As someone who has to ante up for flood insurance every year because a tiny corner of my property is on a flood plain, I'd be mighty pissed if my house got flooded and I wasn't covered, regardless of reason.
On the other hand, shame on me for not reading the fine print.
But overall, if every insurance company's policy contains that loophole, that means that there's no way anyone could possibly obtain flood insurance. IMO the law will therefore probably fall on the side of the policyholders.
