State Farm must pay $2.5 million in punitive damages to a couplewhose house was destroyed by Hurricane Katrina, a Mississippifederal jury ruled yesterday.

The panel's finding came hours after U.S. District Court JudgeL.T. Senter Jr., in Gulfport ruled that the homeowners, whose claimhad been denied by the insurer, were entitled to $223,292 for theirhouse.

At that time he also rejected arguments from the Bloomfield,Ill.-based insurer's attorneys and ruled the jury could considerpunitive damages against State Farm.

Judge Senter, whose rulings on the issue of insurance policyflood exclusion language have previously impacted carriers--madehis finding yesterday in a case brought by Norman and GenevieveBroussard of Biloxi, Miss. The Broussards had sought $5 million inpunitive damages.

One legal expert said yesterday's ruling could impede StateFarm's ongoing efforts to reach a global settlement for similarKatrina cases.

The company said it was disappointed with the punitive damagefinding and will evaluate its next steps, "which will likelyinclude an appeal."

Kim Brunner, State Farm executive vice president, secretary andgeneral counsel, in a statement said the company had not expectedthe jury's decision.

"Testimony of expert witnesses showed that damage to theBroussard home was overwhelmingly caused by water and not wind,"Mr. Brunner said.

However, Judge Senter ruled that the company did not presentsufficient evidence to prove how much damage to the home was causedby water and how much by wind and said the plaintiffs only neededto prove a direct physical loss.

Mr. Brunner said State Farm believes the ruling "is inconsistentwith the insurance contract and Mississippi law.

State Farm, in denying the Broussard's' claim that the windsfrom Hurricane Katrina destroyed their home, attributed the loss tostorm surge--which the company said was non-compensable damageunder flood exclusion language of their policy.

Judge Senter, in a case involving Nationwide in August of lastyear, ruled that insurers cannot totally exclude a claim becausethere has been flooding and must pay for any wind damage.

The judge ruled in the Broussard case that State Farm had notdisproved the Broussard's claim that their Gulf Coast home wasblown off its foundation by hurricane winds.

The jury's award arrived even as State Farm is holdingdiscussions with lawyers for homeowners and Mississippi AttorneyGeneral Jim Hood to see if the insurer can reach a settlement ofmore than 600 lawsuits involving homes in the storm surge zone.

Mr. Hood released a statement saying the latest court action didnot surprise him, "Our learned Judge Senter read the law andapplied it. His ruling reflects what we have been saying allalong."

The attorney general in his own action has argued that insurers'contract language is ambiguous.

Mr. Hood's statement added that the strongest part of JudgeSenter's latest findings "was that the insurance company did NOTmeet its burden of proof to show that water caused the damage.

"Judge Senter held that they had no reasonable basis on which todeny the claim. Therefore the court gave a bad faith juryinstruction and the jury returned the maximum punitive damageverdict available."

"I hope the insurance companies will come to their senses andreach a settlement agreement. I will continue to work with themtowards a speedy settlement."

Mr. Hood concluded by raising the threat of Congressional actionand said if insurers don't settle and if they "continue with their'robber baron' mentality," he thought Congressmen Gene Taylor,D-Miss., Bennie Thompson, D-Miss. and Sen. Trent Lott, R-Miss.would "see to it that we have national insurance reform."

Sen. Lott is currently suing State Farm Fire & Casualty in aclaim dispute over damage to his home from Hurricane Katrina, andin October he inserted language in legislation requiring theDepartment of Homeland Security to investigate insurers' handlingof hurricane claims. Rep. Taylor is also suing State Farm over apersonal claim.

Insurance attorneys have said if a State Farm global agreementis forthcoming, it would have a precedent-setting effect for theindustry.

Randy Maniloff--a Philadelphia commercial litigation attorneywho defends insurers, and who has made a close study of JudgeSenter's rulings--said today's action could stymie State Farm'swider settlement efforts.

The latest decision "justifies State Farm's decision to try andreach a global settlement. The question now is will thepolicyholders want to settle? If you are a policyholder, you arenow looking at this case and you'll say you want full value underthe policy as these people got."

There is less incentive for plaintiffs to settle, he said,because, "they will look at this decision and have visions ofgrandeur."

This article has been updated from an earlier postingJan.11.