Millions of people forced out of New Orleans by Hurricane Katrina may not be insured for the damage to their homes.
More than half of the properties in the city are understood to be insured only for hurricane damage, with insurers insisting that it was a flood that forced the evacuation of the city.
If US courts agree, this could save the insurance industry as much as $10bn (£5.4bn) and leave more than a million people destitute.
Typical US household insurance policies do not cover for flood damage. Instead, homeowners have to buy a second policy through the National Flood Insurance Programme, part of the much- derided Federal Emergency Management Agency. Only 46 per cent of New Orleans householders had purchased one.
Whether the remainder are covered depends on what caused the flood. Was it the hurricane, the sea swelling or the flooding caused by the levee breaking?
"The issue will inevitably go to court," said one London reinsurance expert. If the court decides on either of the latter two, then homeowners will lose out.
Jim Hood, the attorney general of Mississippi, the neighbouring state which was also heavily hit by the hurricane, is already probing the legitimacy of flood exemptions on insurance policies.
The legal battle will bring echoes of the fight over insurance for the twin towers of the World Trade Center, which were hit by aircraft four years ago today. Larry Silverstein, who leased the building, claimed the attack was two separate events, thus entitling him to a higher insurance payout. The New York courts supported him.
Estimates of how much insurers will have to pay in the wake of Katrina have varied from around $20bn to the $50bn mentioned by Brit Insurance, a London firm, last week.
Underwriters at Lloyd's of London have until tomorrow to give their estimates to the insurance market. However, as few insurance assessors have been able to get to the worst-hit sites, these will be liable to substantial change in coming weeks.
The main claims at Lloyd's will come from the energy sector, such as damage to oil rigs in the Gulf of Mexico, pipelines to those rigs and to the onshore oil refineries, nine of which were closed at one point. Other large claims will come from marine insurance, which includes damage to boats in ports such as New Orleans and South Louisiana as well as cargoes which were due to be taken by barge down the Mississippi river and now cannot be unloaded.
Another big issue will be reinsurance of claims from US insurers, and this will be heavily dependent on the court rulings on household liability.
Washington may be forced to step in to cover the losses on people's homes. Its lack of pre-planning has been blamed for the extent of the damage to New Orleans.Reuse content