State Farm "minimized damage"

Scott Miller, Pantagraph©(Bloomington, IL)

BLOOMINGTON — State Farm Insurance Cos. “minimized the damage” by settling a class-action lawsuit Tuesday with Mississippi Attorney General Jim Hood, an industry analyst said.

The Associated Press reported that State Farm agreed Tuesday to pay about $80 million to 639 policyholders involved in a class-action lawsuit filed by Mississippi Attorney General Jim Hood.

In turn, Hood dropped his criminal investigation of State Farm’s claims handling in Mississippi following Hurricane Katrina.

The Bloomington-based insurer also agreed to reopen the claims of an estimated 35,000 Mississippi policyholders who didn’t sue the company but may want more money.

State Farm spokesman Phil Supple would not discuss the company’s analysis of what the reopening might cost.

“It’s hard to tell what the final expenditure of this will be,” he said.

James Valverde, vice president of risk management for the Insurance Information Institute in New York, said State Farm’s decision will have a far-reaching impact on the entire industry, particularly with State Farm and other insurers still involved in hundreds of Katrina-related lawsuits.

Insurance could become costly and hard to find in the Gulf Coast, he said. But the added costs shouldn’t trickle into Central Illinois and other parts of the country, he said.

State Farm also could face more lawsuits if other homeowners see the settlement as a chance to cash in.

“Clearly, this kind of outcome creates a lot of uncertainty in an industry that’s already volatile and fragile,” Valverde said. “These cases give people the false impression that they can use the courts for their best interests. … In the litigious society we live in, (the settlement) could give rise to new lawsuits, but it’s too early to tell. We’re only seeing the beginning of this.”

Given a Mississippi jury’s recent decision to make State Farm pay a Mississippi couple $2.5 million in punitive damages, Valverde said the insurer “minimized the damage” by settling, rather than allowing other juries to follow suit.

Jim Jones, director of the Katie School of Insurance and Financial Services at Illinois State University, noted that State Farm also avoided future litigation expenses by settling this case.

“The industry as a whole settles a lot of cases. Most cases don’t go to trial,” he said. “Part of it is a recognition of the cost of litigation. Another part of it is uncertainly, and (State Farm is) probably feeling pretty uncertain about how a judge or jury is going to rule. … You have to make a business decision.”

State Farm tallied a $3.2 billion profit in 2005, the year Katrina struck. That was after paying $6.3 billion in hurricane damages in the Gulf Coast. The company paid more than $1 billion in Mississippi alone.

Last year looked like a much more profitable year for State Farm, however, though year-end figures haven’t been reported. While Katrina cost the insurer billions in 2005, the largest catastrophe in 2006 was a Midwestern hailstorm in March that cost State Farm nearly $300 million, spokesman Jeff McCollum said.

According to third-quarter financial statements filed with the Illinois Division of Insurance, State Farm’s net worth jumped 14 percent from $50.2 billion to $57 billion at the end of September.