A state grand jury was impaneled in Pascagoula, Miss., last week to hear evidence in an investigation of State Farm's handling of Hurricane Katrina claims, a week after the carrier was hammered with a $2.5 million punitive damage award.

The attorney general's inquiry is looking into allegations that engineering reports may have been altered to minimize wind damage.

The probe, being conducted by State Attorney General Jim Hood, began months ago when subpoenas were issued, and was the subject last year of an unsuccessful court challenge by the insurer and a Houston engineering firm.

Last April, Circuit Judge Stephen B. Simpson in Gulfport, Miss., ruled against the insurer and Rimkus Consulting group, after they sought to limit Mr. Hood's investigation.

Phil Supple, a representative for Bloomington, Ill.-based State Farm, said he could "confirm State Farm is cooperating fully with the attorney general's investigation." He said because grand jury activities "are by nature confidential, there will be no further comment." Mr. Hood's office had no immediate comment.

Mr. Hood has also brought a civil suit against State Farm and other insurers, seeking to compel the carriers to cover damage created by wind-driven storm surge.

Settlement talks are underway between State Farm, Mr. Hood and plaintiffs' attorney Richard Scruggs in an effort to resolve more than 600 suits involving Gulf Coast homes with storm-surge damage, which the insurer says is noncompensable under flood exclusion language.

Mr. Supple said it would be in the best interests of all parties in Mississippi if a settlement could be reached. Last week, the company lost a flood damage case in which Biloxi, Miss., homeowners were awarded $2.74 million--a figure that included $2.5 million in punitive damages.

In the April court action, Mr. Hood's office sought all engineering reports prepared for all insurance companies as a result of Hurricane Katrina in Hancock, Harrison and Jackson Counties. Judge Simpson ruled that request was too broad-based, and ordered that the attorney general should limit his demand for information to specific insurers and adjusters.

Meanwhile, the punitive damage verdict by a Mississippi federal jury is still sending shock waves throughout the industry. The jury's Jan. 10 finding came hours after U.S. District Court Judge L.T. Senter Jr., in Gulfport, Miss., ruled that the homeowners whose claim had been denied by the insurer were entitled to $223,292 for damages to 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 earlier rulings on the issue of insurance policy flood exclusion language negatively impacted carriers--made his latest finding in a case brought by Norman and Genevieve Broussard of Biloxi, Miss., who sought $5 million in punitive damages.

One legal expert said the ruling could impede State Farm's ongoing efforts to reach a global settlement for similar Katrina cases (see last week's edition for details).

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

The carrier had not expected the jury's decision, Kim Brunner, State Farm's executive vice president, secretary and general counsel, said in a statement. "Testimony of expert witnesses showed that damage to the Broussard home was overwhelmingly caused by water and not wind," he 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, saying that 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 claim that the winds from Hurricane Katrina destroyed their home--attributed the loss to storm surge, which the company said was noncompensable 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 claim that their Gulf Coast home was blown off its foundation by hurricane winds.

Attorney General 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 disputed insurance policy language is ambiguous.

Mr. Hood 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."

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

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

Sen. Lott--who is suing State Farm Fire & Casualty in a claim dispute over damage to his home from Hurricane Katrina--last October inserted language in legislation requiring the U.S. Department of Homeland Security to investigate insurer handling of hurricane claims. Rep. Taylor is also suing State Farm over a personal claim.

Randy Maniloff--a Philadelphia commercial litigation attorney who defends insurers, and who has made a close study of Judge Senter's rulings--said the most recent ruling 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 added, because, "they will look at this decision and have visions of grandeur."

Special Reports /

Mississippi Grand Jury Examines State Farm Katrina Record

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