The Supreme Court last week refused to review a national flood insurance case, thereby perpetuating a Catch 22 situation for homeowners in the Louisiana bayou region.

To build a house or to finance one in that region, owners are required by lenders to have flood insurance because water damage is frequent in that lowlying Until last year federally insured financial institutions in 3,700 floodprone communities around the country had to require borrowers -- by law -- to buy coverage; it is now up to each lender in those communities.

Insurers often refuse to issue homeowner policies in the bayou region, so residents must turn to the federal government. However, as the plaintiffs in the court case discovered, the government refused to pay claims resulting from very serious floods. It did, however, renew coverage for protection against floods.

"The national flood insurance program is junk," said Leopold B. Babin, the plaintiffs' attorney, when he learned that the Supreme Court had turned down his appeal. "But," he added sadly, "it's still the only game in town."

The Department of Housing and Urban Development took over the National Flood Insurance Program in 1978 after it threatened to go broke. It now covers 1.4 million policy holders in 16,000 communities. Coverage amounts to $50 billion. Last year the program paid out $147 million in claims.

The Louisiana case had its beginnings in April 1974, when the waters of the Atchafalaya River in south central Louisiana, 90 miles south of New Orleans, were rising. The mayor urged townspeople to buy flood insurance before it was too late. Andrew J. Daigle and Carl D. West of Morgan City, La., were among those who bought policies with a coverage limit of $17,500.

Then, over two days, 12 to 14 inches of rain fell, the worst storm there in many years. On the second day Daigle discovered structural cracking in his $40,000 house. The water was waist high in front of West's house and two inches deep inside. Two weeks later bricks began to separate from baseboards and a crack appeared under the floor tiles. A contractor said the house would have to be demolished and rebuilt.

But the federal government refused to pay the claim on the grounds that the policy excludes damage cause by any kind of "earth movement" except mudslides. Several residents hired Babin to bring suit.

Other residents suffered similar damage, but the consolidated cases of Daigle and West eventually made their way to the Supreme Court. Government experts testified that the flood had had a negligible effect and that the structural damage was due to soil conditions and improper costruction. A jury in a lower court had concluded that the structural damage was a direct loss by flood and awarded Daigle $12,085, minus a $200 deductible. West got the full $17,500.

The verdict was reversed on appeal.