Knight Ridder Washington Bureau

WASHINGTON, D.C. — Six in 10 homeowners and businesses in areas hardest hit by Hurricane Katrina may lack flood insurance, meaning that tens of thousands of displaced property owners may get little money to cover losses or repairs.

In many areas now underwater in New Orleans and throughout the Gulf Coast region, older family homes that no longer carry mortgages don’t have the flood insurance that’s now required when homes are bought or built in flood-prone areas.

“We’re estimating now for the affected areas, maybe 40 percent of the people have flood insurance,” said Edward Pasterick, a senior adviser at Federal Emergency Management Agency, which administers the flood policies that are backed by the National Flood Insurance Program.

Insurance industry groups warn that homeowners’ policies don’t cover flood losses.

“Clearly most if not all of the damage to their homes is from the floods,” said William Bailey, who arrived in Jackson, Miss., on Saturday to coordinate efforts for the Hurricane Insurance Information Center, an industry clearinghouse for storm recovery information.

FEMA statistics show that at the end of 2004, there were only 41,912 federal flood-insurance policies in Alabama and just 42,320 flood policies in Mississippi. Louisiana was a bit better off, with 380,192 policies, but only 83,990 of them were in hard-hit New Orleans and the surrounding Orleans parish.

The federal government thinks that Katrina left at least 1 million people homeless.

The flood-insurance program is usually self-supporting, with premiums from unaffected areas covering the losses in afflicted areas. But the scope of Katrina’s damage — estimated by Risk Management Solutions of Newark, Calif., to exceed $100 billion in insured and uninsured losses — could exceed premiums.

FEMA has the authority to seek loans from the Treasury and pay back those loans with interest. The agency also administers low-interest loans to disaster victims who lack flood insurance, likely forcing huge borrowings from the Treasury.

Katrina’s victims stand a better chance of winning insurance claims if their homes aren’t standing but left in a splintered mess, suggesting wind damage. The worst-off will be those whose homes are intact but underwater and lacking flood insurance.

Chaos, rescue operations, fires, oil spills and the threat of disease have prevented claims adjusters from reaching the hardest-hit areas. But televised images show neighborhoods completely underwater and victims rescued from intact rooftops. That makes it clear to industry executives that insurers are off the hook for much of the losses.

“The definition of flood is fairly ironclad. It’s essentially water that comes from below. That fact that a government-run levee fails and creates a flood does not create a liability for private insurers,” said Robert Hartwig, chief economist with the Insurance Information Institute in New York. “I would say in dollar terms, at least among homes, the majority is related to floods.”

Consumer advocacy groups urge Gulf Coast homeowners to gird for battle with the insurance industry over what is wind damage versus flood damage.

“It’s truly outrageous that these companies would try to draw the line that way. The bean counters in the insurance industry should not be allowed to prevail,” said Douglas Heller, the executive director of the Foundation for Taxpayer and Consumer Rights, a Los Angeles-based advocacy group that clashes frequently with the insurance industry. “Any Katrina survivor that’s told that they aren’t covered because it’s a flood and not a hurricane should get together with their neighbors and caravan to (the command center in) Baton Rouge to let the politicians know.”

Heller said mudslides in California last year offered a precedent for the insurance nightmare that might await thousands of Gulf Coast homeowners. Some insurers, he said, tried to escape paying claims by arguing that if the mud didn’t meet a certain thickness then the damage to homes was due to flooding, not mudslides.

Despite that precedent, the insurance industry is confident that its liability is limited.

The Chicago-based Property Casualty Insurers Association of America, whose members underwrite 40 percent of the nation’s insurance policies, said many Gulf Coast homeowners were just out of luck.

“There are going to be inevitable gaps in coverage. So much of the damage is caused by flooding and the storm surge,” spokesman Joseph Annotti said. He expected a “long, complicated recovery process.”

Companies that sell reinsurance — insurance that insurers take out on the policies they’ve written to minimize their exposure to catastrophic losses — also think their losses may be lessened by flooding.

“The huge storm surge may increase the share of this hurricane that goes to the federal flood insurance,” said Bradley Kading, the senior vice president of the Reinsurance Association of America in Alexandria, Va. “You don’t see a lot of roofs blown off.”

Even so, companies that model for potential losses project that Katrina will be the costliest storm ever for insurers. Estimates range as high as $25 billion or even $30 billion.

The largest insured losses to date are an inflation-adjusted $21 billion from Hurricane Andrew in Florida in 1992. The 2001 terrorist attacks in New York and at the Pentagon resulted in insured losses of just over $20 billion.

For those who have flood insurance, FEMA pays up to $250,000 for residences and up to $100,000 for contents. Business structures are covered up to $500,000 each for buildings and contents.

Adjusters will determine how much damage the hurricane caused before the storm surge or flooding and homeowners’ policies will cover that amount.