Mississippi High Court Tells USAA to Pay up in Hurricane Katrina Bad-Faith Claim

When hurricanes hit coastal areas, property insurers often breathe a sigh of relief when much of the damage appears to be the result of storm surge and flooding – losses that aren’t covered by most homeowners’ policies.

But after Hurricane Katrina slammed the Mississippi Gulf Coast in 2005, hundreds of lawsuits vehemently disputed that reasoning. In the case of a historic, 130-year-old Ocean Springs home designed in part by architect Frank Lloyd Wright and insured by USAA, the circumstances were complicated by the fact that the home was elevated to a degree, the height of the storm surge from Katrina was in dispute, and the claim was filed almost six months after the event.

Last week, the Mississippi Supreme Court upheld a state appellate court’s decision in the case, awarding almost $15 million in punitive damages and attorney fees in what is reported to be one of the largest Katrina-related insurance lawsuit awards.

“We find that the evidence presented at trial demonstrates a type of conduct for which punitive damages are designed,” the Supreme Court wrote in its 5-3 decision, handed down Dec. 6. “The Minor Estate provided sufficient proof that USAA acted in bad faith, with complete disregard for the Estate’s rights.”

The case is one of the longest-running suits that arose after Katrina swamped the Mississippi coast and New Orleans. It has a number of historical sidelights and, perhaps, offers guideposts for property insurers in similar circumstances.

“The evidence presented at trial revealed that USAA wished to reap the benefits of the insurance policy premiums while depriving the Minor Estate the full benefits of that policy,” Justice David Ishee wrote for the majority of the court. The justices also noted in the opinion that USAA has a net worth of $40 billion.

USAA, based in San Antonio, said the insurer is considering its options after the large verdict.

“USAA helped thousands of families recover from Hurricane Katrina, with countless employees working tirelessly to handle member claims,” USAA said in a statement to local news outlets. “We are very disappointed in the Mississippi Supreme Court’s decision as the evidence does not support the excessive punitive damages and attorneys’ fees.”

The lead attorney for the homeowners, James Reeves Jr., of Biloxi, said it was a win for policyholders, although many Katrina-hit homeowners had settled for minor amounts with their insurers years ago, rather than pursue lengthy litigation.

The home and other structures at the site were built in 1890 and were owned by the family of Paul Minor, a Mississippi trial attorney himself who was famous for winning large verdicts against Ford Motor Co. after car crashes in the 1990s, and against insurance companies in claims disputes. Minor was convicted in 2007 on charges that he had paid off loans and bribed judges in exchange for favorable rulings. He has steadfastly denied the charges.

Also implicated in that bribery scandal was a Mississippi Supreme Court justice at the time, Oliver Diaz Jr. Diaz was acquitted of the charges but lost a reelection bid. Diaz, it turns out, later became one of the trial attorneys for the Minors in the USAA case.

Paul Minor was released from prison in 2013, four years after his wife died. The estate was passed on to the Minors’ children, Stephen and Kathryn, who pressed the USAA claims dispute litigation for years.

The case began after Katrina made landfall on Aug. 29, 2005. USAA would ultimately offer the Minor family some $200,000 – one tenth of the policy limits – to cover part of the wind damage.

But the insurer and its adjusters left a paper trail that the insureds’ attorneys used to argue that USAA had known of more extensive wind losses and had acted in bad faith.

In 1994 and in 2001, USAA had sent underwriters to the historic home, which is now restored and is a museum. Those underwriting reports were stored at USAA’s records center in Tampa, a fact that apparently came back to bite the insurer in the litigation, the court explained.

After the Minors reported their loss in January 2006, six months after the storm, USAA sent adjusters to inspect, along with an engineer. The engineer, with Project Time & Cost Forensic Consulting, reported that Katrina’s 110-mph winds had, in fact, damaged the roof, canopies, soffits and window systems of the home. But he also said that much of the house could not have withstood the 10-foot storm surge. The court noted that the report also mentions an elevation certificate, showing the house was elevated to 15 feet above the ground. But testimony differed on the depth of the storm surge, with some experts pegging it at 21 feet.

A USAA adjuster later called the engineer for clarification on the wind damage. The engineer said that dozens of windows all around the house had failed, not just those on the windward side. In an internal email, one adjuster acknowledged that the report opened USAA up to having to pay for all the windows and content losses in the home.

The adjuster then wrote to the Minors, offering a check for $37,245, noting that further payout was not due because the wind damage alone would not have left the home “untenable.” The court noted that the letter appeared to be inconsistent with the engineer’s report.

USAA adjusters also asked the homeowners for photos and diagrams of the property, but the Minors’ lawyers said the insurer was dragging its feet and pointed out that the insurer already had all that information on file in Tampa.

The plaintiffs also argued that the carrier’s own catastrophe claims manager had acknowledged the worrisome delay in resolving the claim. In a memo, the manager said, “this was a $1 million claim and that the adjuster needed to ‘get this file moving,'” the court explained.

The Minors filed suit against USAA in 2008. Five years later, a jury in Jackson County awarded the family $1.5 million on the breach-of-contract claim. USAA paid the judgment and did not appeal.

But the Minors did appeal the trial court’s grant of partial summary judgment in favor of USAA on bad-faith claims. A Mississippi Court of Appeals reversed that judgment, deciding that the insurer had known of the extensive wind damage and had delayed payments. The appellate judges remanded the case to the trial court for proceedings on the bad-faith issue.

After that second trial, a jury returned a verdict of $10 million in punitive damages and $457,858 in attorney fees for the Minors’ lawyers. USAA appealed. The Supreme Court held against the insurance giant.

“In sum, the trial judge did not err as a matter of law by submitting the issue of punitive damages to jury, and the $10 million award of punitive damages is not unconstitutionally disproportionate,” the justices wrote. “We find no error in the jury’s award of extra-contractual damages. Further, there are no errors (standing alone or combined) that warrant a new trial.”

The justices took the fees a step further and awarded another $4 million in attorney fees – plus interest of 4% per year since the 2022 date of judgment, until paid.

Justice James Maxwell concurred in part but dissented on the fees. The dissent and full opinion can be seen here.

The lawsuit may be one of the last of many to reach a conclusion after the dark days of Hurricane Katrina. State Farm Fire and Casualty in 2021 famously settled with the Mississippi attorney general’s office for $12 million, and with the federal government for $100 million after allegations that the insurer had mishandled Katrina claims. Read more here.

A lawyer for USAA in the case could not be reached for comment Sunday.

Top photo: The Charnley-Norwood House (Facebook)

Related: How Florida Lawmakers Addressed Unreasonable Bad-Faith Claims