Lawyers for a group involved in negotiating a federal class-action settlement with State Farm over Mississippi homeowners' hurricane claims have pulled their request to have the deal approved.

The Scruggs Katrina Group, in a notice to U.S. District Court Judge L.T. Senter Jr. in Gulfport, Miss., said they were taking the action based on indications the judge was against the proposal, as well as a stalemate with State Farm Fire and Casualty Company.

State Farm said the motion took them by surprise.

Under the proposed settlement, the company would reexamine 36,000 claims from Hurricane Katrina in three coastal counties, and would be willing to make an immediate payment of 50 percent of policy value for homes that were wiped off their foundations.

According to an estimate by Mississippi Attorney General Jim Hood, who was part of the settlement negotiations, the insurer could possibly pay up to $500 million.

Judge Senter, in rejecting the initial settlement deal on Jan. 26, said he could not call it “fair, just, balanced or reasonable,” while criticizing a proposed arbitration process for homeowners who rejected a State Farm offer as too complex.

The judge later held a hearing at which some parties objected to the settlement.

Scruggs Katrina Group, in a notice signed by trial lawyer Richard “Dickie” Scruggs, said the actions taken by the judge were “seemingly signifying its [the court's] reluctance to grant the motion” for a class-action settlement.

The notice added that it was unclear “whether or not State Farm is genuinely amenable further to address even its own interpretations of the court's actions…”

“Given this stalemate,” Mr. Scruggs wrote that the attorneys would now focus on individual cases.

He said the four attorneys in the group believe the offered settlement “is not only viable legally, but in the best interests of the families on the Coast, particularly in the absence of any other sustainable alternatives being urged upon the court.”

State Farm's Hurricane Katrina claims have been embroiled in litigation largely because of allegations that the company arbitrarily used flood claim exclusion language in policies to reject wind-related damage claims.

There have also been allegations that the company used improper methods with adjusters and engineering reports to deny payment.

A company spokesman, Fraser Engerman, said the insurer was unprepared for the latest development.

“We were surprised,” he said. “Clearly this was done by Mr. Scruggs' group on his own. We are still hopeful a resolution can be reached. It was done unilaterally. We did not know it was coming.”

Asked about the negotiations becoming a stalemate, he said, “that's their opinion. We were awaiting the judge to make some decision with regard to the settlement proposal.”

Randy Maniloff, a Philadelphia attorney who represents insurers and has been analyzing the State Farm case, said it was possible Mr. Scruggs' move is a negotiating technique to put more pressure on State Farm–which, without a class-action settlement, would face a tide of individual legal actions.

Attorney General Hood, who ended a grand jury investigation of State Farm's claims-handling when the proposed settlement was announced, reacted to the Scruggs Group notice by saying, “I understand the plaintiff's frustration. However, the plaintiff's motion has no impact upon State Farm's duty to honor the State court order.

“I am working with other insurance companies, other storm victims and their attorneys to put together a proposal agreeable to all. We await a response from State Farm to see how they intend to meet their obligations.”

This article updated March 14, 9:06 a.m. EDT

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Katrina Claims Lawyers Pull Settlement Request

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