Katrina floods not covered by insurance: court

NEW YORK (Reuters) - A U.S. appeals court ruled on Thursday that three major insurers are not responsible for flood damages in New Orleans -- even if "negligence" caused flooding that inundated the city during 2005's Hurricane Katrina.

Katrina pounded the low-lying port city with powerful winds and a storm surge that breached levees constructed to protect from surrounding waters.

The flooding that followed cost billions in damages and hundreds of lives in August and early September that year.

Residents of the area, along with Xavier University, sued property insurers Allstate Corp, Travelers Cos Inc and mutual insurer State Farm.

Residential property insurance policies exclude flood coverage, which is provided under a federal program. But the plaintiffs said that, because the negligent design, construction and maintenance of the levees was responsible for the breaks, the insurers should pay claims on their homes and property.

The U.S. Court of Appeals for the Fifth Circuit, however, ruled the insurers' contracts were valid. Even if the construction of the levees was faulty, the resulting floods were excluded from coverage, the court said.

"Regardless of what caused the failure of the flood-control structures that were put in place to prevent such a catastrophe, their failure resulted in a widespread flood that damaged the plaintiffs' property," Judge Carolyn King wrote.

"This event was excluded from coverage under the plaintiffs' insurance policies, and under Louisiana law, we are bound to enforce the unambiguous terms of their insurance contracts as written."

The decision, which overturned an earlier lower court ruling, was welcome, said Michael Siemienas, a spokesman for Allstate, the second largest residential insurer in the U.S. behind State Farm.

"We are pleased that the court concluded that policy exclusions for flood damage are unambiguous and enforceable," he said.

But an attorney for Xavier University, James Garner, said the case was not over.

"The issue will be argued again on September 12 in the Louisiana State Court of Appeals and, ultimately, at the state supreme court," Garner said.

Two years after the hurricane, State Farm, Allstate and other insurers face a continuing battle with Gulf Coast homeowners who claim they were shortchanged.

In June, Mississippi State Attorney General Jim Hood sued State Farm for violating a court agreement to settle 35,000 claims by victims of the hurricane who were insured by the carrier. State Farm has said it is handling the suits outside the court process.

(Reporting by Ed Leefeldt)