Lawyers for a group involved in negotiating a class-actionsettlement with State Farm over Mississippi homeowners' claims fromHurricane Katrina have withdrawn their request to have the dealapproved by a federal court. State Farm said the motion took themby surprise.

The Scruggs Katrina Group, in a notice to U.S. District CourtJudge L.T. Senter Jr. in Gulfport, Miss., said they were taking theaction based on indications the judge was against the proposal, aswell as the fact they've reached a “stalemate” with State Farm Fireand Casualty Company.

Under the proposed settlement, the company would re-examine36,000 claims from Hurricane Katrina in three coastal counties, andwould be willing to make an immediate payment of 50 percent ofpolicy value for homes that were wiped off their foundations.

According to an estimate by Mississippi Attorney General JimHood, who was part of the settlement negotiations, the insurercould possibly pay up to $500 million in the settlement.

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 whorejected a State Farm offer as too complex. The judge later held ahearing at which some parties objected to the settlement.

Scruggs Katrina Group, in a notice signed by Richard “Dickie”Scruggs–the lead plaintiff attorney for the group involved with theclass action–said the actions taken by the judge were “seeminglysignifying [the court's] reluctance to grant the motion” for aclass-action settlement.

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

“Given this stalemate,” Mr. Scruggs wrote that the attorneyswould now focus on pursuing individual cases against thecarrier.

State Farm's Hurricane Katrina claims have been embroiled inlitigation largely because of allegations that the companyarbitrarily used flood claim exclusion language in policies toreject wind-related damage claims. There have also been allegationsthat the company used improper methods with adjusters andengineering reports to deny payment.

A State Farm representative, Fraser Engerman, said the insurerwas 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 bereached. It was done unilaterally. We did not know it wascoming.”

Asked about the negotiations becoming a “stalemate,” he said,“That's their opinion. We were waiting for the judge to make somedecision with regard to the settlement proposal.”

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

“I understand the plaintiff's frustration. However, theplaintiff's motion has no impact upon State Farm's duty to honorthe state court order,” said Attorney General Hood, reacting to theScruggs Group notice.

“I am working with other insurance companies, other stormvictims and their attorneys to put together a proposal agreeable toall. We await a response from State Farm to see how they intend tomeet their obligations,” added Mr. Hood, who ended a grand jurycriminal investigation of State Farm's claims-handling when theproposed settlement was announced.

Meanwhile, in related news, Mississippi's insurance regulatorannounced a week before the Scruggs Katrina Group withdrew theirsettlement request that State Farm had agreed to his request tore-examine all claims involving policyholders in the state whosehomes were smashed off their foundation slabs by HurricaneKatrina.

A State Farm representative indicated the arrangement withInsurance Commissioner George Dale was separate from the proposedclass-action settlement for 36,000 property owners in threeMississippi Counties.

Mr. Scruggs assailed the commissioner's announcement, saying it“merely requires State Farm to do what the law has always requiredthem to do. It is clearly an election year illusion by State Farmto help its favorite commissioner.”

Mr. Dale said the insurer agreed to identify and review all“slab” claims, identify the amount paid and/or offered to date,detail the additional action State Farm is willing to take for each“slab” claim, and report in writing back to his office within 30days.

“While the great majority of State Farm's customers appear to besatisfied with the way their claim was handled, we continue to hearcomplaints from consumers where all that's left of their claim is afoundation or 'slab,'” wrote Mr. Dale in a letter to thecarrier.

The commissioner said the consumers he was concerned with insistthey sustained wind damage prior to water surge. State Farmpolicies exclude flooding, but Judge Senter has ruled that anyportion of damage that can be attributed to wind must be paid.

Mr. Dale wrote the carrier that the slab owners complained“State Farm failed to properly apportion the loss and still paidzero.” He reminded them that on Sept. 7, 2005, his department hadissued Bulletin 2005-6, notifying insurers that where an insurerbelieves the damage was caused by water, the company must be ableto prove to the department that the damage was caused by water andnot by wind.

State Farm, according to Mr. Dale, in addition to being thetarget of single-action and class-action suits on the wind/waterissue, has been the subject of “hundreds of complaints” to theinsurance department that it is “not adhering to thisbulletin.”

The complaints, he said, had sparked an ongoing market conductexam regarding State Farm's handling of Katrina claims in the sixcoastal Mississippi counties, which the commissioner said will takeseveral more months to complete.

“In the meantime, many consumers' claims remain unsettled, andthat is unacceptable. That is why I believe it is in the bestinterest of all parties that State Farm reopen these 'slab' claimsand have them reviewed by a new team in accordance to all earlierbulletins,” he said.

The commissioner added he hoped his action “will bring aboutclosure. Rest assured the [insurance department] will continue, asit has since Katrina made landfall, to work directly with consumersand companies to verify that all claims were properly adjustedaccording to the policies, bulletins and regulations issued by thisoffice.”

A second State Farm representative, Phil Supple, said thecompany received the commissioner's letter and “continues to workwith Commissioner Dale to address insurance issues arising out ofHurricane Katrina. We intend to give the commissioner theinformation he has requested on this small group of claims. Many ofthese types of claims have already been resolved through thedepartment's successful mediation program.”

He said the company was glad to see the commissioner's letter“acknowledges that the greatest majority of State Farm customersappear to be satisfied. State Farm has provided more that $1.1billon to Mississippi property owners for the state's rebuildingefforts.”