THE Gillard government has warned the insurance industry to tread carefully with victims as some of the worst flooding in decades has hit Victoria and NSW, threatening the region's multi-billion-dollar food bowl.

Financial Services Minister Bill Shorten said last night that flood victims in northern Victoria and the NSW Riverina would be worried about whether companies would pay up.

Mr Shorten said residents were not concerned about where the water or mud had come from, just that it had damaged their homes.

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"That's what the homeowner cares about," he told The Australian last night.

He added that insurers should follow the spirit of the law by not putting a "microscope on the product disclosure statement".

Homeowners, businesses and councils were last night taking stock of the latest flooding, fuelled by unseasonally high rainfalls north and west of the Great Dividing Range.

In Canberra the half-built Cotter dam expansion was overwhelmed, with water spilling spectacularly over its new wall, washing away light equipment and raising concerns about earthworks.

At least three townships in northern Victoria remained under siege last night with hundreds of houses at risk and once highly productive farmland devastated across large parts of the north and northeast of the state.

In Numurkah, 220km north of Melbourne, residents such as 25-year-old Sam McPherson, soldiers and State Emergency Service volunteers were busy sandbagging to save houses and businesses.

NSW SES issued an evacuation warning for North Wagga Wagga, saying those who stayed would risk death.

Already in NSW an estimated 3500 people in nine areas had been forced out of their homes at the weekend, including 240 properties in Yoogali Village - near Griffith - 300 in Lockhart in the Riverina and a further 500 in Forbes to the north on the Lachlan River.

The inundation was so bad in northern Victoria that carp and red fin fish were swimming yesterday in Numurkah, where cars normally passed without trouble.

Joey Buha, in the town's Telegraph Hotel, said late yesterday that water was still slowly advancing.

"There's water everywhere, it's coming up the main street now," he said. "The pub's fine, she's been sandbagged. We just had a town meeting: they were no help."

Down the road at the local IGA, which serves the 4600-strong town, there was panic-buying of mainly milk and bread as water spewed out of Broken Creek.

The town's nursing home was evacuated, as was part of the hospital, with the creek expected to peak overnight.

Houses in the Murray River town of Yarrawonga were also submerged.

Victorian Premier Ted Baillieu said 160mm of rain had fallen on Mount Buffalo in one day.

He said Numurkah, Katamatite and Nathalia, between Numurkah and the Murray River town of Echuca, were in strife.

The SES said 40 homes and businesses were flooded at Numurkah.

There are 176 properties at risk of flooding in Nathalia and at Walwa on the NSW border, 55km southwest of Holbrook, the caravan park was evacuated amid a raging Upper Murray River.

The Numurkah floodwaters are higher than in 1993 and 1974.

The SES said that towns downstream would be under threat for up to a week.

Mr Baillieu said the massive floods of last year in north and northwest Victoria were a warning of things to come.

"Events from last year should have encouraged many people to check their insurance to ensure they had the right cover for them," he said through a spokeswoman.

Insurance Council of Australia president Robert Scott said the industry body would compile assessments from insurers and estimate the total damage bill early this week.

Mr Scott, who is also managing director of Wesfarmers Insurance, owner of the WFI, Lumley and OAMPS insurance brands, defended the industry's record on assisting flood victims.

"Claims are a time that define our brand and experience with clients, so we do generally make an effort to help our clients at those difficult times," he said.

The industry had paid out billions in recent disasters.

"In 2011, insurers paid out over $5 billion over more than 175,000 claims from catastrophe events, so I believe our industry has a strong record for paying claims," he said.

"But for insurers to pay for damage that's not covered by a policy could put the whole solvency of the industry at risk, and that would be a major concern for regulators."

Additional reporting: Blair Speedy

