Mississippi Jury Hammers State Farm For $2.5M In Hurricane Katrina Claim

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 in Gulfport, Miss., 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 Broussards' 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 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," he said.

The attorney general, in his own civil suit, 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," he said.

"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," he added.

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., and Bennie Thompson, D-Miss., as well as U.S. Sen. Trent Lott, R-Miss., would "see to it that we have national insurance reform."

Sen. Lott is suing State Farm Fire & Casualty in a claim dispute over damage to his home from Hurricane Katrina. In October he 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.

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 last week'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."

Meanwhile, earlier in the week an insurance department official said Mississippi is negotiating disputed Hurricane Katrina home damage claims with "almost all insurers in the state," concurrent with a report that State Farm is near a mass settlement of Katrina lawsuits.

However, the state's commissioner warned against "jumping the gun."

Mississippi Deputy Insurance Commissioner Lee Harrell said mediation activity by his department had resulted in the settlement of 5,000 disputes over Katrina claims between homeowners and carriers.

Mr. Harrell said the majority of claims from the August 2005 storm still in dispute were south of Interstate 10, "where the water surge stopped." Insurers have argued that where storm-driven water surge hit homes, all claims were barred by flood exclusion language in policies–regardless of damage caused by wind.

Mr. Harrell said his department began negotiating with carriers in the state over homeowners' claims "the day after the storm."

Phil Supple, a representative for Bloomfield, Ill.-based State Farm, said by e-mail that his company had about 84,000 claims in Mississippi and had paid out $1.1 billion on them. He said the company has about 800 Katrina lawsuits pending.

In what could be an industry precedent, State Farm is preparing to settle 639 of those actions for $80 million, The New York Times reported. Mr. Supple said that at this point, "we [State Farm] have no settlement. We continue to talk and to search for ways to bring these events to a resolution."

He mentioned that the company was working to resolve the cases–consistent with a call by Judge Senter, for attorneys on all sides to conclude the Katrina wind-versus-water cases in a just, speedy and inexpensive manner.

On Jan. 9–the day the report of settlements broke, and two days before the jury verdict against State Farm–Mississippi Insurance Commissioner George Dale said a mass claims resolution had not yet been reached, while criticizing a justice system that forces insurers to settle for the wrong reasons.

"I think there's something wrong with our system when the parties involved say, 'We will settle because in the long run we will save money,' [rather than] speaking to the issue of what's right and what's wrong," Mr. Dale said during a panel discussion at the annual Property-Casualty Insurance Joint Industry Forum in New York City.

While Mr. Dale confirmed that his department "has been involved in negotiations with some parties" relating to a large number of pending suits, "at this point in time, they're not settled," he said. "I don't know who jumped the gun and wrote the article, or who put out the information."

The negotiations, he added, "are not at the point of being a solution" to litigation issues.

Robert P. Hartwig, president of the New York-based Insurance Information Institute, who moderated the panel session, asked if the commissioner believed insurers would be better off settling and getting litigation behind them.

"I can't speak for the industry, but it definitely would be in the best interests of everybody if we could get these things settled so the insurance companies could make plans for the future," Mr. Dale said, voicing his concern about a shrinking post-Katrina insurance market in his state.

Noting that insurers have paid $11.2 billion in hurricane damage losses in Mississippi, Mr. Dale added that his responsibility is not just to make sure every claim owed is paid, but also that there's a Gulf Coast insurance market "after all this is over."

"I'm finding that the second one of these responsibilities may be a little bit more difficult than the first," he said. "Unfortunately, some of our friends in the plaintiffs' bar and some well-meaning political officeholders are not familiar with that second issue."

Several times during the session, Mr. Dale attempted to raise the second issue directly with insurers in attendance. "What do regulators need to do to try to tell our consumers" about things they can do–such as adhering to stiffer building codes–"to encourage the industry [to] take another look rather than saying, 'We're gone'?"

While some speculated that a number of chief executives in attendance would not come back to the market at any price–or at least at any price customers would rationally pay–Mr. Hartwig argued that with greater flexibility of homeowners rates, there would be a greater insurer presence in the state, which also might keep the residual market as small as possible.

Panelists agreed that settling these particular claims isn't enough–that the industry needs to know if wind-driven water is a covered event to underwrite and price for such risk appropriately.

Mr. Dale recalled what he characterized as one of the biggest mistakes he made just after Katrina, noting that he said publicly that some claims would go unpaid because under certain conditions water is not part of the standard homeowner policy.

"You would have thought I had come out against motherhood and the flag," he said, recalling the enormous amount of criticism he received for trying to tell the facts. Rather than honesty, he said, "the public wants a demagogue. They want somebody to tell [them] what they want to hear."

Commenting on the insurance industry response to Katrina, he said insurers received "passing marks" for claims handling, but "took a black eye" in the state of Mississippi when wind-water issues are factored in. "It's not the first time," he said, noting that the wind-water issue also raged in 1969 after Hurricane Camille.

"If the wind came before the water, you had coverage. If the water came before the wind, you had no coverage. Thirty-six years later, we have the same issue," he said.

During last week's forum, p-c insurance executives in attendance were polled on a variety of issues, including the question of whether insurers would prevail in wind-water suits–with 80 percent responding that they would.