Claims Mark Recovery's Beginning

But Deciding How Much Damage Is Attributable to Floods May Get Tricky

HATTIESBURG, Miss. -- As the immediate humanitarian crisis eases in the Gulf Coast states, people are turning their attention to recovery, and for the vast majority, the key to recovery is an insurance claim.

Insurance adjusters are flooding the region to cope with claims expected to number in the millions. Homeowners across a huge swath of the country now confront the most important financial moment of their lives -- getting an insurer to keep its promise to make them whole after a disaster. Some are likely to be caught up in a contentious debate over how much of the hurricane's damage should be attributed to flooding.

As an insurance man crawled around a roof the other day in the broiling Mississippi sun, Eddie A. Holloway stood below in the kitchen, pointing to strips of paint and plaster hanging from a giant hole in the ceiling of a rental house he owns in Hattiesburg.

The house, in a poor section of town, was rendered uninhabitable by the storm, and the tenants fled. "They're gone," he said, and so is his income on the property, perhaps for weeks or months.

State Farm adjuster Curtis Rasmussen, fresh in town from Utah to handle claims, crawled down a trembling stepladder toting a digital camera to show Holloway the damage. Hurricane Katrina had stripped the roof bare, and a new one would be required. On this modest house alone, 70 miles from the Gulf of Mexico, State Farm will be writing a check for thousands of dollars.

The scene will replay again and again across the region. Everywhere but New Orleans, insurance adjusters are thick on the ground already -- stuffing hotels, grabbing anything that resembles office space, firing up generators and pointing satellite dishes skyward in a desperate attempt to get Internet access in a region where many people still lack electricity. They are buoying spirits across three states with immediate $2,500 and $5,000 checks to cover living expenses.

But the process of adjudicating several million claims has barely begun, and Hurricane Katrina is already posing a vexing set of insurance problems that will reach all the way to Washington. For starters, much of the damage along the Gulf Coast was caused by a surge of water that rose as high as 30 feet, the biggest storm surge ever recorded in North America. That surge was technically a flood, even though it was produced by a hurricane, and it is not covered by standard homeowners' insurance.

Flood insurance has to be bought separately from the federal government. Many people in New Orleans had it, and they are likely to be made whole, though the payments are expected to send the government's flood-insurance program into the red.

In Alabama and Mississippi, by contrast, many people did not have flood coverage, and that is sowing the seeds of a potentially vast conflict involving angry consumers, insurance companies, banks that write mortgages, state regulators and lawmakers in Washington.

A huge fight may yet be averted if insurers succumb to political pressure to attribute most of the region's damage to wind instead of flooding -- a policy that regulators say could put some insurers at risk of bankruptcy.

If the insurers enforce their policies as written, politicians are going to find themselves coping with unhappy constituents throughout the Gulf Coast who did not realize their damage would not be covered. There is already talk of massive lawsuits and the need for wholesale changes in the way federal flood insurance works.

"I had $60,000 worth of contents, and I thought I had it made," said Dorice Mitchell, a 40-year resident of Pascagoula, Miss., who lost many of his belongings when his house flooded. He walked away from a State Farm catastrophe center empty-handed last week after learning his policy won't help him. "They said it ain't worth a dime. No flood insurance. I'm going to be living in apple crates."