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updated 9/13/2005 1:53:17 PM ET 2005-09-13T17:53:17

Louisiana is facing an epic legal battle to determine who should pay to repair damaged properties, with insurance experts predicting that tens of thousands of homeowners will discover their insurance claims will not cover the cost of rebuilding their homes.

Jim Brown, Louisiana's insurance commissioner from 1992 until 2004, estimates that only a quarter of houses in the poorest areas affected by Hurricane Katrina had flood insurance. Standard insurance policies, carried by almost all homeowners, cover damage caused by storms but not floods.

In addition, those who bought federal flood insurance beyond the means of many poorer households may find compensation falls short, since it covers losses of only up to $250,000. "There is a big insurance gap," said Mr. Brown. "In all likelihood many people will suffer great financial loss."

Similar disputes are expected along the Mississippi coast, where the worst damage was caused by the storm surge brought ashore by Hurricane Katrina rather than the 145 mph winds. Experts said disputes are likely to arise over whether a storm surge will be classified as a flood.

Flood coverage was offered under a scheme backed by the Federal Flood Insurance Program. But it was expensive, costing up to $1,000 a year for a $200,000 home.

"The [physical] nightmare of the emergency is hopefully over for many people but the financial nightmare is just about to begin," said E.L. "Bubba" Henry, a lawyer representing insurance companies.

A report by Risk Management Solutions, a company that provides catastrophic risk data to insurers, estimated that losses from the hurricane could reach $125 billion, with insured losses of between $40 billion and $60 billion. Insurance experts said in general, if damage is caused by wind or rain, the insurance companies are liable. But if the water comes from the ground, the Federal Flood Insurance Program is liable. Many homeowners are expected to argue that the flooding was caused by the wind and torrential rain, which led to the bursting of the levees in New Orleans.

James Donelon, general counsel for the state Department of Insurance, believes this question will have to be decided in court.

© The Financial Times Ltd 2013. "FT" and "Financial Times" are trademarks of the Financial Times.

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