The Mississippi coast remains a disaster from Hurricane Katrina. Debris sits, and rebuilding proceeds slowly. Efforts are complicated by a lack of sufficient housing. Residents are leaving, and employers are closing. FEMA’s response and “Brownie’s great job” are well-known and need not be critiqued further here.
Against this backdrop, three protagonists are ready to brawl. In one corner are the policyholders, their attorneys and Mississippi Attorney General Jim Hood. Using adverse publicity, a bully pulpit and litigation, they have attempted to pressure insurers into covering flood damage. Their legal arguments have been that the flood exclusions are void and unenforceable or, alternatively, that a “storm surge” is not a “flood.” Their efforts have not succeeded. The insurers have stood firm, asking federal courts in Mississippi to enforce policy language as written and have had some success. The leading federal judge in these cases is L.T. Senter, Jr. of the Southern District of Mississippi. Judge Senter has now become something of a protagonist himself. Let us first review some of Judge Senter’s recent decisions.
In Leonard v. Nationwide Mutual Ins. Co., 438 F. Supp. 2d 684 (S.D. Miss. August 15, 2006), Judge Senter held that a storm surge is a specie of “flood” and, therefore, is excluded from coverage under a typical homeowner’s policy. Judge Senter also held that, anti-concurrent loss clause notwithstanding, actual losses from wind must be covered even if the property also sustained flood damage. The finder of fact would identify and value losses caused by wind versus flood. This decision was consistent with Mississippi law and kept a broadly worded concurrent cause clause from eviscerating coverage in the policy.
The practical result is that a jury (judge in a bench trial) must allocate wind loss and flood loss. Given the wide range of expert opinions available on the subject, insurers took limited comfort from his decision. However, Judge Senter acted as the trier of fact in the Leonard case and found that only slightly over $1,000 in damage was caused by wind.
In Sima/Signature Lake, L.P. v. Certain Underwriters at Lloyd’s London, Case No. 1:06CV186 (S.D. Miss. December 6, 2006), a commercial real estate developer had separate wind and flood policies. After the developer recovered the limits under the flood policies, it demanded payment under the wind policies. The insurer argued that, under the wind policies’ proration clause, the developer’s losses must be prorated based on the limits of the respective policies. In granting the developer’s motions for partial summary judgment, Judge Senter rejected the insurer’s proration argument, holding that the jury was free to determine the value of the losses caused by wind, except (a) that the developer could not obtain a duplicative recovery and (b) that the property values on the developer’s insurance applications would be admissible, but not dispositive, evidence of the total value of loss. [FULL DISCLOSURE: THIS LAW FIRM REPRESENTED THE DEVELOPER IN THAT CASE].
This part of Judge Senter’s legal approach makes sense. He has upheld the flood exclusion and rejected fictitious distinctions between “flood,” on the one hand, and “storm surge,” on the other. Conversely, he has refused to allow an insurer to seize upon a smidget of flood damage to avoid any liability for wind damage. The danger in Judge Senter’s approach is that, given the vagaries of expert witness testimony, a jury may be swayed by sympathy rather than focus on the causation inquiry. Strict control by the trial judge is necessary to avoid this problem.
On the other hand, Judge Senter recently upheld a jury’s punitive award against State Farm, albeit reducing it to $1 million, finding that State Farm had acted in a grossly negligent way in adjusting a homeowner’s claim. Broussard v. State Farm Fire and Casualty Co., Case No. 1:06cv6 (S.D.Miss., January 31, 2007). According to Judge Senter, State Farm impermissibly placed the burden on the policyholder to prove the amount of damage properly apportioned to wind. The decision is troubling, since the anti-concurrent clause issue has not yet been decided by an appellate court. (That issue is now before the Fifth Circuit). In any event, regardless of the merits of Judge Senter’s decision, it is unlikely to comfort insurers ensnared in federal court in Mississippi.
While enjoying limited success in the courts, Mr. Hood and policyholder counsel have used the media in an attempt to embarrass and shame insurers into covering flood damage. Thus far, insurers have resisted these efforts. As stated by Robert P. Hartwig of the Insurance Information Institute, “Fundamentally, what is happening is that insurers are being forced to pay hundreds of millions, if not ultimately billions, in excluded flood losses – a type of loss for which insurers have never collected a penny in premiums.”
In an effort to resolve these issues, State Farm and attorney Richard Scruggs (on behalf of his clients) submitted to Judge Senter a request for class certification and a proposed class settlement. The proposed settlement included the following:
- A minimal $50 million settlement fund;
- A minimum payment to those policyholders with only a slab remaining of their improvements, but no minimum payment to those with lesser damage;
- Binding arbitration of disputed claims before arbitrators paid by State Farm, with the length of the hearing not to exceed two hours and with no right of appeal;
- A cap equal to the difference between the policy limit under the wind policy and amounts collected under a flood policy;
- Release of State Farm and all its agents and representatives; and
- A payment of $10 million or $20 million to the class attorneys.
Judge Senter denied the request to approve the settlement, holding that he did not see the settlement as beneficial to policyholders. He specifically cited the following:
- The court could not determine the fairness of the $50 million fund, because the parties did not show the total number of class claims or how thinly the fund would be spread among class members;
- The court was not comfortable that class counsel had earned the minimum $10 million fee;
- Limiting State Farm’s liability to the difference between the policy’s limits and any flood recovery abrogated the policyholder’s legal rights without any compensation. See Sima/Signature Lake, supra;
- The arbitration process did not appear fair or to require compliance with past court decisions. “I will certainly never approve of any procedure that does not honor the decisions of both state and federal courts on relevant points of law;” and
- The opt-out process was so convoluted as to stifle opt-outs.
In a letter to counsel in all Katrina cases, dated February 2, 2007, he explained his rejection and requested ideas. He noted that 150 cases were set for trial in 2007 and that other judges could assist in trying the cases.
Mr. Hood, who previously lauded the proposed settlement, then distanced himself: “Our office did not negotiate the terms of the proposed federal court class action. In fact, our office had reservations about some of the terms of the class agreed to by plaintiffs and State Farm.”
On February 14, 2007, State Farm announced that it would not write new policies in Mississippi, citing the uncertainty engendered by massive litigation. State Farm stated that Mississippi’s “current legal and political environment is simply untenable. We’re just not in a position to accept any additional risk in this homeowners’ market.”
In a remarkable litigation tactic, plaintiffs’ counsel also criticized Judge Senter, expressing regret that State Farm would not write new policies for homeowners, adding that “the [t]he balanced settlement we presented to Judge Senter could have prevented this and started sizable checks flowing to thousands of Mississippi Gulf Coast families by summer. At this point in time, the Judge chose to block the agreement.” Mr. Scruggs also attacked State Farm: “State Farm’s extreme reaction could surely hinder the Coasts’ recovery and jeopardize new home mortgages throughout Mississippi . . . Our legal team will continue to pursue this balanced resolution to head off an all-out economic war for out state. It’s time for everyone to take a deep breath and think through the consequences of their actions.” His sensible sentiments apply at least as forcefully to him and the homeowners’ assault team as to State Farm.
In a subsequent statement on February 16, 2007, Mr. Hood decried State Farm’s alleged “bullying tactics” and proposed legislation to force State Farm to write new homeowner’s policies. He characterized his proposal as looking the “robber barons in the face.”
In a response, State Farm cited Mr. Hood’s statement and proposal as illustrating “the legal and political challenge we face in Mississippi.” Governor Haley Barbour declined Mr. Hood’s suggestion that Mr. Hood’s proposal be enacted by executive order pending legislative action. “I have no authority to force a private company to sell its products in the state of Mississippi,” said Mr. Barbour. Governor Barbour previously has criticized Mr. Hood’s lawsuits against insurers.
In a welcome display of deliberation, Mississippi’s Insurance Department reacted cautiously to Mr. Hood’s proposal, noting that Florida had passed similar legislation and that “we’re seeing [insurance] companies leave Florida daily.” “We must proceed cautiously and not jeopardize an already fragile insurance market.”
State Farm also has attacked the judicial system more directly by filing a separate suit seeking to disqualify a law clerk for Judge Senter from hearing any more Katrina damage suits against State Farm. State Farm alleges that, because the clerk had brought a Katrina-related lawsuit against Allstate (later settled), he appeared to have a bias against insurers generally in Katrina cases. According to State Farm, the clerk unduly influenced Judge Senter in his rulings in the Broussard case.
The efficacy of State Farm’s strategy is debatable. Even if State Farm’s attack on the law clerk is successful, Judge Senter himself would not necessarily be disqualified from hearing State Farm cases. At press time, State Farm's separate motion to disqualify Judge Senter had been denied.
My column previously has railed against class action settlements that benefit primarily the lawyers and has lauded judges that block such settlements. Judge Senter is determined that a settlement benefit more than the attorneys. On the other hand, State Farm is understandably skeptical as to whether it will receive impartial trials in coastal Mississippi. TheBroussard decision seems to have opened the punitive floodgates.
Much remains uncertain. It is unclear whether the settlement can be structured in a way to satisfy Mr. Scruggs, State Farm and Judge Senter.
Lewis Hassett is a partner in the firm’s litigation group and chairs the firm’s insurance and reinsurance dispute resolution group. His practice concentrates in the areas of complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies. Lew received his bachelor’s degree from the University of Miami and his law degree from the University of Virginia.
