WASHINGTON (Bloomberg) - The U.S. government, which President George W. Bush said will pay for most of the rebuilding costs from Hurricane Katrina, is bound by law to let states settle disputes over homeowners' insurance claims, the White House said.

"That's an issue that the states are going to have to deal with, with the insurance companies and with the homeowners," Al Hubbard, director of Bush's National Economic Council, said at a press briefing in Washington. He cited a 1944 law, the McCarran- Ferguson Act, that gives states regulatory power over the insurance industry.

Katrina may cost U.S. insurers $40 billion to $60 billion, modelers at Risk Management Solutions Inc. said last week. Total damages caused by the Category 4 storm may exceed $125 billion. The storm flooded 80 percent of New Orleans and destroyed almost all homes along the Mississippi coast.

On Monday, during his third trip to the Gulf region since the Aug. 29 storm, Bush said he "wouldn't like it a bit" if an insurance claims agent denied a claim because flooding, rather than wind, did the damage. Such determinations have caused at least one state to sue some insurance providers.

Asked today whether the White House was working with insurance providers to come up with write-offs or subsidies for policyholders, White House spokesman Scott McClellan said that, while Bush "understands those concerns fully," it is the "state insurance commissioner that is charged with making those decisions."

Mississippi's Suit

Mississippi Attorney General Jim Hood yesterday sued Allstate Corp., State Farm Mutual Automobile Insurance Co. and three other insurers for refusing to cover homes damaged by floods in the aftermath of Hurricane Katrina.

The lawsuit, filed in state court in Jackson, Mississippi, seeks to nullify policies that exclude coverage for hurricane damage caused by flooding. The clause is "unreasonably favorable" to insurers and "oppressive" to holders, Hood said in the suit.

Hood's suit blames the damage along the Gulf Coast on Katrina's winds, which would be covered by a typical homeowner's policy. Most homeowners' policies sold by insurers don't cover flooding, though some commercial policies do.

Congress in 1968 created the National Flood Insurance Program to offer coverage to homeowners, renters and businesses in designated floodplains in response to rising taxpayer costs to support flood victims.

Through the Federal Emergency Management Agency, "you can rest assured that we will be fulfilling our obligations there as quickly as possible," Hubbard said.

Scruggs Serves Notice

Former tobacco company legal foe Richard Scruggs, himself a victim of damage to his Pascagoula, Mississippi home, said he will file thousands of lawsuits on behalf of clients next week to compel insurers to cover storm damage. Scruggs helped reach a $206 billion settlement between states and tobacco companies to reimburse smoking-related medical costs.

Scruggs claimed insurance companies are categorizing storm damage to homes as flood-induced and therefore not covered by the typical homeowner policy. "This is an outrage with all of their billions in diversified risk around the world that they are going to dine and dodge," Scruggs said in a conference call today.