Wednesday, February 14, 2007

"Hurricanes can be insured against--but litigation can't..."

State Farm: No more Mississippi home policies

Leading home insurer says it can't take on any more risk in the state as it works to resolve a legal battle over Katrina.

February 14 2007: 3:17 PM EST

NEW YORK (Reuters) -- State Farm Mutual Automobile Insurance Co. will stop writing new homeowner and commercial insurance in Mississippi following a legal battle over damage claims there from 2005's Hurricane Katrina.

"It is no longer prudent for us to take on additional risk in a legal and business environment that is becoming more unpredictable," Bob Trippel, senior vice president of the largest home insurer in the United States, said in a statement.

State Farm joins other insurers - among them Allstate Corp. (up $0.90 to $62.10, Charts), State Farm's biggest national competitor - that have also cut back in coastal areas. The others include American International Group (Charts), the world's largest insurer, and Nationwide Mutual, the parent company of Nationwide Financial Services Inc. (up $0.24 to $54.13, Charts).

One industry expert said the avalanche of legal claims State Farm has faced following a controversy over whether homes were devastated by floods, for which they weren't insured, or wind damage, for which they were, may have been the deciding factor.

"Hurricanes can be insured against, but litigation can't," said Robert Hartwig, head of the Insurance Information Institute, which provides insurance statistics. "Those costs are extremely high."

State Farm currently insures more than 30 percent of the homeowners in Mississippi. It said it would continue to serve current policyholders and write new auto insurance business. But it left open the possibility of nonrenewals if the situation got worse.

"Current legal and business environments ... are becoming untenable," said Trippel in a letter to Mississippi Insurance Commissioner George Dale.

Dale could not immediately be reached for comment.

State Farm is facing hundreds of suits by Mississippi Gulf Coast homeowners whose homes were damaged or destroyed by Hurricane Katrina. At $38 billion, Hurricane Katrina was the most costly storm in U.S. history.

Wind or water

Led by plaintiffs' attorney Richard Scruggs and Mississippi Attorney General Jim Hood, the homeowners argue that insurers should pay the claims when it is not clear whether winds or floods caused the destruction.

State Farm and other carriers say they only insure against wind damage, while water damage is covered under a federal flood insurance program.

In January, U.S. District Court Judge L.T. Senter agreed with the homeowner in one case. State Farm then settled with a thousand Mississippi homeowners. The class action settlement would have a potential cost of between $50 million and $500 million for the insurer.

But Judge Senter turned down the settlement, creating further uncertainty for State Farm, which has more than 74 million policies in North America.

Attorney General Hood had launched a criminal grand jury investigation of State Farm but dropped it after the class action settlement. He could not be reached for comment on the State Farm announcement. Scruggs, who represents many of the Mississippi plaintiffs, also could not be reached.

State Farm said it had already handled over 84,000 non-auto property claims in Mississippi that resulted from Katrina, and already paid in excess of $1 billion in damages there. It said fewer than 2 percent of its Katrina claims remain unsettled.

Allstate has been the most aggressive in getting out of coastal areas and has declined to renew homeowners as far north as Connecticut.

Florida, the state hardest hit by hurricanes, has passed legislation and regulations that prohibit insurers from leaving the state and increase the size of its own state-run insurance company.

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