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PASCAGOULA, Miss. -- Which came first, the wind or the water?
That question is in the eye of a legal storm brewing in Mississippi that has financial ramifications for insurers, which have already paid billions in claims related to Hurricanes Rita and Katrina.
"Gone with the Wind," reads the yellow and black yard sign on Tina Lee's property in Pascagoula, Miss. Her home was leveled last August by Hurricane Katrina, and Lee blames the wind.
Lee's insurer, MetLife (MET, news, msgs), blames most of the damage on Katrina's storm surge. MetLife gave her $2,500 to cover damages caused by the onshore rush of water, but nothing for the subsequent flooding that it says made her home uninhabitable.
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If it was the storm surge, Lee asks, why are so many other homes in her waterfront neighborhood still standing? So Lee is suing MetLife, asking a court to decide what wiped out her home.
Lee and other plaintiffs sustained a setback last week when a federal judge ruled that a Mississippi couple cannot collect from Nationwide Mutual Insurance Co. because their policy does not cover damage caused by flooding. The ruling validates the longstanding practice of insurers of not covering flood damage, which is typically insured through the federal government.
But the judge in the case rejected attempts by the insurers to withhold payments for wind damage when it occurs in combination with flooding. In essence, the judge opened the door for another court to decide whether insurance policies cover damage done by wind -– like a roof blowing off – before the floodwaters move in.
So insurance companies are still on the hook in the bevy of lawsuits from Katrina victims who thought their policies afforded them protection from hurricane damage, says Dick Scruggs, an attorney representing Tina Lee and 3,000 other Mississippi policyholders.
"The houses are completely gone," Scruggs says. "(The insurance companies) are going to have a pretty high hill to climb to prove what happened there, particularly with eyewitnesses and all this scientific evidence that shows that winds preceded the water by several hours."
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The insurance industry says that the plaintiffs' cases won't fly because the insurance contracts are airtight.
"Insurers have very, very strong defenses here, including language in the policy that was approved by the insurance regulator in the state of Mississippi," says Robert Hartwig of the Insurance Information Institute.
The institute says that 90% of Mississippi's Katrina-related claims have been settled, to the tune of $10 billion. The organization brandishes the figures in making its case that the industry hasn't dodged its responsibility to last year's Gulf Coast storm victims.
Scruggs, whose law firm made $1 billion suing Big Tobacco in the 1990s, claims that up to $20 billion more is owed to homeowners, including many with homes on the Gulf Coast that were completely washed away.
Even if Scruggs starts beating the insurers, analysts say the Katrina-related cases are unlikely to cripple the insurance industry.
"The insurance industry can certainly absorb $1 billion or $2 billion or $3 billion of unanticipated losses," says Donald Light, senior analyst at Celent, a consulting firm focused on the financial services industry.
What alarms some plaintiffs -- including Sen. Trent Lott, a Mississippi Republican who had a beach-side home destroyed by Katrina -– is the sense that the industry is content to wait out the 3,000 cases scheduled to be tried separately or in small groups, some of which could take years to reach the docket.
"I will say to the Supreme Court, to the Judicial Council, to the District Court of Appeals and the district judges in the South, 'You better do something, because this is an unacceptable situation,'" says Lott, who has his own lawsuit pending. Lott's attorney in the insurance lawsuit is his brother-in-law, Richard Scruggs, the same attorney handling Tina Lee's lawsuit.
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