Hurricane Sandy Sets the Stage for Insurance Battles

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NEW YORK ( TheStreet) -- The pain following Hurricane Sandy is just beginning as millions of policyholders discover their insurance will not cover a majority of the damage done by the storm.

Most of the destruction from the super storm has been caused not by hurricane winds, but by severe flooding from the tidal surge.

But traditional homeowner policies do not cover floods. Flood insurance needs to be purchased separately from the government's National Flood Insurance Program.

This may come as a rude shock to victims of the disaster, as it did years ago to the victims of the devastating Hurricane Katrina.

At the time, hundreds of policyowners dragged insurance carriers to court, arguing that their policy covered damage caused by wind and that the damage to their homes from the catastophic flood was really nothing more than that caused by "wind-driven rain."

Unfortunately, the law came firmly on the side of the carriers. Courts ruled that so long as the damage is caused by flooding, whether by wind or not, insurers were not liable.

Despite the experience of Katrina and numerous examples of widespread devastation caused by floods, less than 15% of homeowners nationwide have taken up flood insurance, according to industry data.

And as the disaster victims in the NorthEast, where flood insurance is rarer still, wake up to the fact that they are not going to get much from their insurer after paying a rich premium, they are going to try the same argument in court again.

"It is an ongoing saga," says insurance lawyer Frank Darras, who has worked extensively on litigation scenarios following Katrina. "If you are a homeowner, you are going to argue that you have damage caused by wind and wind-driven rain. If you are the carrier, you are going to say the damage was caused by flood, tidal surge or a hurricane, which requires hurricane coverage."

"Anytime you get a big surge combined with wind the big question is what caused the damage," says Bob Freitag of AmeriClaims. As a public adjuster, Freitag works with individuals and businessowners to get the largest settlement possible from the insurance carrier following a fire, flood or other disaster.

While the wind versus water is sure to be a contentious issue given the widespread damage, Freitag isn't sure the debate will be as stormy as it was post Katrina.

"We had much higher winds with Katrina, nothing was left. What you are seeing in New York and New Jersey is not quite the same. Water did not come as far and the winds were not that high."

Others also believe that homeowners won't have much luck winning the" wind-carried water" argument. "Five years ago, you did not have this many video cameras. You see a big wall of water flooding the city and there is nothing left in its wake. It is very difficult to argue it wasn't a tidal surge," says Darras.