Reinsurer wordings examined

NEW ORLEANS—Some reinsurers may be on the hook if a Louisiana district court's decision to allow some claims for Hurricane Katrina-related water damage in New Orleans is upheld.

If the decision stands on appeal, contract wording will determine whether reinsurers ultimately will face claims from insurers, said Julius A. Rousseau, a reinsurance attorney with Herrick, Feinstein L.L.P. in New York.

"If the reinsurer has the same flood definition, they are going to have to follow the fortunes" of the primary insurer, Mr. Rousseau said. "If your reinsurance contract defines flood differently than your underlying policy, which could happen on a treaty basis, you can get into some battles" because there is a difference in conditions in the same contract, he said.

"There is a lot of case law as to what flooding really means, and a flood is a flood...a flood is water rising, man-made or artificial," said Stephen K. Bolland, president of reinsurance intermediary Gill & Roeser Inc. in New York.

"At the moment, (the decision) brings in a little uncertainty," Mr. Bolland said, noting that companies such as "State Farm and Allstate at that time were not huge buyers of reinsurance."

And "if they've already gone through their reinsurance layer...the insurers will be back on the hook," said Paul Budde, manager, ReMetrics-Product Development and Applied Research, for Benfield Group Ltd. in Minneapolis.

In any event, predicted Mr. Rousseau, "We're going to see some changes to contract wording...so (reinsurers) get out of this problem."