Aug. 15 (Bloomberg) -- Nationwide Mutual Insurance Co. won the first trial of hundreds of insurance lawsuits over damage by Hurricane Katrina, a victory that may help it win other cases.

U.S. District Judge L.T. Senter in Gulfport, Mississippi, today rejected a couple's claim the insurer owed them about $150,000 for damage by wind-driven ``storm surge.'' Senter upheld the company, saying storm surge was part of a water-damage exclusion from coverage in their homeowners' policy.

The decision after a nonjury trial last month may signal how similar suits against insurers including State Farm Mutual Automobile Insurance Co. and Allstate Corp. will be resolved. Senter will preside over most federal court Katrina cases.

``A very large amount of money was at stake, not in this particular claim, but for how the courts would react to an event like this, with billions of dollars at stake,'' said Donald Thorpe, an insurance analyst at Fitch Ratings in Chicago. ``It looks like Nationwide won the key points. If this went the other way, they have a liability they didn't anticipate and where they didn't collect a premium to cover it.''

An American Insurance Association official called the verdict ``a significant step forward for insurers and others committed to rebuilding after Katrina,'' which devastated New Orleans and caused widespread damage in Mississippi last summer.

Industry Reaction

The decision ``validates the sanctity not only of insurance contracts in Mississippi, but all legal contracts in the state,'' Cecil Pearce, a vice president of the industry group, said in a statement.

``We are pleased that Judge Senter has ruled to uphold the meaning and intent of the insurance contract,'' said Dick Luedke, a spokesman for Bloomington, Illinois-based State Farm, the largest U.S. home and car insurer.

State Farm is a defendant in more than 100 similar lawsuits in Mississippi after settling 98 percent of more than 100,000 Katrina claims there, Luedke said.

Shares of Northbrook, Illinois-based Allstate, the second- largest U.S. home and car insurer, rose 94 cents to $57.36 in New York Stock Exchange composite trading. Nationwide and State Farm are policyholder-owned mutual companies.

Nationwide, based in Columbus, Ohio, said in a statement it was pleased the court upheld ``the long-standing flood exclusion language which is foundational to traditional homeowner policies across the country.''

Trial Issues

The couple in the case, Paul and Julie Leonard, said their Pascagoula, Mississippi, home sustained damage from five feet of water from storm surge in the hurricane, which hit the Mississippi coast on Aug. 29, 2005.

An issue in the suit besides storm surge was whether the Leonards' insurance agent told them they didn't need to buy government flood insurance because their policy covered all hurricane damage. The couple claimed he advised them not to buy the extra insurance, which he denied. Senter said the couple's claim wasn't supported by evidence.

The judge did award the Leonards $1,228 in damage he found was caused by wind that hadn't been paid for by Nationwide. The money was to cover replacing a window and to clean and repair exterior walls above the water line.

``Nationwide has met the burden of proving, by a preponderance of the evidence, that all other damage to the Leonards' property was caused by water and water-borne materials'' and was excluded by the policy, Senter wrote.

Clients, Costs

The water-damage exclusion is part of most state-approved homeowners' policies, Pearce of the Insurance Association said.

The Leonards' lawyer Richard Scruggs has more than 1,000 clients in lawsuits against insurers for refusing to pay Katrina claims. The lawyer couldn't immediately be reached for comment.

Nationwide has spent $230 million settling claims in Mississippi. Insurers have paid $40.6 billion for Katrina damage, according to Property Claim Services, a Jersey City, New Jersey- based firm that surveys insurers about claims.

Flooding is excluded from coverage in the Nationwide policy. Storm surge wasn't mentioned in the Leonards' policy, the family's lawyers argued, making the policy ambiguous and under Mississippi law requiring an interpretation in favor of policyholders.

A hurricane deductible provision led the couple to believe the water damage during the storm would be covered, their lawyers argued at trial.

The Leonards claimed their insurance agent, Jay Fletcher, misrepresented their coverage by saying they didn't need government flood insurance.

Other Cases

Senter found the agent ``made no representation that suggested that the water damage exclusion in the Nationwide homeowners policy did not apply in the context of a hurricane.''

The case against Nationwide is one of more than 240 filed by Scruggs, his son Zach and John ``Don'' Barrett. Richard Scruggs and Barrett negotiated a $206 billion settlement with the tobacco industry in 1998.

Since Katrina, Nationwide has added a specific exclusion of storm surge to its homeowners' policy.

A Mississippi law professor said the decision is ``cause for insurance companies to take a sigh of relief.''

``First and foremost insurance companies had to establish that their policy language excluded this,'' said Professor Matt Steffy of the Mississippi College School of Law. ``And that sounds like what happened here.''

The Katrina insurance litigation has drawn attention from politicians. Mississippi Attorney General Jim Hood has filed his own lawsuit on behalf of state residents denied coverage.

Pelosi Statement

U.S. Representative Nancy Pelosi of California, the House Democratic leader, criticized insurers for rejecting Katrina claims. ``Insurance policies should not make arbitrary distinctions between wind and water damage,'' she said in a statement after today's verdict.

U.S. Senator Trent Lott is suing State Farm individually, seeking payment to replace his beachfront home destroyed in the storm.

Senter wants to see the rest of the Katrina cases resolved in the next year, according to a letter he sent lawyers in the litigation. The judge asked for proposals by Aug. 25 for the quickest and cheapest way to end the cases.

The case is Leonard v. Nationwide Mutual Insurance Co., 1:05-cv-00475, U.S. District Court, Southern District of Mississippi (Gulfport).

To contact the reporters on this story: Laurence Viele Davidson in Atlanta at lviele@bloomberg.net; Josh P. Hamilton in New York at jphamilton@bloomberg.net.

Last Updated: August 15, 2006 18:06 EDT