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State Farm settles suit on Katrina

Jan 24, 2007 | Chicago Tribune

State Farm Mutual Automobile Insurance Co. on Tuesday agreed to settle a class-action lawsuit that will give thousands of policyholders another shot at having their Hurricane Katrina claims evaluated and that could cost the insurer as much as $500 million, according to one estimate.

The deal with Mississippi Atty. Gen. Jim Hood and lawyers for thousands of policyholders in the state resolves a civil lawsuit, as well as a criminal probe that Hood had initiated against the Bloomington, Ill.-based insurer for allegedly refusing to adequately cover Katrina-related damages in 2005.

"It's in the best interest of our policyholders, State Farm and the effort to rebuild Mississippi," State Farm spokesman Fraser Engerman said of the settlement, which covers the three counties most affected by the hurricane.

The settlement, which came only weeks after State Farm was ordered to pay $2.5 million in punitive damages to one Mississippi couple, enables as many as 35,000 policyholders to ask the insurer to re-evaluate their claims. If they choose, they can have their claims resolved through binding arbitration.

Hood said State Farm must pay a minimum of $50 million to the policyholders after their claims are reviewed, The Associated Press reported.

But depending on how many policyholders qualify, the company could end up paying hundreds of millions of dollars more than that because there isn't a cap on the amount.

Bloomberg News estimated that the settlement could ultimately cost State Farm as much as $500 million.

State Farm's settlement came only weeks after it was ordered by a jury to pay a Biloxi couple $2.5 million in punitive damages. A judge in the case said State Farm was liable for $223,000 in compensatory damages.

Policyholders with other lawsuits pending against State Farm are excluded from the settlement, State Farm said.

"I hope that this settlement with State Farm will encourage other insurers to join the settlement, so that we can get a quick flow of capital into our coastal counties at this critical time," Hood said in a statement.

U.S. District Court Judge L.T. Senter in Gulfport, Miss., has more than 200 other Katrina-related suits on his docket.

"We believe the settlement works towards Judge Senter's goal of a just, speedy and efficient resolution of these matters," State Farm said.

Industry watchers disagree on whether State Farm's settlement of the case puts pressure on other insurers, including Northbrook-based Allstate Corp., to settle cases more broadly in areas ravaged by Katrina.

"This puts a lot of uncertainty behind State Farm," said Robert Hartwig, chief economist for the Insurance Information Institute.

However, he added, "while this is damage to just one insurer and while specifics of other cases may differ, it boils down to insurers [that] could be forced to pay tens of millions in flood losses that are excluded from homeowner's policies and for which they've never collected a dime in premiums."

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