Vindication for an Industry

There is a world of difference here between the legal significance and the practical significance. As far as the value of legal precedent, there is no particular legal significance to the dismissal of McIntosh because it was part of a settlement, and a settlement is just like any other contract — it's not binding on anyone else but the parties who execute it. The McIntosh couple's attorney tried to emphasize this by publicly saying that the settlement is particular to the McIntosh case and has nothing to do with other pending State Farm lawsuits. But it does — it dramatically impacts them.

The practical significance for State Farm of the McIntosh settlement is enormous. The plaintiffs' lawyers who still have unsettled Katrina claims just saw the value of those lawsuits go way down. Just think of our recent financial crisis when market events over a few short weeks absolutely devastated the value of everyone's retirement accounts. The same thing happens to a "portfolio" of lawsuits. The value of those unsettled Katrina claims — those that deal with a wind/water dispute and rely upon allegations of "bad faith" for their punch — have gone way down, and very quickly, too. Claimants' counsel who were previously holding out to force a large settlement on the eve of trial are probably asking if that last offer is still available.

I like to say that truth always trumps fiction, though sometimes it takes time. The truth of McIntosh is that the scandalous and well-publicized accusations of bad faith and illegal conduct alleged against State Farm have now been exposed as pure fiction, a make-believe story carefully orchestrated by the now-convicted felon Dickie Scruggs and his accomplices. The story was like the Wizard of Oz; when you pulled back the curtain, there was nothing of substance.

Another truth has been a long time in coming. That is, the early court decisions that so crippled the anti-concurrent causation language have now been overruled, and definitively so. Ultimately, the "truth" of well settled and reliable legal precedent prevailed, but this has been a very, very costly exercise for the insurance industry. According to the Insurance Information Institute, more than 99 percent of Hurricane Katrina claims have settled to the tune of $40.6 billion, with Louisiana claimants receiving $25.3 billion and Mississippi claimants receiving $13.6 billion. Payments just to homeowners in affected states exceeded $16 billion. State Farm alone paid out more than $3.1 billion as a result of Katrina. How many millions were paid out in the initial stages of the claim process based on the teachings of those early court decisions that have now been determined to be wrong? Just as the recent developments in McIntosh lowered the value of those few Katrina claims that remain, how much more was the value of hundreds of Katrina cases inflated when Judge L.T. Senter [of the Federal Court for the Southern District of Mississippi] first ruled against the anti-concurrent causation language?

It is ironic that this story begins and ends in part with Judge Senter. When he first ruled in the Leonard case that he would not apply the anti-concurrent causation language in that case, it immediately caused many insurers and claim counsel to revaluate their cases. The settlement value of cases involving anti-concurrent causation language suddenly went up. It is said that the only good claim file is a closed claim file, and the industry continued to push to resolve the many Katrina claims. I would not be surprised if hundreds of millions of dollars were paid out in the interim, between the time of the early court decisions that cast doubt on the reliability of the anti-concurrent causation language and the standard definitions for flood, and the more recent series of appellate decisions that cast aside any doubts about the validity of such pivotal policy language.

Judge Senter's ruling on Leonard was later reversed by the Fifth Circuit's holding that the anti-concurrent causation clause was, in fact, valid. A similar story played out in the Tuepker case involving storm surge. Judge Senter ruled that the anti-concurrent causation clause was ambiguous and the Fifth Circuit again reversed his ruling, holding that the anti-concurrent causation clause was unambiguous and enforceable.

There were other pivotal court rulings that were initially made in error, then later reversed. The Sher and Katrina Canal Breaches cases come to mind. In Sher, the plaintiff sought to recover for damages to his home after Katrina. The plaintiff argued that the flood exclusion did not apply to the damage to his home because the damage resulted from man-made events, i.e. the breach in the levees, rather than flooding. The trial court and the Louisiana Court of Appeals agreed with the plaintiff. Finally, the Louisiana State Supreme Court disagreed and applied the plain meaning of "flood," which does not differentiate between man-made floods and other floods. The court also held, in any event, the flood was caused by Hurricane Katrina, not by man. Katrina Canal Breaches was the federal court's version of Sher. It was a strikingly similar dispute about the meaning of the term "flood," and it was finally resolved to similar effect by the Fifth Circuit.

The court decisions came full circle, but a lot of money had changed hands in the interim. Just like the true facts finally emerging in the McIntosh case, the "truth" of these final appellate decisions were a long time in emerging.

In the settlement, the McIntoshes say that their claim was handled properly. Why do you believe they decided to settle now, almost three-and-a-half years after Katrina?

I suspect the reasons why the McIntoshes now say that their claim was handled properly is that they finally received some good legal advice. We have to remember that, like State Farm, the McIntoshes were also the victim of calculated manipulation.

Court records show that before he was ever contacted by Scruggs, Thomas McIntosh had signed a statement saying that he was satisfied with his claim resolution, and that he wished to be left out of the limelight. Evidently, Scruggs contacted Thomas and Pamela McIntosh only after Scruggs aired his version of the handling of their claim with ABC News' 20/20 and the Associated Press. Against Scruggs' persuasive onslaught, the McIntoshes relented and finally agreed to sue State Farm for millions in punitive damages.

Scruggs fanned the firestorm with spurious allegations as long as he could. But a few things happened along the way: Scruggs got indicted in an unrelated case and pled guilty; he withdrew from the McIntosh case and all other cases; the successor group that he wanted to handle those cases was disqualified for ethics reasons; and the McIntoshes sought new counsel. When the McIntosh allegations met the hard steel edge of truth, the case deflated like a punctured balloon.

It was alleged that State Farm and others manipulated engineering reports to shift claim losses to the NFIP. Could these charges resurface?

In our legal system, anybody can say anything they want about anyone else. All it takes is a few dollars. What I mean by that is that anyone can file a lawsuit and say whatever they want — you just pay the filing fee for your legal petition. State law generally protects those making allegations in a lawsuit from being sued themselves for libel or slander for what is said in their legal papers. So, in a general sense, you can say whatever you want without much fear of legal reprisal. Of course, just as in the McIntosh case, at the end of the process those claimants are going to face the hard edge of truth. It would be easy for someone to resurrect that charge, but another thing entirely to prove it.

How do you view State Farm's legal approach in defending itself against Richard Scruggs' all-out media attack? Is it more or less restrained than you imagined a company would respond?

In the legal arena, State Farm has won — and won decisively. That cannot be said for the public relations war. Scruggs is believed to have masterfully orchestrated a public relations onslaught that lured politicians, the media, and others into publicly attacking State Farm.

At a time when it was politically expedient to do so, former Mississippi Senator Trent Lott, Mississippi Congressman Gene Taylor, and Mississippi Attorney General Jim Hood publicly eviscerated State Farm in the media and on the floor of Congress. That must have damaged State Farm and other insurance companies incalculably in the public eye. Just like the politicians, the public at large snaps up the "bait" of misinformation.

Although the general media has covered Scruggs' foibles and the fact that the McIntoshes set the record straight, they have not done so with the same frenzied force with which they covered the initial scandalous allegations against State Farm. That is disappointing. I tip my hat to State Farm's legal team for defeating this attack so convincingly in court. You cannot quarrel with that fine result. While I am disappointed that State Farm was not more aggressive in publicly rebutting these attacks, you have to remember that State Farm is constrained in a way that Scruggs' attacks was never constrained — by the truth.

You mentioned how politicians such as former Mississippi Senator Lott, Congressman Taylor, and Mississippi Attorney General Hood publicly attacked State Farm after Katrina. Do you believe there should be repercussions for those who made what seem to be false accusations against the company?

There should be repercussions for those who made and spread these false allegations. When it was politically popular to do so, these politicians heaped on the criticism, evidently without doing the most cursory independent investigation to determine whether they were being mislead by Scruggs' orchestration.

In a normal context, an aggrieved party can sue for business disparagement. Those suits are difficult, though. Lott, Taylor, and Hood would probably hide behind the doctrine of sovereign immunity, which essentially protects them from the consequences of their scandalous accusations when those accusations were made on the floor of Congress or otherwise pursuant to their official duties. Also, such a suit might be unpopular, and could cause a public relations backlash against State Farm that would exacerbate the original damage.

Legally speaking, what's next for the Rigsby sisters, who are accused of stealing confidential documents while working with Scruggs. Will they face charges?

It's difficult to say whether the Rigsby sisters will face charges. State Farm was sued civilly by the sisters in a suit pending in the Southern District of Mississippi (the sisters' home district). Earlier in 2008, State Farm pursued a counterclaim against the Rigsby sisters, which includes a claim for violation of the federal Computer Fraud and Abuse Act. State Farm's counterclaim is for civil violation of the Act. However, the Act also has a criminal component and carries a maximum penalty of 10 years imprisonment for a first offense. Although it would seem that the Rigsby sisters would have gone down with Scruggs, State Farm's counterclaim has really been pressed only in 2008, so it is possible the authorities are still investigating criminal charges against the sisters. [See sidebar at end of story, Rigsby Sisters Lose Again.]

What lessons can companies like State Farm learn with regard to their claim processes in order to prevent these kinds of accusations from resurfacing in the future?

Perhaps the only lesson for State Farm that is appropriate here is that no good deed goes unpunished. It is unfortunate that they did virtually nothing wrong and were vilified for it for so long.

Like the silly overemphasis given to Joe the Plumber in the recent Presidential election, there was a common sticky note affixed in a file that took on a life of its own. The wording on the sticky note was completely innocuous, but it also was vague. Attached to an expert's report, it said, "Put in Wind file – DO NOT PAY BILL – DO NOT DISCUSS." That vagueness allowed the Scruggs' law firm and the Rigsby sisters to deliberately mischaracterize the intent of the note.

One thing that we can all learn is that thoughtful and specific documentation of a claim by claim professionals can be as important, if not more important, than what is actually done on a claim. Like the medical profession, adjusters need to practice defensive claim adjusting with their documentation practices, carefully writing things up in such a way so that the specific truth of those claim notations can never be twisted around or misconstrued.

Jay W. Brown may be reached at 713-960-7306, jbrown@bmpllp.com, www.bmpllp.com.