Department spokesperson Kerry Hall also notes that North Carolina policies refer to “named-storm” deductibles rather than hurricane deductibles, the law firm says in a memo.

The legal memo calls the controversy “One of the myriad issues that has arisen from Sandy.

The lawyers say that because of “Sandy's unique nature” as a hybrid tropical and post-tropical storm, “the applicability of these deductibles to property damage claims stemming from the superstorm is ripe for controversy.”

The controversy was created when the National Weather Service downgraded Sandy from a hurricane to a “post-tropical cyclone.”

The Nelson, Levine lawyers argue that state decisions “proactively ended the controversy,” but officials of the American Insurance Association and the Property Casualty Insurers Association of America disagree. Their objections are in addition to concerns raised earlier by the National Association of Mutual Insurance Companies.

Officials of the trade groups and the insurers are explaining to the regulators that they based their rates on the contract language they negotiated with state regulators, and voiced concern about the potential the issue has to threaten their solvency.

Willem Rijksen, vice president of public affairs for the American Insurance Association, says, “Insurers are committed and ready to help our policyholders recover from this terrible disaster.”

But, he adds, “Let's remember that it's absolutely essential that we support certainty, and a robust competitive private insurance market for coastal residents in the years to come.

“Political manipulation of private markets weakens those markets—and that's the last thing coastal residents need,” Rijksen says. “We want to work with regulators to help our policyholders recover.”

Donald Griffin, vice president, personal lines, for the Property and Casualty Insurers Association of America, Chicago, Ill., says insurance companies and their trade groups have been working with regulators to establish the rules when settling claims on Sandy.

“Companies have filed and regulators have approved storm deductibles and PCI is working with our members and the regulators on these issues,” Griffin says.

He adds that insurance policy contracts may differ based on the state and whether the contract calls for a deductible based on a windstorm or hurricane trigger.

“Whether windstorm, hurricane or standard, we want to make sure the deductibles are applied fairly and according to the terms of the contract,” Griffin says.

He also cautions that the current controversy could impact the solvency of insurance companies.

In an earlier statement on CNBC, Jim Whittle of the AIA said the likely result of the decision is higher rates for everyone, a position also noted by Neil Alldredge, senior vice president, State & Policy Affairs, for NAMIC.

Alldredge also says that NAMIC companies are likely to rethink how much coastal risk they can afford to underwrite, given the states' actions.