Scruggs Group Throws Monkey Wrench Into Katrina Settlement

Lawyers for a group involved in negotiating a class-action settlement with State Farm over Mississippi homeowners' claims from Hurricane Katrina have withdrawn their request to have the deal approved by a federal court. State Farm said the motion took them by surprise.

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 the fact they've reached a “stalemate” with State Farm Fire and Casualty Company.

Under the proposed settlement, the company would re-examine 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 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 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 Richard “Dickie” Scruggs–the lead plaintiff attorney for the group involved with the class action–said the actions taken by the judge were “seemingly signifying [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 to further address even its own interpretations of the court's actions…”

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

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 State Farm representative, 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 waiting for the judge to make some decision with regard to the settlement proposal.”

Randy Maniloff, a Philadelphia attorney who represents insurers and who 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.

“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,” said Attorney General Hood, reacting to the Scruggs Group notice.

“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,” added Mr. Hood, who ended a grand jury criminal investigation of State Farm's claims-handling when the proposed settlement was announced.

Meanwhile, in related news, Mississippi's insurance regulator announced a week before the Scruggs Katrina Group withdrew their settlement request that State Farm had agreed to his request to re-examine all claims involving policyholders in the state whose homes were smashed off their foundation slabs by Hurricane Katrina.

A State Farm representative indicated the arrangement with Insurance Commissioner George Dale was separate from the proposed class-action settlement for 36,000 property owners in three Mississippi Counties.

Mr. Scruggs assailed the commissioner's announcement, saying it “merely requires State Farm to do what the law has always required them to do. It is clearly an election year illusion by State Farm to 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 30 days.

“While the great majority of State Farm's customers appear to be satisfied with the way their claim was handled, we continue to hear complaints from consumers where all that's left of their claim is a foundation or 'slab,'” wrote Mr. Dale in a letter to the carrier.

The commissioner said the consumers he was concerned with insist they sustained wind damage prior to water surge. State Farm policies exclude flooding, but Judge Senter has ruled that any portion 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 paid zero.” He reminded them that on Sept. 7, 2005, his department had issued Bulletin 2005-6, notifying insurers that where an insurer believes the damage was caused by water, the company must be able to prove to the department that the damage was caused by water and not by wind.

State Farm, according to Mr. Dale, in addition to being the target of single-action and class-action suits on the wind/water issue, has been the subject of “hundreds of complaints” to the insurance department that it is “not adhering to this bulletin.”

The complaints, he said, had sparked an ongoing market conduct exam regarding State Farm's handling of Katrina claims in the six coastal Mississippi counties, which the commissioner said will take several more months to complete.

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

The commissioner added he hoped his action “will bring about closure. Rest assured the [insurance department] will continue, as it has since Katrina made landfall, to work directly with consumers and companies to verify that all claims were properly adjusted according to the policies, bulletins and regulations issued by this office.”

A second State Farm representative, Phil Supple, said the company received the commissioner's letter and “continues to work with Commissioner Dale to address insurance issues arising out of Hurricane Katrina. We intend to give the commissioner the information he has requested on this small group of claims. Many of these types of claims have already been resolved through the department's successful mediation program.”

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