Duval allowed a lawsuit against The Allstate Corp., The St. Paul Travelers Companies Inc. and other insurers to proceed, but said the issue of "flood exclusion" could be appealed by the companies.

A hearing on the appeal was held Wednesday at the 5th U.S. Circuit Court of Appeals. A three-judge panel heard arguments from lawyers for policyholders and several insurance companies. Rulings from the appeals court often take months but Judge Carolyn King, one of the three judges, said a decision would come as quickly as possible.

"This case is not just going to take in the queue. It's going to the head of the list," she said.

Insurers say their homeowner policies do not cover damage from any type of flooding, including water from the levees that broke in the aftermath of the Aug. 29, 2005, storm.

"The generally prevailing meaning of the word flood includes what happened during and after Hurricane Katrina in this city," Richard Doren, lawyer for Lexington Insurance Co. argued Wednesday.

The insurance industry stands to lose an estimated $1 billion ($740 million) in Louisiana if policyholders successfully challenge companies' refusal to cover damage from levee breaches, said Robert Hartwig, chief economist at the industry-funded Insurance Information Institute in New York.

In court papers, a lawyer for policyholders with consolidated cases against insurers said Duval properly concluded that the definition of "flood" in policies is limited to "naturally occurring events."

But plaintiffs' attorney John Ellison accuses insurers of purposely not defining the term 'flood' and deliberately drafting vague policy language "to frustrate the reasonable expectations of Louisiana homeowner policyholders from whom they collected premiums for years."

"It's difficult to think of a more important or significant issue that needs to be resolved with respect to Louisiana law," Ellison said Wednesday.

Lexington Insurance Co. attorneys argue that punishing insurers for failing to define common words like "flood" could force them to engage in "defensive over-specification, which would inevitably lead to longer policies that are less comprehensible to most policyholders."

Duval agreed last year to dismiss State Farm Insurance Cos. from the litigation. He ruled that State Farm's policies included language that clearly excluded all flood damage, regardless of the cause.