Judge Denies State Farm Motion to Dismiss Miss. Lawsuit

A federal judge has denied State Farm Fire and Casualty Co.’s request to dismiss a lawsuit against the insurer because the policyholders received an emergency Small Business Administration loan to help rebuild their Waveland, Miss. home after Hurricane Katrina.

State Farm, based in Bloomington, Ill., has argued that cases against the company should be dismissed where SBA loans apply because the policyholders have assigned future insurance proceeds to the SBA in exchange for low-interest loans to rebuild.

U.S. District Judge L. T. Senter, in denying the motion, said he was “at a loss to understand” State Farm’s argument, according to a www.sunherald.com article.

“I find no merit in State Farm’s contention that the assignment of these insurance proceeds deprives the plaintiffs, the named insureds, of standing to pursue a claim under the homeowners insurance policy,” Senter said in the order.

Senter said the policyholders, Mark and Deborah Buchanan, have a right to pursue the lawsuit and a separate obligation to repay the SBA any amount owed from insurance proceeds collected. The SBA loan assignment did not appear to entitle the agency to any punitive damages that could be awarded if the insurance claim was denied in bad faith, he said.

The SBA loan is in part secured by any future insurance proceeds, so the policyholders would be in a “Catch-22” if they were not allowed to try to collect the money, the judge said.

State Farm representatives have contended that the company simply wanted to clarify to whom any money would be owed so duplicate payments could be avoided.

The company asked that the SBA be named as a party to the lawsuit if Senter denied the motion to dismiss the case. Senter rejected the request, saying the SBA has no interest in the insurance policy beyond any proceeds it might be owed. The SBA’s right to be repaid, he wrote, is “unchallenged.”

SBA also issued a statement saying the assignment of insurance proceeds is not an assignment of the right to sue and any payment to policyholders would benefit the SBA by reducing the policyholders’ debt.