NEW ORLEANS (AP) - An insurance company is not obligated to pay for water damage from the failure of New Orleans area levees after Hurricane Katrina, Louisiana's highest court ruled yesterday in a case that could affect thousands of homeowners.

In a major victory for insurers, the Louisiana Supreme Court reversed a state appeals court decision that favoured New Orleans property owner Joseph Sher in his suit against Lafayette Insurance Co.

In November, the 4th Circuit Court of Appeal concluded Lafayette's homeowner policy failed to exclude all forms of flooding because its language was ambiguous.

But the state Supreme Court disagreed, and said Lafayette is entitled to limit its liability for damage from a levee breach.

John Houghtaling, a lawyer who represented the state when the 4th Circuit heard the case, said the ruling has "very troubling" implications for the Louisiana insurance market and deals a sharp blow to thousands of homeowners devastated by the August 2005 hurricane.

"It's a multi-billion dollar windfall for the insurers," Mr. Houghtaling said.

The Supreme Court's ruling mirrors a decision last year by a federal appeals court in a separate but similar case. The 5th US Circuit Court of Appeals in New Orleans also ruled that insurers are not obligated to cover water damage from a levee failure.

Lafayette and other insurers say their policies cover damage from wind but not flooding, including water from a levee breach.

In Katrina's aftermath, levee failures flooded 80 percent of New Orleans. The Army Corps of Engineers is widely blamed for poorly designing and maintaining the city's flood protection system.

A state judge also ruled Lafayette's flood-exclusion language was ambiguous and therefore covered "man-made events".

However, the Supreme Court said the definition of flooding in an insurance policy does not depend on whether an event is a natural disaster or man-made one. In either case, Justice Chet Traylor wrote, "a large amount of water covers an area that is usually dry".

Mr. Traylor also disagreed with the claim that "man" was responsible for flooding from the broken levees.

Four of seven Supreme Court justices signed on to Mr. Traylor's 29-page majority opinion. Two others concurred in the result. One concurred in part and dissented in part.

Mr. Sher, a 92-year-old Holocaust survivor, owned and lived in a five-unit apartment complex that took on four feet of water after the levees broke on August 29, 2005.

James Garner, one of his lawyers, argued insurers are to blame for writing policy language that confused policyholders and resulted in conflicting court opinions.