State Farm must pay $2.5 million in punitive damages to a couple whose house was destroyed by Hurricane Katrina, a Mississippi federal jury ruled yesterday.

The panel's finding came hours after U.S. District Court Judge L.T. Senter Jr., in Gulfport ruled that the homeowners, whose claim had been denied by the insurer, were entitled to $223,292 for their house.

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

Judge Senter, whose rulings on the issue of insurance policy flood exclusion language have previously impacted carriers--made his finding yesterday in a case brought by Norman and Genevieve Broussard of Biloxi, Miss. The Broussards had sought $5 million in punitive damages.

One legal expert said yesterday's ruling could impede State Farm's ongoing efforts to reach a global settlement for similar Katrina cases.

The company said it was disappointed with the punitive damage finding and will evaluate its next steps, "which will likely include an appeal."

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

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

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

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

State Farm, in denying the Broussard's' claim that the winds from Hurricane Katrina destroyed their home, attributed the loss to storm surge--which the company said was non-compensable damage under flood exclusion language of their policy.

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

The judge ruled in the Broussard case that State Farm had not disproved the Broussard's claim that their Gulf Coast home was blown off its foundation by hurricane winds.

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

Mr. Hood released a statement saying the latest court action did not surprise him, "Our learned Judge Senter read the law and applied it. His ruling reflects what we have been saying all along."

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 Judge Senter's latest findings "was that the insurance company did NOT meet its burden of proof to show that water caused the damage.

"Judge Senter held that they had no reasonable basis on which to deny the claim. Therefore the court gave a bad faith jury instruction and the jury returned the maximum punitive damage verdict available."

"I hope the insurance companies will come to their senses and reach a settlement agreement. I will continue to work with them towards a speedy settlement."

Mr. Hood concluded by raising the threat of Congressional action and 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 a claim dispute over damage to his home from Hurricane Katrina, and in October he inserted language in legislation requiring the Department of Homeland Security to investigate insurers' handling of hurricane claims. Rep. Taylor is also suing State Farm over a personal claim.

Insurance attorneys have said if a State Farm global agreement is forthcoming, it would have a precedent-setting effect for the industry.

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

The latest decision "justifies State Farm's decision to try and reach a global settlement. The question now is will the policyholders want to settle? If you are a policyholder, you are now looking at this case and you'll say you want full value under the 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 of grandeur."

This article has been updated from an earlier posting Jan.11.

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