Miss. Commissioner, AG Upset Over State Farm Cutback

Mississippi officials are concerned about the effect State Farm’s decision to curtail its insurance writings will have on rebuilding efforts and remaining insurance markets.

State Farm, Mississippi’s largest insurer, announced this week that it will stop writing new homeowners and commercial property insurance throughout Mississippi.

State Farm Senior Vice President Bob Trippel advised Mississippi Commissioner of Insurance George Dale of the plans on Monday. “We came to this decision reluctantly. But it is no longer prudent for us to take on additional risk in a legal and business environment that is becoming more unpredictable. When there’s more certainty, we will reassess the situation,” said Trippel.

State Farm cited legal problems as one of the reasons for its decision. The company is concerned that its insurance policies are being reinterpreted after the fact to provide for coverages that were not contemplated when the policies were written.

The insurer was recently assessed $1 million in punitive damages (reduced from a $2.5 million jury award) in a case involving its handling of a Hurricane Katrina claim for the Broussard family. The federal judge in that case has said he would consider whether this ruling should open the door for a class action by other State Farm policyholders.

Also, in separate settlements last month, State Farm agreed to pay about $80 million to end lawsuits filed by 640 policyholders and to pay an additional $50 million to reconsider claims of up to 35,000 additional policyholders. Some details of these settlements are still being worked out.

Dale said the State Farm decision confirmed one of his fears.

“This has been a concern of mine since the day Katrina made landfall,” Dale said. “State Farm’s decision is a stark reminder that the issues brought about by Hurricane Katrina affect not only the coast, but policyholders all across the state.

“I regret that State Farm has chosen to make this decision at a time in the state’s Hurricane Katrina recovery process when it is becoming more vital than ever that policyholders in Mississippi have a viable and affordable insurance market.”

Dale, who recently announced he will run for reelection, said he is hopeful that State Farm will reverse its decision “some time in the future.”

The elected commissioner also urged state lawmakers to act now to fix the state’s wind pool in order to keep other insurers from leaving because of its rising assessments. “State Farm’s actions clearly illustrate the importance of passing the wind pool legislation I sent to the Legislature in order to help stabilize a volatile insurance market and prevent other companies from making similar decisions,” Dale said.

The State Farm decision also did not sit well with another of the state’s politicians who has been heavily involved in helping Katrina claimants.

State Attorney General Jim Hood blasted State Farm, maintaining that by delaying legal proceedings and not paying settlements in a timely manner, the insurer created and profited from the very legal environment it now seeks to escape.

“They’re trying to nickel and dime the state judge now,” Hood said in reference to the Broussard ruling. “Two million dollars to a company that makes $3.9 billion in a year is nothing.”

Hood said one of the main reasons for reaching a settlement over other State Farm claims was to keep the insurer in Mississippi, “because they have 25 percent of the insurance market on our coast.” He said he had hoped that the settlement would help to stabilize the market and provide a shot in the arm for rebuilding efforts.

“They (State Farm) have been dragging this out for 15 months – more than that – and hoping people will just go away,” Hood said. “I’m disappointed but not surprised.”

According to Hood, State Farm “oversold itself on the coast” and couldn’t pay claims based on the rates it charged. He reeled at the earnings he said State Farm reported for 2005. “It’s unfortunate that in the most catastrophic year in U.S. history, they increased their profits by $3.9 billion up to a net worth of over $50 billion – unbelievable!” Hood said.

Hood likened the situation to “being in a death roll with an alligator” and said he hopes it leads to federal indictments and “true national insurance reform.”

State Farm currently insures 30.3 percent of the homeowners market in Mississippi (according to 2005 data from A.M. Best). The company actually grew its business in Mississippi in 2006, writing over 29,000 new homeowners policies and more than 76,000 new auto policies.

“We will continue to serve our existing policyholders, write new auto insurance policies and market our financial services products as long as market conditions allow, but the current legal and business environments with regard to homeowners and commercial insurance are becoming untenable,” Trippel said.

In the Broussard case, State Farm denied the family’s claim by insisting that all the damage was caused by storm surge. State Farm has said its homeowner policies cover damage from wind but not from water, and that the policies exclude damage that could have been caused by a combination of both, even if hurricane-force winds preceded a storm’s rising water.

However, the judge ruled that State Farm couldn’t prove that Katrina’s storm surge was responsible for all of the damage to the Broussards’ home. The judge also said the testimony failed to establish how much damage was caused by wind and how much resulted from storm surge.

In an interview with Insurance Journal, State Farm spokesman Fraser Engerman defended the insurer’s claims handling. “We have honored the terms of the contract and we’re proud of our commitment. We put over $1 billion back into the state,” he said.

Engerman said the company did make a profit in 2005. “That shows that we are financially strong and that is good for our customers,” he maintained. “A company that is financially and fiscally strong is a company that is looking out for the policyholders.”

Sources: State Farm
Mississippi Attorney General
Mississippi Insurance Department