State Farm Storm Surge Settlement Could Scare Insurers from Mississippi Market

A landmark legal settlement with State Farm Fire & Casualty Co. promises to jump-start the rebuilding process for thousands of Mississippi homeowners devastated by Hurricane Katrina, but critics warn the deal could hurt many of Mississippi’s Gulf Coast residents.

That’s because the multimillion dollar accord threatens to make the hurricane-ravaged coast an even less attractive market for major insurers that already are reluctant to renew policies or write new coverage in the storm’s aftermath, industry experts said Wednesday.

Hundreds of Mississippi homeowners sued Bloomington, Ill.-based State Farm and other insurers for refusing to pay for damage from Katrina’s storm surge, which the companies say isn’t covered by their standard homeowner policies.

On Tuesday, however, State Farm agreed to settle more than 600 of those suits and reopen and pay thousands of other claims it denied after the Aug. 29, 2005, storm.

The settlement resolves a lawsuit that Mississippi Attorney General Jim Hood filed against State Farm. The deal, part of which must be approved by a federal judge, also ends Hood’s criminal investigation into allegations that the insurer defrauded policyholders.

State Farm will pay about $80 million to 639 policyholders who sued the company. The company also agreed to pay at least $50 million — but possibly hundreds of millions more — to roughly 35,000 policyholders who haven’t sued the company but will have their claims reopened.

Robert Hartwig, president and chief economist at the industry-financed Insurance Information Institute in New York, said the settlement adds another dose of uncertainty to Mississippi’s post-Katrina insurance market.

“How contracts are going to be enforced in Mississippi is unclear. It’s an open question,” Hartwig said.

Mississippi Insurance Commissioner George Dale said he tried in vain to secure a promise from State Farm that the settlement wouldn’t be factored into any future rate increases in Mississippi.

Dale also said he wasn’t certain how the deal will affect the availability and affordability of insurance on the coast, where tens of thousands of homes were damaged or destroyed.

“We’re a long way from seeing how this is going to shuffle out,” he said. “I hope the long-range effects are positive.”

But Joseph Annotti, spokesman for the Property Casualty Insurers Association of America, was skeptical of the deal.

“At least part of the message is that you don’t necessarily need the right insurance policies to get the right coverage. You just need a good lawyer,” he said.

Richard “Dickie” Scruggs, a lawyer who also helped secure a multibillion dollar settlement with tobacco companies in the mid-1990s, helped negotiate the deal with State Farm on behalf of policyholders. Zach Scruggs, his son and law partner, scoffed at the notion that the pact will send rates soaring and prompt insurers to pull out of the region.

“That is ridiculous,” he said. “It’s wrong for the industry to use threats of higher premiums and policy cancellations as an excuse for not paying claims owed under the policies.”

Scruggs’ clients include Sen. Trent Lott, R-Miss., and Rep. Gene Taylor, D-Miss., both of whom sued State Farm for refusing to cover damage to their homes.

Taylor said he was pleased that thousands of homeowners could be getting the money they need to rebuild, but disappointed that Hood dropped his criminal investigation. Scruggs and other lawyers accused State Farm of pressuring engineers to change their conclusions about storm damage to homes so that claims could be denied.

“As a congressman, I remain convinced that the biggest Katrina fraud of them all was the insurance companies,” Taylor said.

William Merlin, a Tampa, Fla.-based lawyer who represents 85 State Farm policyholders who aren’t part of the settlement, faulted Hood for allowing the company to “buy its way out” of a criminal investigation.

“I think that’s a horrible precedent for the state,” he said. “State Farm should not be in a position to stop a criminal investigation by agreeing to pay people what they were already owed beforehand.”

But the deal could benefit thousands of policyholders like Joseph Benvenutti, whose Bay St. Louis home was reduced to a slab by Katrina.

Benvenutti, 53, said State Farm refused to pay for $720,000 in damage, but he was reluctant to sue the company and wage a lengthy court battle. He said he was “elated” to hear that his claim can be reopened, reviewed and possibly paid.

“This is the very best news we’ve gotten since the storm,” he said. “I was starting to give up hope that I would be able to settle this without suing State Farm.”

Mississippi’s mass settlement, the first of its kind, doesn’t affect claims in other states. Plaintiffs’ lawyers and state officials said they aren’t aware of similar settlement talks in Louisiana, where Katrina severely damaged or destroyed about 270,000 homes in greater New Orleans alone.

Joseph Bruno, a lawyer who represents 4,500 homeowners in the New Orleans area, said insurers and policyholders there are settling hundreds of cases individually. But a mass settlement like Mississippi’s is less likely in Louisiana, he said, because punitive damages aren’t allowed under state law and the companies aren’t facing a criminal investigation there.

“You shouldn’t have to have a criminal investigation to get an insurance company to settle a claim,” he added. “We’re successfully negotiating settlements, but we’re doing it one at a time.”