updated 1/26/2007 7:05:37 PM ET 2007-01-27T00:05:37

A federal judge in Mississippi on Friday refused to endorse part of a proposed settlement that calls for insurance payments to thousands of Mississippi policyholders whose homes were destroyed or damaged by Hurricane Katrina.

U.S. District Judge L.T. Senter Jr. would not sign off on a deal between State Farm Fire & Casualty Co. and Mississippi Attorney General Jim Hood for at least $50 million in payments to policyholders whose claims were denied but didn’t sue the company.

The Bloomington, Ill.-based insurer also had agreed to pay about $80 million to more than 600 policyholders who sued the company for refusing to cover damage from the Aug. 29, 2005, storm. Senter hasn’t been asked to sign off on that part of the deal.

Senter said he doesn’t have enough information to determine how many policyholders would benefit from the deal or how much each can be paid.

“In the absence of substantially more information than I now have before me, I am unable to say, even preliminarily, that the proposed settlement establishes a procedure that is fair, just, balanced or reasonable,” he wrote.

Senter rejected the settlement “without prejudice,” allowing lawyers to present a new agreement that satisfies his concerns.

State Farm spokesman Phil Supple said the company looks forward to “addressing Judge Senter’s concerns,” adding, “We believe, given the opportunity, he will come to view the proposed settlement as fair, just, balanced and reasonable.”

Hood, in a written statement, said State Farm and plaintiffs’ lawyers were responsible for negotiating the terms of the “class action” portion of the settlement. Hood added that he had “reservations” about that part of the deal.

“Nevertheless, I knew that Judge Senter would make sure that the class was a fair procedure for all,” he added. “I am confident that Judge Senter will make the plaintiffs and State Farm fix the problems he has raised in his order.”

Richard “Dickie” Scruggs, a lawyer for the 639 policyholders who have settled their lawsuits with State Farm, said Senter’s ruling shouldn’t have any affect on the company’s settlements with his clients. Scruggs said he expects to begin making payments to his clients next week.

“Case by case, litigation over many years is in nobody’s best interest,” Scruggs said. “It’s our hope that we can quickly address the judge’s concerns.”

In his eight-page ruling Friday, Senter said that although State Farm has agreed to pay $50 million to policyholders who qualify for the class action portion of the settlement, he can’t determine “how thinly this large sum may be spread among the class members.”

Senter also expressed concern about a lack of any “guaranteed” payments to policyholders whose homes weren’t completely destroyed and said he is “uncomfortable” with allowing many cases to be settled by binding arbitration “when none of these individuals has ever agreed to participate in that procedure.”

Mississippi’s mass settlement agreement didn’t involve any claims in other states.

Lawyers involved in the agreement presented the “class action” portion of the deal to Senter on Tuesday afternoon.

That part of the agreement would require State Farm to reopen and review claims filed by roughly 35,000 policyholders who live in Mississippi’s three coastal counties but didn’t file lawsuits against State Farm.

After reviewing those claims, the company would be required to make new offers. Any disputes would be heard by an arbitrator whose decision would be binding.

The accord came less than two weeks after a federal jury in Gulfport awarded $2.5 million in punitive damages to a couple who sued State Farm for denying their claim after Katrina. Senter took part of that case out of jurors’ hands, ruling that State Farm is liable for $223,292 in storm damage to the Biloxi home of Norman and Genevieve Broussard.

Senter is the only federal judge in Mississippi who has been presiding over the hundreds of lawsuits that policyholders filed against State Farm and other insurers.

In the first trial for a Katrina insurance case, Senter ruled in August that Nationwide Mutual Insurance Co.’s homeowner policies cover damage from wind but not storm surge. He also has ordered dozens of policyholders who sued their insurers to participate in an experimental mediation program.

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