Aug. 15 (Bloomberg) -- A judge in Mississippi ruled in favor of Nationwide Mutual Insurance Co. in the first trial of hundreds of insurance lawsuits over damage by

Hurricane Katrina.

U.S. District Judge L.T. Senter in Gulfport, Mississippi, today rejected the claim by Paul and Julie Leonard that 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 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 Katrina cases.

``If I were an insurance company, I would be cautiously optimistic,'' said Professor Matt Steffy of the Mississippi College School of Law. ``First and foremost insurance companies had to establish that their policy language excluded this. And that sounds like what happened here. This is clearly cause for insurance companies to take a sigh of relief.''

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.

Other Companies

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

``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.

Joe Case, a spokesman for Nationwide, based in Columbus, Ohio, declined to comment.

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, and he denied it. Senter said the couple's claim wasn't supported by evidence.

Window and Walls

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.

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

Trial Issues

The Leonards 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.

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.

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.''

Scruggs Lawsuits

The case against Nationwide is one of more than 240 filed by Scruggs, his son Zach and John ``Don'' Barrett, who 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.

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).