MOSS POINT, Miss. - The insurance adjuster took one look at the mildewed walls and buckled floors in Jerry and Cynthia Wilson's water-logged home and issued an immediate ruling: the wreckage caused by Hurricane Katrina wasn't his company's responsibility.
The damage, the Allstate Corp. agent told the couple, was caused not by wind or rain, but by flooding - and they had no flood insurance.
Not so fast, say the Wilsons and thousands of Gulf Coast homeowners in similar straits. They, along with regulators, politicians and consumer advocates, are already girding for an increasingly contentious battle with billions of dollars in property claims on the line. And similar battles may take place in Texas if Hurricane Rita causes similar havoc when it rams the coast line this weekend.
"It may take a team of New York lawyers to get down here and straighten this out," Cynthia Wilson said.
The battle hinges on what, from a distance, might seem straightforward. Were homes and businesses in Katrina's path battered by the hurricane's 145 mph winds or a storm surge that sent Gulf waters up to 30 feet high rushing more than a mile inland, well beyond designated flood zones?
Mississippi Attorney General Jim Hood argued in a lawsuit filed last week against Allstate, State Farm Insurance Cos., Nationwide Mutual Insurance Co., Mississippi Farm Bureau Insurance and other insurers operating in the state that they should pay for all Katrina damages, whether caused by wind, wind-driven water or storm surge flooding.
Insurers say their policies don't cover floods and that's what Katrina's storm surge was - water pushed by the force of the wind. Flood insurance is offered separately by the federal government.
Homeowners bought their insurance policies "for the primary purpose of insuring against any damage that could possibly result from hurricanes originating from the Gulf of Mexico," the suit says.
"This wasn't Flood Katrina. This was Hurricane Katrina," attorney general's spokesman Jacob Ray says.
The lawsuits aren't likely to end there. Richard Scruggs, a lawyer from nearby Pascagoula known for extracting huge settlements from tobacco and asbestos manufacturers, was among those whose home was damaged. Scruggs says he will lead homeowners in challenging what he says are insurers' deceptive business practices.
Insurers are trying to "dine and dodge," Scruggs says.
The insurance industry - already looking at losses that could reach $60 billion - says a ruling in Hood's favor would be financially ruinous and could turn insurance regulation on its head.
Hood's lawsuit "threatens to undermine the insurance industry's financial stability and its ability to respond not only to its obligations arising out of Katrina, but also its ability to respond to other claim obligations in Mississippi and around the U.S.," State Farm spokesman Dick Luedke said.
Even if they prevail, it's unclear how insurers would fare against individual homeowners.
"My guess is that it is going to be a mixed result. I think the insurance companies are going to lose a lot more than they expect, both in terms of public opinion and in terms of actually losing in court," said J. Robert Hunter, director of insurance at the Consumer Federation of America and former administrator of the national flood insurance program.
Adam Scales, a visiting professor of insurance law at the University of Connecticut, said he expects "courts will bend over backward to help the plaintiff. When there's a huge disaster, the plaintiff is going to win."
Fewer than half of New Orleans' homeowners had flood insurance, but that's still one of the highest rates in the nation. Only three in 10 in parts of Mississippi and Alabama struck by Katrina had the coverage, the Federal Emergency Management Agency says.
State Farm Insurance Cos., the biggest property insurer in the region, already has received 225,000 Katrina-related claims for damage to homes and businesses.
In his lawsuit, Hood says storm surge payouts could reach $2 billion to $4 billion in Mississippi.
"That amount would likely bankrupt a fair number of smaller insurance companies operating in the state," said Bob Hartwig, chief economist for the industry's Insurance Information Institute.
There have already been reports that some insurance adjusters, seeking to limit their losses, were denying all claims in areas that saw flooding, prompting a warning from Mississippi Insurance Commissioner George Dale: Insurers must "be able to prove to this office that the damage was caused by water and not by wind."
Standard homeowner's policies only cover damage from wind or wind-driven rain, and typically contain a sentence excluding "flood, surface water, waves, tidal water, overflow of a body of water or spray from any of these."
But Hunter of the Consumer Federation said, "You have to look at the entire policy, not just one sentence. If you have two provisions at odds with each other, if there is ambiguity, the insurance companies will lose." Agents' promises of protection to consumers also will be on trial, he said.
Adjusters, trained by FEMA, are expert at spotting "telltale signs to identify wind versus water damage," said Bill Mellander, spokesman for Allstate.
But Steve Burgess, state consumer advocate for insurance in Florida, said his experience shows it isn't that simple. Some structural engineers say a storm surge will cause damage before wind can do anything, but other structural engineers say the opposite, he said.
For now, Gulf Coast homeowners are stuck with uncertainty.
Loi Nguyen was sure insurance would protect him after Katrina left his Pascagoula home eight feet deep in water. That is, until an adjuster told the 33-year-old restaurant manager his policy would only cover the Christmas decorations and other stuff stored in his attic.
"If they say they are not going to pay, what can you do?" he said.
Another homeowner, Cecil Graham, said the water reaches waist-deep at his home in Moss Point, a community in the shadows of the giant Northrop Grumman Corp. shipyards not far from the Alabama state line. The water has subsided. But Graham - a father of two who still owes $45,000 on the home - is distraught.
"I lost everything," he says.
The fight over who should bear responsibility for their losses is fast turning into a political brouhaha.
Hood's lawsuit pits the activist Democratic attorney general against Republican Gov. Haley Barbour and insurance commissioner Dale, a conservative Democrat who received about 75 percent of his campaign contributions from the insurance industry in the last election. Scruggs, the class-action lawyer, is the brother-in-law of former Senate Majority Leader Trent Lott, R-Miss.
Barbour would rather negotiate than sue, and seek a federal bailout for the people lacking flood insurance rather than make insurers pay.
Dale is trying to walk middle ground.
"Whose fault is it? The proper coverage was available and for whatever reason they chose not to take it out," he said.
A ruling against insurers would fly in the face of regulators in every state, Hartwig said, and increase the cost and dangers of selling insurance in any area prone to hurricanes.
"We can price for the probability of certain events," Hartwig said. "But we can't price for what amounts to political risk."