State Farm Insurance Cos. is suspending sales of any new commercial or homeowner policies in Mississippi starting Friday, citing in part a wave of litigation it has faced since Hurricane Katrina, a company official said Wednesday.
Mike Fernandez, vice president of public affairs for State Farm, said 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.”
Fernandez said the decision does not affect existing policies but the company is still assessing how many of the current policies in Mississippi will be renewed this year.
Fernandez said the action was not a direct response to any specific development in the litigation. That litigation has included a recent federal jury’s $2.5 million punitive damage award to a couple who sued State Farm for refusing to cover the 2005 hurricane’s storm surge damage to their Biloxi home.
U.S. District Judge L.T. Senter Jr. later reduced the award to $1 million, even though Senter said State Farm acted in a “grossly negligent way” by denying the claim filed by policyholders Norman and Genevieve Broussard.
“I view this decision as the inevitable outcome of the increased uncertainty and cost associated with the litigation that has developed post-Katrina,” said Robert Hartwig, vice president and chief economist for the Insurance Information Institute in New York, an industry-funded group.
The state’s courts and some state officials have created a “virtually impossible working environment for insurers,” he said.
Like the rest of the insurance industry, State Farm has been highly profitable over the past few years, despite hurricane payouts. State Farm recorded a net profit of $3.24 billion in 2005 on revenue of about $60 billion, down 39 percent from the $5.31 billion in net income for 2004. Last fall, Hartwig estimated that the industry would see record profits of $55 billion to $60 billion for 2006 when results are available later this year. Even in 2005, the year of Katrina, the industry made $43 billion.
The industry's performance in the wake of Katrina and other hurricanes, and the use of hurricane payouts as an excuse to jack up premiums and stop doing business in some areas has drawn fire from consumer groups. A report released last month by Americans for Insurance Reform blasted the industry’s "poor response to Hurricane Katrina" and found "a significant pattern of callousness, unfairness, and generally inept performance by many companies. In some cases, insurers’ conduct worsened the suffering of policyholders, many of whom were left hungry and homeless by the hurricane."
"They have overestimated their losses and vastly overpriced," J. Robert Hunter, the director of insurance at the Consumer Federation of American, told the New York Times.
Mississippi Insurance Commissioner George Dale said State Farm’s decision comes at a time in the recovery process when “it is becoming more vital than ever that policyholders in Mississippi have a viable and affordable insurance market.”
“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,” Dale said in a statement.
“It is my hope that by continuing to work with State Farm, they will at some time in the future reverse the decision,” Dale said.
Bob Trippel, State Farm senior vice president, said in a statement that the company would reassess the situation “when there’s more certainty” in the state’s business climate.
State Farm, the largest homeowners insurer in Mississippi with more than 30 percent of the market, has agreed to settle hundreds of lawsuits by policyholders and reopen and pay thousands of other disputed claims. The landmark deal is potentially worth hundreds of millions of dollars for Mississippi homeowners devastated by Katrina.
The company had written roughly 29,000 new homeowner policies in the Mississippi in 2006, while other companies were writing a smaller percentage of claims, Fernandez said.
The decision does not impact State Farm’s financial services, banking products or automobile coverage in the state. And Fernandez said Mississippi is the only state where his company has suspended writing new policies.
“The political and regulatory and legal environment in the other two states (hit by Katrina) — Louisiana and Alabama — is not the situation in Mississippi,” he said.
State Farm and other insurers say their homeowner policies cover damage from wind but not from water — and exclude damage that could have been caused by a combination of both, even if hurricane-force winds preceded a storm’s rising water. Hundreds of policyholders have challenged that claim, saying they are entitled to damages from storm surge.
“We don’t want to write new policies under a contract that they are calling into question,” Fernandez said.
The settlement reached last month calls for State Farm to pay about $80 million to more than 600 policyholders who sued the company for refusing to cover damage caused by Katrina on Aug. 29, 2005.
Senter later said he would not sign off on part of the agreement, a deal between State Farm 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.
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.
State Farm said earlier that it already has paid roughly $1.1 billion for about 84,000 property claims in Mississippi.