It’s really starting to look grim for State Farm and other insurers that had expected the standard flood exclusion to protect them from hundreds of millions of dollars in Hurricane Katrina-related damages. What’s worse, not only did the carrier lose on the merits of its argument, it’s getting hammered by ticked-off jurors not shy about handing down stiff punitive damage awards. Indeed, the $2.5 million penalty levied by a Mississippi jury last week is anything but a slap on the wrist, and puts all insurers with similar claims on notice that it might be time to settle.

Meanwhile, Mississippi Attorney General Jim Hood is feeling pretty pleased with himself these days. First, two federal judges rejected attempts to get his lawsuit against carriers challenging what he calls their “ambiguous” flood exclusions moved to federal courts. And then individual cases start coming down against the industry, strengthening his hand in ongoing settlement negotiations. (For the full story, click here.)

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