State Farm puts brakes on Mississippi policies

The nation’s largest residential insurer said Wednesday that it would stop selling new homeowners and commercial policies in storm-damaged Mississippi because of lawsuits and legislative saber-rattling over the company’s handling of claims from Hurricane Katrina.

The decision by State Farm Insurance is the latest by a major insurance company to reduce its risks by retreating from the nation’s coastlines. Allstate Insurance has canceled or weakened coverage, or refused to write new policies in more than a dozen coastal states including Mississippi, Louisiana, Florida and Texas.

“We’ve reluctantly come to the conclusion that it is no longer prudent for us to take on additional risk given the uncertain legal and business climate” in Mississippi, said Fraser Engerman, a spokesman for the Bloomington, Ill.-based insurance giant.

State Farm wrote 30,000 new homeowners policies in Mississippi last year. It is the state’s largest residential insurer with a 30.3% market share, according to A.M. Best, the insurance rating and analysis firm.

State Farm’s move turns up the heat in an already fevered legal and political face-off between the company and some of the state’s most powerful figures.

It follows by three weeks a decision by U.S. District Judge L.T. Senter Jr. to reject the insurer’s proposed settlement of lawsuits with some Mississippi homeowners because the plan did not guarantee payments to most policyholders. State Atty. Gen. Jim Hood has launched a criminal investigation of the firm’s handling of Katrina-related claims.

Meanwhile, Senate Minority Whip Trent Lott (R-Miss.) and Rep. Gene Taylor (D-Miss.) both of whom lost homes to the storm, have announced plans to try to yank the insurance industry’s long-standing and highly valued antitrust immunity.

Mississippi’s legal wrangling with insurers stands in marked contrast to the state’s stoic early reaction to the August 2005 hurricane. Then, Mississippi Gov. Haley Barbour, a longtime Republican power broker, voiced little criticism of the Bush administration for its sluggish response to the disaster, unlike his counterpart in neighboring Louisiana, the other state walloped by Katrina.

But the rash of suits -- and the federal court’s apparent willingness to see the cases move forward -- touched a nerve with insurers. “What’s going on here is that the certainty of [insurers’] contractual arrangements are being undermined,” said Howard Kunreuther, a University of Pennsylvania economist and risk expert. “If there isn’t a well-defined contract, no insurer is going to be comfortable offering coverage,” he said.

The immediate impact of State Farm’s decision on Mississippi homeowners was hard to assess. Longtime state insurance commissioner George Dale said the move “further complicates the situation on the Mississippi Gulf Coast,” where he said all of the state’s major insurers have announced they would no longer cover wind and rain damage. But Dale also said State Farm’s action came as no surprise.

“Insurance companies can insure anything if they’ve got predictability,” he said. “But with all these lawsuits flying around, they don’t have predictability.”

Engerman, the State Farm spokesman, declined to say how many households might be affected by the company’s move. Asked whether the no-new-policy decision would apply only to new customers or also to old ones whose coverage is coming up for renewal, the spokesman would say only, “We continue to assess our position ... to determine what further steps, if any, are necessary.”

Litigation against State Farm in Mississippi includes a federal jury’s $2.5-million punitive-damage award to a couple who sued the firm for refusing to cover the damage that a storm surge from Katrina caused their Biloxi house. Senter, the federal district judge, reduced the award to $1 million, even as he blasted the company for acting in a “grossly negligent way” in denying the claim filed by policyholders Norman and Genevieve Broussard.

On Jan. 23, State Farm; Hood, the state attorney general; and plaintiffs lawyer Richard Scruggs proposed a settlement of all the Katrina-related homeowners claims that Hood estimated would result in a payout of $50 million to $500 million.

But Senter said in court papers that he wanted the company and Scruggs, who negotiated for the homeowners, to consider giving all plaintiffs a minimum guaranteed payment. The judge also said Scruggs would have to justify his potential $20-million legal fee that would be part of the settlement. He set Feb. 28 for a hearing on the proposal.

In comments Wednesday, State Farm executives complained the lawsuits were seeking to wrongly stretch the extent of the coverage the company offered. “Our policies are being reinterpreted after the fact to provide coverage that was never contemplated or paid for when the policies were written,” Engerman said.

State Farm said it had paid more than $1 billion in Katrina claims to 84,000 Mississippi homeowners.

peter.gosselin@latimes.com