Aug. 24 (Bloomberg) -- A year after Hurricane Katrina destroyed his New Orleans home, Aaron Mercadel said his insurance company has given him $7,000 to rebuild.

``It's been a joke,'' said Mercadel, 50, whose Lower Ninth Ward house was assessed at $55,000 before being flooded with 20 feet of water. ``They send you a check for $2,000, $3,000 and expect you to renovate a whole house.''

As surely as Katrina transformed the Gulf Coast with 125- mile-per-hour winds and storm surges as high as 28 feet, clashes over insurance policies are shaping the region's recovery, according to bankers, public officials and aid groups.

Disputed settlements, rates that have soared as much as 500 percent and insurers' reluctance to write new policies in storm- prone areas are forcing people to move away from coastline homes and inner-city New Orleans neighborhoods, they say.

Storm victims accuse insurers of underestimating damage caused by rain and wind, which the companies cover, and exaggerating the impact of floods, which is the responsibility of the federal government's National Flood Insurance Program. As many as 1,200 lawsuits have been filed on behalf of policyholders against their insurers, and companies including Allstate Corp. and State Farm Mutual Automobile Insurance Co. are looking to cut back coverage in Louisiana.

Insurers say the criticism is unfair. Allstate, State Farm, Nationwide Mutual Insurance Co. and others have settled about 95 percent of the record 1.7 million Katrina-related claims and paid out $41 billion, said Robert Hartwig, chief economist of the New York-based Insurance Information Institute.

Insurers also shouldn't be criticized for refusing to cover coastal homes repeatedly damaged in storms, said George Dale, insurance commissioner for Mississippi. In some places, ``people shouldn't be allowed to build,'' Dale said.

Curbside Debris

The force and breadth of Katrina are evident in the crushed cars and debris still piled curbside 12 months after the storm, which ripped apart homes from Louisiana to Florida, breaching the New Orleans levees and forcing the city's evacuation.

Rebecca Dickensauge's day-care center in Long Beach, Mississippi, was among the more than 300,000 properties caught in the path of destruction. Dickensauge, 44, said she didn't know how she was going to rebuild after her insurer, Prime Insurance Syndicate Inc., offered her $16,000 on her $200,000 policy.

``I had no income coming in,, and there was just nothing to do but sit in the parking lot and wonder how I was going to get through tomorrow,'' she said.

Saved by Charity

With the help of charitable organizations including Save the Children, Dickensauge reopened the center on July 31 while she prepares to fight her insurer in court.

Barbara Malkowski, a spokeswoman for Sandy, Utah-based Prime Insurance, said the company determined Dickensauge didn't have enough insurance to cover hurricanes and that the matter is being brought to an independent appraiser.

The first trial involving a lawsuit over damage by Katrina was resolved last week in favor of an insurer -- Nationwide. U.S. District Judge L.T. Senter in Gulfport, Mississippi, rejected a couple's claim that the Columbus, Ohio-based insurer owed them about $150,000 for damage by wind-driven ``storm surge.'' He ruled the surge was part of a water-damage exclusion from coverage in their homeowners' policy.

The decision may signal how similar suits against insurers including State Farm and Allstate will be resolved.

Tulane University, New Orleans's largest employer, sued Allianz AG of Germany on July 12 for $250 million, charging that Europe's biggest insurer didn't pay for Katrina-related damage covered by the university's policy.

`Insensitive'

``The insurance industry -- State Farm, Allstate, Nationwide -- has been the most unresponsive, insensitive I've ever seen,'' said Senator Trent Lott, a Mississippi Republican. Lott is suing State Farm for not paying more on his claim after he lost his Pascagoula house to the storm.

``Our adjusters go out looking to help people rebuild their lives,'' said Joe Case, a spokesman for Nationwide. ``We are doing everything we can.'' The high cost of rebuilding is a result of the increased prices for construction supplies that usually follow a storm and a labor shortage created by one of the Gulf Coast's largest evacuations, Case said.

No Flood Coverage

While insurers and victims argue over how much damage was caused by covered wind and rain damage, the federal program designed to pay for flood damage is already overburdened, David Walker, comptroller general of the U.S., told a Senate committee in January. The program insures about 5.2 million people for $946 billion, spokesman Butch Kinerney said. Many of the policies cover residences built before flood-plain-management regulations were established, so homeowners pay premiums that are too low, according to a Government Accountability Office report.

In Katrina's aftermath, premium rates have shot up from 300 percent to 500 percent on some coastal properties, according to a July survey by the Council of Insurance Agents & Brokers, a Washington-based trade group.

Louisiana Insurance Commissioner Jim Donelon and Governor Kathleen Blanco last month discussed with Allstate President Thomas Wilson the company's request to drop wind and hail coverage for 30,000 homeowners. After the July 31 meeting, Allstate issued a statement saying it wanted to remain in Louisiana, although spokesman Michael Trevino recently said the company wants to ``reduce our exposure in the state.''

`Very Careful'

State Farm spokesman Jeff McCollum said the company stopped writing new policies on the Louisiana coast after Katrina. ``We're just very careful who we'll take on,'' he said.

Insurers are being pressured by their own insurance companies, known as reinsurers, to drop coverage to reduce exposure in storm-prone regions, Mississippi's Dale said.

Rate increases and insurers' desire to winnow down the list of policyholders in storm-prone areas are determining where houses are rebuilt and who can afford to move into them, bankers and realtors said.

``We've had closings blow up because the buyers couldn't get insurance,'' said Guy Williams, president of Gulf Coast Bank & Trust in New Orleans.

Hollowing Out

Insurance rates have become such a consideration in New Orleans that its outskirts, where the insurance rates are lower because the area is less vulnerable to flooding, are in demand while the city's inner neighborhoods are still under-populated.

Mercadel said he had a $65,000 policy on his inner-city home because he said its location in the Holy Cross historic district added to its value. Yet he purchased no flood insurance, since his home was deemed outside of a flood plain.

He said he's in discussions with ZC Sterling Corp., an Atlanta-based agency hired by insurers to sell and manage policies, to receive an additional $10,000.

James Novak, a senior vice president at ZC Sterling, said the insurer has already paid Mercadel more money than the homeowner is claiming.

``We adjusted his claim consistent with the terms of the applicable policy and Louisiana law,'' Novak said. He wouldn't discuss details of the claim or identify Mercadel's insurer, citing privacy restrictions.

Mercadel is living in a Federal Emergency Management Agency trailer in front of a church while he battles his insurer. Mercadel, who owns a construction company, has renovated 45 houses in the last year while he waits for enough insurance money to fix his own properties.

``Every house that I've worked on, people are working off their retirement funds or their own personal funds,'' Mercadel said. ``Ain't hardly nobody gotten insurance funds.''

To contact the reporter on this story: Jeff Bliss in Washington at jbliss@bloomberg.net

Last Updated: August 24, 2006 00:12 EDT