State Farm Not Acting as a

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State Farm Not Acting as a “Good Neighbor”? Woullard v. State Farm Fire & Casualty Co., No. 1:06cv1057 LTS-RHW (S.D. Miss. Jan. 26, 2007) Allyson L. Vaughn, 3L, University of Mississippi School of Law When Hurricane Katrina made landfall on August 29, 2005, it brought along a twenty-seven foot wall of water that crashed down on everything in its path, causing catastrophic damage along the Mississippi Gulf coast. Insurance companies, such as State Farm Fire and Casualty, maintained that their policies only covered wind damage, not damage resulting from the storm surge. The exclusion resulted in a controversy among home owners and their insurers and left thousands of Mississippians with insurance policies that do not compensate for the losses they suffered. Background State Farm insures more than one in five homes in the United States and in 2005 recorded a net profit of $3.24 billion.1 Because it controls such a substantial piece of the market, the media has focused its attention on the “Good Neighbor” brand during the wind-driven water controversy. From articles in national newspapers to debate on the floor of Congress, the water versus wind fight has resonated throughout the country and centered itself on the policies written by State Farm. The claim denials have not only resulted in media attention, but also in hundreds of lawsuits filed against the company. In Woullard v. State Farm, State Farm policyholders with insured property in Jackson, Harrison, and Hancock counties filed a motion in federal district court for class certification and for preliminary approval of a class action settlement. On January 26, 2007, United States District Judge L.T. Senter, Jr. denied the settlement agreement, which would have settled hundreds of lawsuits and reopened thousands of disputed claims resulting from the catastrophic impact of Hurricane Katrina. In the order, Judge Senter held that without additional information the proposed settlement did not clearly establish a “procedure that is fair, just, balanced or reasonable.”2 Settlement Agreement The “Woullard Settlement Agreement” (settlement) contained two main components. In the first component, State Farm agreed to pay 639 claimants an average of $125,000 each, totaling $80 million. This aspect of the settlement only applied to those suits filed by the Scruggs Law Firm involving homes that were completely lost to the storm, referred to as “slab cases.” This category includes United States Senator Trent Lott, who lost his home in Jackson County to the storm. It is unclear how this component of the agreement is affected by the order, as Judge Senter dealt exclusively with the other component; however, both State Farm representatives and Richard F. Scruggs agreed that the two elements are separate and the settlement procedures in the 639 cases would proceed.3 The second part of the settlement created an administrative process to reevaluate the denial of coverage for approximately 35,000 State Farm policyholders who live in Mississippi’s three coastal counties but did not file lawsuits against State Farm. In order to adequately address these disputes, the agreement creates a damage matrix to assist in distributing policy benefits. The matrix, the Mississippi Katrina Resolution Guideline Tool (MKRGT), divides the type of loss sustained by the proposed class members into five categories. The first category involves “slab cases” or “foundation only” cases and is defined as those cases involving the absence of a structure on the site of the insured property. Slab cases are guaranteed a minimum recovery. The other four categories are as follows: Total/Constructive Total (the damage to the insured structure is equal to or greater than 60 percent of the insured value), Severe (the damage to the insured structure is between 30 percent to 60 percent of the insured value), Moderate (the damage to the insured structure is between 10 percent and 30 percent of its insured value) and Minor (the damage to the insured structure is equal to or less than 10 percent of its insured value). Any property falling in these four categories is subject to maximum recovery but no minimum recovery requirements are set forth. The agreement called for a minimum of $50 million to be dispersed among these individuals with total costs estimated to reach around $500 - $600 million. Judge Senter’s order deals exclusively with this aspect of the settlement agreement. The court refused to accept this matrix as an adequate procedure because State Farm failed to present any information that new criteria had been established to reevaluate the claims of class members. It was the lack of detail in dispersing the funds that Judge Senter ultimately found the most problematic. “[T]here is no way I can ascertain how this sum compares to the total claims of the members of the proposed class. Nor can I fairly estimate, with even a minimum degree of accuracy, how thinly this large sum may be spread among the class members.”4 Judge Senter feared the payments from the matrix would be arbitrary and not fair and reasonable. He also found that the administrative process was too complex for the lay person and would require the assistance of legal counsel. The agreement set forth mandatory and binding arbitration for any disputes arising from the revaluation of claims. Judge Senter found this arbitration procedure needing revision because it provides no right of appeal, a two hour time limit, and the State Farm-trained arbitrator had the power to award less than the initial offer by State Farm yet State Farm presented no information to the court as to what training the arbitrator would receive and how State Farm would minimize their control over the claims resolution process. The settlement also contained provisions providing attorneys’ fees totaling $46 million. The fees were divided between the $26 million for settling the 639 lawsuits and $20 million for reopening the 35,000 claims. Judge Senter found no evidence to justify the payment for reopening the claims as the plaintiffs failed to provide information concerning the basis for calculation of the fee arrangement. A final element of the settlement involved Mississippi Attorney General Jim Hood agreeing to drop a criminal investigation into State Farm’s response to hurricane claims and the charge that the insurer fraudulently denied Katrina-related claims. A grand jury had been assembled and was hearing evidence only days before the settlement was announced.5 Certification of the Class In addition to rejecting the settlement agreement, the order also denies the plaintiffs’ motion to certify a class. In order for the district court to certify a group of plaintiffs as a class in federal court, the court must conduct a rigorous analysis to determine if all requirements of Federal Rule of Civil Procedure 23 are satisfied. The district court has great discretion in determining whether to certify a class. Rule 23(a) establishes four requirements: (1) numerosity, which requires a class so large that joinder of all members is impracticable; (2) commonality, which requires questions of law or fact to be common to the class; (3) typicality, which requires that the named parties’ claims or defenses are typical of the class; and (4) adequate representation, which ensures that the representatives will fairly and adequately protect the interests of the class. Judge Senter found that the plaintiffs failed to satisfy all of the Rule 23(a) requirements. “Neither the plaintiffs nor State Farm has given the Court any information from which the Court can determine with any reasonable degree of certainty how many policy holders are within the proposed class or how many policyholders have each of the eleven types of policies identified.”6 Thus, the plaintiffs failed to satisfy the numerosity requirement because the court requires a reasonable estimate of the number of purported class members. The court also found that the requirements of commonality, typicality and adequate representation were not satisfied because “[t]here is insufficient information to support a finding that the plaintiffs, who are presumably owners of a State Farm homeowners policy, have a claim that is substantially similar to claims under the other ten categories of policies covered by the proposed agreement.”7 However, in denying certification, Judge Senter invited the plaintiffs to request certification again and present sufficient evidence that satisfies the requirements of F.R.Civ.P. Rule 23. No New Policies What does this mean for State Farm and its presence in Mississippi? On February 14, 2007, State Farm announced that it would no longer sell new homeowner policies in Mississippi and would be assessing how many current policies to renew this year.8 Mike Fernandez, vice-president of public affairs for State Farm, said that State Farm cannot “write new policies under a contract that they are calling into question,” referring to the challenge by homeowners to their policy that storm surge is wind-driven water and should be covered by policies that cover wind damage.9 For now, Mississippians seeking to insure their homes from future storms will face increased obstacles. A New Deal During the weeks following the rejection of Scruggs’ settlement agreement, Mississippi Insurance Commissioner George Dale reached an out-of-court agreement with State Farm, and the Scruggs law firm removed its settlement agreement from court consideration. The new agreement appears very similar to the settlement agreement that was rejected in federal court but lacks some of the more controversial components.10 The agreement calls for mediation for homeowners, renters, and commercial entities in the three coastal counties of Mississippi. State Farm has agreed to pay no less than $50 million to settle claims, and there is no limit in the agreement on how much State Farm could spend. The new agreement takes the dispute between State Farm and a policy owner out of the court system. While the parties will likely avoid years of expensive and time-consuming litigation, they may lose the benefits of a judge’s review. Ideally, this new agreement will speed the rebuilding process as homeowners begin to receive financial assistance to move forward with life. Endnotes 1. Randy J. Maniloff, Looking Under the Hood of State Farm’s (Rejected, for Now) Mississippi Katrina Claims Settlement, The National Underwriter Company, January 29, 2007. 2. Woullard v. State Farm Fire & Casualty Co., No. 1:06cv1057 LTS-RHW (S.D. Miss. Jan. 26, 2007). 3. Joseph B. Treaster, Judge Puts Settlement on Katrina in Question, The N.Y. Times, January 27, 2007, available at http://nytimes.com/2007/01/27/business/27insure.html?ei=5070&en=d6af6e205a7ffab7&ei=5070 . 4. Woullard, at 6. 5. Michael Kunzelman, Ex-State Farm Adjusters Tell Miss. Grand Jury of Katrina Claims, The Associated Press, January 23, 2007, published at http://www.insurance - journal.com/news/southeast/2007/01/23/76104.htm . 6. Woullard, at 1. 7. Id. at 2. 8.MSNBC, State Farm: No new home policies in Miss., Insurer to also stop writing commercial coverage amid Katrina litigation, MSNBC.com, available at* http:/www.msnbc.com/id/17150886/ (February 14, 2007). 9. Id. 10. Emily Wagster Pettus, In Mississippi, Dale Moves In with State Farm Settlement as Scruggs Withdraws, Insurance Journal, March 21, 2007, available at http://www.insurancejournal.com/news/southeast/2007/03/21/77911.htm .
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State Farm Not Acting as a “Good Neighbor”?

Woullard v. State Farm Fire & Casualty Co., No. 1:06cv1057 LTS-RHW (S.D. Miss. Jan. 26, 2007)

Allyson L. Vaughn, 3L, University of Mississippi School of Law

When Hurricane Katrina made landfall on August 29, 2005, it brought along a twenty-seven foot wall of water that crashed down on everything in its path, causing catastrophic damage along the Mississippi Gulf coast. Insurance companies, such as State Farm Fire and Casualty, maintained that their policies only covered wind damage, not damage resulting from the storm surge. The exclusion resulted in a controversy among home owners and their insurers and left thousands of Mississippians with insurance policies that do not compensate for the losses they suffered.

Background
State Farm insures more than one in five homes in the United States and in 2005 recorded a net profit of $3.24 billion.1 Because it controls such a substantial piece of the market, the media has focused its attention on the “Good Neighbor” brand during the wind-driven water controversy. From articles in national newspapers to debate on the floor of Congress, the water versus wind fight has resonated throughout the country and centered itself on the policies written by State Farm.

The claim denials have not only resulted in media attention, but also in hundreds of lawsuits filed against the company. In Woullard v. State Farm, State Farm policyholders with insured property in Jackson, Harrison, and Hancock counties filed a motion in federal district court for class certification and for preliminary approval of a class action settlement.

On January 26, 2007, United States District Judge L.T. Senter, Jr. denied the settlement agreement, which would have settled hundreds of lawsuits and reopened thousands of disputed claims resulting from the catastrophic impact of Hurricane Katrina. In the order, Judge Senter held that without additional information the proposed settlement did not clearly establish a “procedure that is fair, just, balanced or reasonable.”2

Settlement Agreement
The “Woullard Settlement Agreement” (settlement) contained two main components. In the first component, State Farm agreed to pay 639 claimants an average of $125,000 each, totaling $80 million. This aspect of the settlement only applied to those suits filed by the Scruggs Law Firm involving homes that were completely lost to the storm, referred to as “slab cases.” This category includes United States Senator Trent Lott, who lost his home in Jackson County to the storm. It is unclear how this component of the agreement is affected by the order, as Judge Senter dealt exclusively with the other component; however, both State Farm representatives and Richard F. Scruggs agreed that the two elements are separate and the settlement procedures in the 639 cases would proceed.3

The second part of the settlement created an administrative process to reevaluate the denial of coverage for approximately 35,000 State Farm policyholders who live in Mississippi’s three coastal counties but did not file lawsuits against State Farm. In order to adequately address these disputes, the agreement creates a damage matrix to assist in distributing policy benefits.

The matrix, the Mississippi Katrina Resolution Guideline Tool (MKRGT), divides the type of loss sustained by the proposed class members into five categories. The first category involves “slab cases” or “foundation only” cases and is defined as those cases involving the absence of a structure on the site of the insured property. Slab cases are guaranteed a minimum recovery. The other four categories are as follows: Total/Constructive Total (the damage to the insured structure is equal to or greater than 60 percent of the insured value), Severe (the damage to the insured structure is between 30 percent to 60 percent of the insured value), Moderate (the damage to the insured structure is between 10 percent and 30 percent of its insured value) and Minor (the damage to the insured structure is equal to or less than 10 percent of its insured value). Any property falling in these four categories is subject to maximum recovery but no minimum recovery requirements are set forth. The agreement called for a minimum of $50 million to be dispersed among these individuals with total costs estimated to reach around $500 - $600 million. Judge Senter’s order deals exclusively with this aspect of the settlement agreement.

The court refused to accept this matrix as an adequate procedure because State Farm failed to present any information that new criteria had been established to reevaluate the claims of class members. It was the lack of detail in dispersing the funds that Judge Senter ultimately found the most problematic. “[T]here is no way I can ascertain how this sum compares to the total claims of the members of the proposed class. Nor can I fairly estimate, with even a minimum degree of accuracy, how thinly this large sum may be spread among the class members.”4 Judge Senter feared the payments from the matrix would be arbitrary and not fair and reasonable. He also found that the administrative process was too complex for the lay person and would require the assistance of legal counsel.

The agreement set forth mandatory and binding arbitration for any disputes arising from the revaluation of claims. Judge Senter found this arbitration procedure needing revision because it provides no right of appeal, a two hour time limit, and the State Farm-trained arbitrator had the power to award less than the initial offer by State Farm yet State Farm presented no information to the court as to what training the arbitrator would receive and how State Farm would minimize their control over the claims resolution process.

The settlement also contained provisions providing attorneys’ fees totaling $46 million. The fees were divided between the $26 million for settling the 639 lawsuits and $20 million for reopening the 35,000 claims. Judge Senter found no evidence to justify the payment for reopening the claims as the plaintiffs failed to provide information concerning the basis for calculation of the fee arrangement.

A final element of the settlement involved Mississippi Attorney General Jim Hood agreeing to drop a criminal investigation into State Farm’s response to hurricane claims and the charge that the insurer fraudulently denied Katrina-related claims. A grand jury had been assembled and was hearing evidence only days before the settlement was announced.5

Certification of the Class
In addition to rejecting the settlement agreement, the order also denies the plaintiffs’ motion to certify a class. In order for the district court to certify a group of plaintiffs as a class in federal court, the court must conduct a rigorous analysis to determine if all requirements of Federal Rule of Civil Procedure 23 are satisfied. The district court has great discretion in determining whether to certify a class. Rule 23(a) establishes four requirements: (1) numerosity, which requires a class so large that joinder of all members is impracticable; (2) commonality, which requires questions of law or fact to be common to the class; (3) typicality, which requires that the named parties’ claims or defenses are typical of the class; and (4) adequate representation, which ensures that the representatives will fairly and adequately protect the interests of the class.

Judge Senter found that the plaintiffs failed to satisfy all of the Rule 23(a) requirements. “Neither the plaintiffs nor State Farm has given the Court any information from which the Court can determine with any reasonable degree of certainty how many policy holders are within the proposed class or how many policyholders have each of the eleven types of policies identified.”6 Thus, the plaintiffs failed to satisfy the numerosity requirement because the court requires a reasonable estimate of the number of purported class members. The court also found that the requirements of commonality, typicality and adequate representation were not satisfied because “[t]here is insufficient information to support a finding that the plaintiffs, who are presumably owners of a State Farm homeowners policy, have a claim that is substantially similar to claims under the other ten categories of policies covered by the proposed agreement.”7 However, in denying certification, Judge Senter invited the plaintiffs to request certification again and present sufficient evidence that satisfies the requirements of F.R.Civ.P. Rule 23.

No New Policies
What does this mean for State Farm and its presence in Mississippi? On February 14, 2007, State Farm announced that it would no longer sell new homeowner policies in Mississippi and would be assessing how many current policies to renew this year.8 Mike Fernandez, vice-president of public affairs for State Farm, said that State Farm cannot “write new policies under a contract that they are calling into question,” referring to the challenge by homeowners to their policy that storm surge is wind-driven water and should be covered by policies that cover wind damage.9 For now, Mississippians seeking to insure their homes from future storms will face increased obstacles.

A New Deal
During the weeks following the rejection of Scruggs’ settlement agreement, Mississippi Insurance Commissioner George Dale reached an out-of-court agreement with State Farm, and the Scruggs law firm removed its settlement agreement from court consideration. The new agreement appears very similar to the settlement agreement that was rejected in federal court but lacks some of the more controversial components.10 The agreement calls for mediation for homeowners, renters, and commercial entities in the three coastal counties of Mississippi. State Farm has agreed to pay no less than $50 million to settle claims, and there is no limit in the agreement on how much State Farm could spend.

The new agreement takes the dispute between State Farm and a policy owner out of the court system. While the parties will likely avoid years of expensive and time-consuming litigation, they may lose the benefits of a judge’s review. Ideally, this new agreement will speed the rebuilding process as homeowners begin to receive financial assistance to move forward with life.

Endnotes
1. Randy J. Maniloff, Looking Under the Hood of State Farm’s (Rejected, for Now) Mississippi Katrina Claims Settlement, The National Underwriter Company, January 29, 2007.
2. Woullard v. State Farm Fire & Casualty Co., No. 1:06cv1057 LTS-RHW (S.D. Miss. Jan. 26, 2007).
3. Joseph B. Treaster, Judge Puts Settlement on Katrina in Question, The N.Y. Times, January 27, 2007, available at http://nytimes.com/2007/01/27/business/27insure.html?ei=5070&en=d6af6e205a7ffab7&ei=5070 .
4. Woullard, at *6.
5. Michael Kunzelman, Ex-State Farm Adjusters Tell Miss. Grand Jury of Katrina Claims, The Associated Press, January 23, 2007, published at http://www.insurance - journal.com/news/southeast/2007/01/23/76104.htm .
6. Woullard, at *1.
7. Id. at *2.
8.MSNBC, State Farm: No new home policies in Miss., Insurer to also stop writing commercial coverage amid Katrina litigation, MSNBC.com, available at http:/www.msnbc.com/id/17150886/ (February 14, 2007).
9. Id.
10. Emily Wagster Pettus, In Mississippi, Dale Moves In with State Farm Settlement as Scruggs Withdraws, Insurance Journal, March 21, 2007, available at http://www.insurancejournal.com/news/southeast/2007/03/21/77911.htm .