What will Homeland Security report on April 1, 2007, when investigators are required to reveal their findings to Congress? More importantly, what will Congress do about it?

Perhaps Congress will decide the flood exclusion is too confusing and easily fudged in settling claims, and wipe it out altogether, while forcing insurers to write all-peril coverage for homeowners. That might not be a bad thing–it certainly would solve the problem of people ignorantly or recklessly declining to buy flood coverage even if they have such an exposure.

However, the big question is whether the federal and state governments would allow insurers to charge actuarially-sound rates for all-perils coverage. Uncle Sam's track record isn't good on this point. After all, one big reason why the National Flood Insurance Program is so horribly underfunded is that insureds weren't charged anywhere near what a private carrier would have demanded to take on this massive exposure.

In a recent social setting with insurance folk, there was also talk about how in the world any carrier could tick off a U.S. senator by denying his claim, knowing full well he could make life miserable for the entire industry. But showing any favoritism toward a major power broker would not only have been unethical, it would have been stupid, opening the door for all other flood-related claims.

I can't help but wonder, following Sen. Lott's little backdoor ploy, whether federal charter backers are still sure they want Uncle Sam regulating them?