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Big “I” National News

Legal Advocacy

Settlement Proposed for State Farm’s Katrina Claims in Mississippi

When State Farm lost a Hurricane Katrina lawsuit in a stunning decision in federal court in Mississippi two weeks ago, many observers felt it was just a matter of time before the company would settle many of its remaining Mississippi cases. And they were right. That court decision held State Farm liable for $223,292 in actual damages and $2.5 million in punitive damages to the Broussards, homeowners who sued the company for failing to cover losses due to Katrina. State Farm argued that the home was destroyed by water, which was not a covered loss, but the court ruled against the company due to its inability to prove its claim.
 

With hundreds of other pending lawsuits against State Farm in Mississippi involving similar issues of coverage for wind versus water damage, the liability exposure for the company was substantial. Compounding that was the criminal investigation launched by Mississippi Attorney General Jim Hood, alleging that State Farm fraudulently denied Katrina-related claims filed by homeowners. On Tuesday, ending much speculation by the industry, State Farm announced a proposed settlement that covers about 639 lawsuits filed by State Farm policyholders---and could potentially impact another 35,000 State Farm policyholders in three counties of Mississippi. The proposed settlement has been submitted for approval to the same judge who decided the Broussard case, but no date was set for the court’s hearing or ruling when IN&V went to press.

According to a story in the New York Times, the proposed settlement, once approved, would require State Farm to pay $80 million to settle the 639 lawsuits, and at least $50 million more to as many as 35,000 other homeowners whose claims have been closed.

These 35,000 homeowners must opt-in to the class action settlement to receive money from it and there is no cap on the total damages available to them. Some speculate that these claims could drive up the settlement costs for State Farm to $250 million to $600 million. According to press reports, State Farm policyholders whose homes were completely destroyed, leaving only a slab after Katrina, will be offered a minimum of 50% of their structural policy limits value. The remaining policyholders will be offered varying amounts depending on their individual circumstances. If any of the policyholders are not satisfied after receiving an offer from State Farm, they can proceed to binding arbitration against the company. They will be notified of the settlement after it is approved by the court and are expected to have 60 days after receiving the notice to decide if they want to participate in the settlement. The payment process is being designed with the hope that participating policyholders will be paid before the end of 2007.

Hood stated that the settlement would resolve both the civil lawsuit he filed against State Farm for refusing to cover policyholders’ damages caused by Katrina’s storm surge, as well as the grand jury investigation that commenced based on allegations of criminal fraud in State Farm’s denial of those claims.

Richard Scruggs, lead lawyer for the 639 plaintiffs in the class action, praised the settlement.

“The agreement can bring prompt and fair relief to residents of the three coastal counties who filed a claim with State Farm,” Scruggs says.

Senator Trent Lott (R-Miss.), who filed suit against State Farm after his home was destroyed in Katrina and is Scruggs’ brother-in-law, also praised the settlement.

“We’ve been waiting for a development like this. This is good for Mississippi and is so important to people along the Gulf Coast and in South Mississippi in getting on with their lives and rebuilding their homes,” he says.

Mississippi Commissioner of Insurance George Dale says “This is a big step in the right direction” and notes that he is “pleased that this agreement will quickly put money into the hands of those along the Gulf Coast without lengthy litigation.”

Jeffrey Jackson, State Farm’s corporate general counsel, says, “This settlement offers policyholders who resided in the areas most impacted by the unprecedented storm an opportunity to have their claims reviewed, share any additional information and, if they choose, have their cases resolved through binding arbitration.”

Not everyone is pleased by the settlement though. Robert Hartwig, president of the Insurance Information Institute, was quoted as calling the settlement bad for the industry and saying that insurers now face a “stacked deck” in Mississippi.

“Fundamentally, what is happening is that insurers are being forced to pay hundreds of millions, if not ultimately billions, in excluded flood loss—a type of loss for which insurers have never collected a penny in premiums,” he says. He further criticized the settlement saying “very substantial amounts [will] . . . go to trial lawyers rather than those whose homes have been destroyed.”

This settlement only applies to State Farm policyholders; policyholders insured by other carriers are not directly affected by this proposed settlement. However, some in the industry believe that this settlement will spur other carriers to settle as well. In a separate statement, Scruggs says, “Mississippians who are insured by other companies and who feel they were not treated fairly should see this agreement as a sign of hope. This settlement is a wake up call to the insurance industry – they must step up and do the right thing for their policyholders. We will move forward to advance all of our client’s claims against all other insurance companies.”

So far, other insurers have not indicated they will settle pending litigation in the same manner as State Farm. In press reports, Allstate, also sued by Hood, says the State Farm settlement “does not impact Allstate, since our policy language and claim handling is different.”

Nationwide’s spokesman says that Nationwide’s claims practices and procedures are not State Farm’s, but that it is reviewing the development.

For more information, contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.

P&C Trends

What Does State Farm Ruling Mean for the Industry?

Fitch Ratings weighs in on potential impact.

Since the ruling in favor of the Biloxi couple who sued Sate Farm Fire and Casualty Co. for denying their claim following Hurricane Katrina, agents, carriers and policyholders have had one question on their minds: What next?

Two weeks ago, Judge L.T. Senter Jr. awarded Genevieve and Norman Broussard of Gulfport, Miss., $233,292 in storm damages and $2.5 million in punitive damages in a suit that disputed whether damage to their home was caused by wind or water. The Broussards claimed their home, which was completely destroyed during the storm, was demolished by a tornado and not the storm surge that swept through the area. The ruling has since sparked a debate over whether the ruling will set a precedent for future cases, one that is likely to continue until some of the hundreds of other related cases have their day in court. State Farm has already paid $1.1 billion in Katrina-related claims and recently negotiated an agreement with other policyholders to settle claims outside court. Fitch Ratings, a global rating agency, is predicting the verdict will have a significant affect on outstanding settlement negotiations between policyholders and insurers in Katrina-related claims, not only with State Farm, but with all insurers.

“A lot of insurers have very similar claims and what we don’t know is how other insurers have been settling these claims. Certain insurers pay up very liberally and others are taking a very hard line,” says Douglas Pawlowski, director and insurance analyst at Fitch Ratings. “If they (the claims) go before a jury, these are exactly the sorts of things people can empathize with and if juries are handing out awards they will probably be larger now. Since we’ve seen how these (first cases) have been settled, I think this is a huge incentive to settle out side of court.”

Last August, Senter presided over another Katrina-related case, Leonard v. Nationwide Mutual Insurance, and upheld the flood exclusion language in the company’s homeowners’ insurance policy, but his latest ruling finds that in the absence of proof, insurers may still be liable for damages. Fitch doesn’t view Senter’s differentiating decisions as a contradiction as much as a guide to future cases in which it’s difficult to separate wind and flood damage.

“The couples that settled most recently, their homes were swept away and were completely gone. This was the judge saying there is no evidence left to judge, but these are also more extreme example…it seems like the burden of proof will be on state farm or other insurers in the future,” Pawlowski says.

The losses sustained during Hurricane Katrina are arguably the most complex insured losses in the United States history, and as a result many claims are taking longer than usual to settle. The lack of action means the risk of an adverse reaction is very high, according Pawlowski. And while it is still too early to determine what the financial impact will be on the industry, as a result of the claims, the ruling isn’t expected to immediately affect insurers’ ratings.

“Currently there is no effect, but we have to wait to really quantify it---we cannot put it to the number of cases, we need to put it in dollars. What we are looking for is an insurer who is potentially going to suffer losses greater than peers, out of line with the industry,” he says.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

P&C Trends

Snow in the Desert

Help your clients avoid winter weather-related claims.

When most people think of Arizona or New Mexico, they usually conjure up images of a sun-baked desert and maybe a cactus or two, but not this week. On Monday, both warm-weather states were covered in a blanket of snow rather than sunshine as another winter snowstorm swept across the country.

In the last month, nearly every state from California to Maine has been the target of some winter weather, but this winter has actually been considerably milder than most in recent years.

Scientists at the National Oceanic and Atmospheric Administration have predicted that this winter will likely to be warmer than the 30-year norm (1971-2000) across much of the nation, yet cooler than last year's very warm winter season. The NOAA expects the El Niño/Southern Oscillation (ENSO), which influence the jet stream and the track storms take across the eastern Pacific and North America, will be responsible for this year’s winter conditions.

So while the ski resorts and other winter-related industries cringe at the lack of snow, the predicted lack of severe weather is good news to insurers

“Winter storm losses, on average, account for about 10% of catastrophe losses in a given year,” says Robert Hartwig, president and chief economist at the Insurance Information Institute. “The recent snow/ice events have to be balanced against the fact that the year has been mild and virtually snow-free on the East Coast.”

Despite the temperate winter, even the occasional combination of snow, freezing temperatures and interspersed periods of melting and freezing can cause considerable damage to homes. Most standard homeowners policies do cover damages resulting from a freeze, but do not cover backups in sewers and drains or flood damage. The I.I.I. recommends that agents and brokers educate their policyholders on what is covered in their policies as well as how to safeguard their homes. It also has the following suggestions for agents and brokers to pass along to their customers in the event of a winter storm situation:

• Keep the house heated to at least 65 degrees since the temperature inside the walls where pipes are located is considerably colder than the walls themselves.

• Open hot and cold faucets enough to let them drip slightly. The moving water will keep pipes from freezing.

• If pipes freeze, do not wait for them to burst. Thaw them immediately or call a plumber for assistance. If the pipes burst, turn off the water and clean up spills to prevent further damage.

• In the event of an incident, encourage policyowners to call their agent as soon as possible so that the damage can be inspected.

• Make a list of damaged items and save receipts for any expense incurred as a result of an incident, including additional living expenses if it is necessary to leave the home until repairs are completed. Both of these are necessary for reimbursement.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

P&C Trends

Met Life Auto & Home Names New President

MetLife, Inc., has announced that William Moore will succeed William Mullaney as the president of MetLife Auto & Home.

Effective immediately, Moore, senior vice president for eastern zone individual business, will take over for Mullaney who was named president of MetLife’s institutional business segment last week. Moore has been with the MetLife Auto & Home since 1977 and held a variety of leadership positions in sales and marketing before becoming head of the eastern zone.

“I have known and worked with Bill for a number of years and his experience in both sales and marketing combined with his strong leadership ability will serve him well as he takes the helm at auto and home,” says C. Robert Henrikson, chairman of the board, president and chief executive officer at MetLife.

In addition to his work heading the eastern zone, Moore has 24 years of experience in the auto and home organization, including his most recent role as head of its property-casualty specialist organization, which includes more than 2,000 producers and administrative staff.

MetLife Auto & Home is a $3 billion personal lines property-casualty subsidiary that insures nearly four million automobiles and homes nationwide.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

L&H Trends

Bring Choice to the Forefront

One of the most important aspects of selling life insurance, long-term care insurance, health insurance and annuities is the ability to tailor the solution to the specific needs of the client. This may be an obvious observation; however, one of the worst things a professional can do is assume a certain level of knowledge from the person across the desk.

Customers may not understand what independent insurance agents are all about. In your initial meetings with them, cover all the basics. Start by explaining the variety of products available to fit their needs. In the life-health side of the equation, independent agents have a big advantage over traditional career agents because they can go to a variety of companies to solve customers’ needs. Most companies make their products available directly or through wholesalers, so agents can obtain quotes from a variety of companies.

Consumers don’t necessarily understand this capability. According to brand research conducted at the inception of Trusted Choice^®, only 6% of personal insurance customers mentioned choice when asked why they use an independent agent. However, when given a list of attributes to choose, 61% said choice was important. These findings were critical in developing the name Trusted Choice^®, as the name speaks to the consumer demand for customization of policies and choice of products. So, it’s important for independent agents to reemphasize this crucial distinction versus captive distribution channels since consumers indicate they want choice and don’t immediately make the connection with independent agents.

There are many considerations to take into account when offering a disability, long-term care or other insurance policy, including underwriting, price, carrier solvency, claims reputation, etc. No single carrier is going to be the best solution in every situation. Independent insurance agents realize this and should capitalize on this distinction in their internal and external communications materials, which should include their business cards, letterhead, Web site, proposals and brochures. Reinforcing choice and then emphasizing professionalism are the twin cornerstones to growing the book of business.

Don’t assume customers know agents provide them choice. Educate them.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.