Penalty for Refusing to Cover Damages. A federal jury ordered State Farm insurance yesterday to pay a $2.5 million penalty for refusing to cover damages to a Mississippi couple’s house that was destroyed in Hurricane Katrina, throwing into question settlement talks intended to resolve hundreds of lawsuits filed after the 2005 storm.
The eight jurors in Federal District Court in Gulfport, Miss., reached a unanimous decision yesterday less than three hours after Judge L. T. Senter Jr. ruled that State Farm failed to prove that the damage to the house in Biloxi had come from surging floodwaters and, thus, was not covered by the homeowner’s policy.
Lawyers for the homeowners, had argued that the house was knocked off its foundation and torn apart by high winds a hazard covered as a fundamental part of home insurance coverage and that a wall of water driving in from the Gulf of Mexico had scattered the debris.
In a statement from the bench, Judge Senter said that State Farm had presented no “legal or arguable reason for refusing to pay the plaintiffs’ claim,” Bloomberg News reported.
The judge then ordered State Farm to pay the full value of the policy, $233, 292, and told the jury to determine whether the insurer should pay punitive damages and, if so, how much. The homeowners had sought $5 million in addition to their coverage.
Yesterday’s decision was the first by a jury in a sprawling dispute that sprang up after thousands of homes were damaged or destroyed by Hurricane Katrina and the insurers were accused of narrowly interpreting coverage and vastly underpaying claims. More than 2,000 lawsuits have been filed.
The verdict came as State Farm acknowledged it had started settlement talks with 639 other homeowners in Mississippi. The homeoener’s lawsuit was not included in those discussions. Those talks continued yesterday amid signs that progress was being made.
But, lawyers following the talks said the midafternoon announcement of the $2.5 million verdict was like a lightning strike captivating, but not immediately easy to interpret.
A spokesman for State Farm, Phil Supple, said the insurer was “surprised and disappointed” by yesterday’s decision.
“We believe the expert testimony” of State Farm witnesses “supported a different result,” Mr. Supple said, adding that “an appeal of the decision is likely.”
Mr. Supple acknowledged that State Farm had been sued after it had refused to pay the family anything for their loss.
Not Covered by a Typical Homeowner Policy.
After Hurricane Katrina, State Farm and other insurers balked at paying claims, arguing that much of the damage to houses was caused by flooding, which is not covered by a typical homeowner policy. Many insurers also contended that if any damage to a home had come from water, it nullified the basic coverage for wind damage.
Judge Senter agreed in a ruling that the insurers were not obligated to pay for flood damage. But he said that when both wind and water damaged or destroyed a house, it was the burden of the insurance company to prove how much of the loss was because of water and pay for any wind damage.
A clerk for Judge Senter said in a telephone interview from Gulfport that experts for State Farm acknowledged in court documents that some damage to the homeowner’s home had come from wind. But, he said, “they did not offer evidence during trial” showing how much of the damage was from water and how much from wind, as Judge Senter had required.
Ultimately, he said, the judge ruled that State Farm was liable for all the damage because the insurer had not provided enough evidence “the jury could use to segregate” the wind from the water damage.
State Farm would not comment on the impact of the verdict. But lawyers who have been following the talks said they expected strong reactions from the participants that could accelerate the negotiations or to blow them apart.
But one lawyer who spoke on condition of anonymity, called the decision a “very unsettling” and “potentially destabilizing event” that could drive State Farm from the bargaining table.
The jury decision could also lead policyholders to conclude that instead of settling they should hold out in the hope that a jury would award them millions of dollars in punitive damages, said Randy Maniloff, a lawyer in Philadelphia who represents insurance companies.
Many lawyers and insurance executives have said in interviews that a settlement by State Farm, the largest insurer in Mississippi and the nation, would probably lead other insurers to follow suit. That would potentially bring hundreds of millions of dollars into the hands of homeowners to start rebuilding.
A settlement would probably yield less money than many homeowners thought they could get from a jury, but with the huge number of pending cases, it could be years before they got their day in court.
The Mississippi attorney general, Jim Hood, has filed a civil lawsuit against State Farm and other insurers and had began investigating possible criminal charges against State Farm for the way that it handled claims.
As a part of the settlement of the 639 lawsuits alreadybrought by other lawyers, the attorney general’s lawsuit and criminal investigation would be dropped.
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