State Farm Hit With Racketeering Suit Over Katrina Claims

A group of Mississippi Gulf Coast homeowners accuses State Farm and two of its vendors of racketeering by falsifying engineering reports, bullying experts and fabricating scientific data to cheat them out of nearly $4 million in coverage for Hurricane Katrina damage.

According to a lawsuit filed June 20 in a Mississippi federal court, State Farm conspired with an adjusting firm and an engineering company to make it appear that the damage to the plaintiffs' homes was caused by flooding rather than wind.

Wind damage was covered by the policies, but flooding and storm-surge damage were specifically excluded.

The lawsuit is the latest battle in an intensifying war between the Bloomington, Ill.-based insurance giant and prominent Mississippi attorney Richard "Dickie" Scruggs, whose Scruggs Katrina Group represents hundreds of policyholders with damage claims against their insurers.

Alabama-based adjuster E.A. Renfroe & Co. Inc., which contracted with State Farm to handle the insurer's Mississippi property claims, is a defendant in the lawsuit.

The other defendant vendor is Forensic Analysis & Engineering Corp., a North Carolina-based engineering firm hired by State Farm to inspect the properties.

The plaintiffs are 21 people whose homes were destroyed or substantially damaged when Hurricane Katrina struck Aug. 29, 2005.

The homeowners filed the lawsuit in the U.S. District Court for the Southern District of Mississippi.

In the 101-page complaint, they accuse State Farm and its vendors of violating the federal Racketeer Influenced and Corrupt Organizations Act, a law originally drafted to crack down on organized crime.

"[State Farm and its co-defendants] willfully caused victims of Hurricane Katrina extreme emotional and financial distress in their calculated strategy to falsify and conceal evidence, intimidate anyone who got in their way, and use their privileged position to pressure policyholders into accepting pitiful payments both before and during the mediation process," Scruggs Katrina Group attorney Don Barrett said in a statement June 20.

The homeowners allege that State Farm and its co-defendants:

• Threatened experts who disagreed with the mandated water-damage findings;
• Fired engineers who refused to cooperate in the scheme;
• Concealed information that favored the homeowners;
• Destroyed and altered reports;
• Instituted a new company policy to exclude all hurricane damage, including wind damage; and
• •Used their size and strength to intimidate policyholders through the mediation process.

  The complaint details a company-wide policy directing State Farm employees to automatically conclude that the Katrina damage to Gulf Coast policyholders' homes was caused primarily by flooding and storm surge.

  The plaintiffs say the scheme is essentially the same as one used by the insurer in Oklahoma to deny claims for damage from a 1999 tornado.

  In May 2006 a jury in that state ordered State Farm to pay $13 million in damages, including nearly $10 million in punitive damages, to an insured couple who were denied coverage for the destruction of their home by the tornado.

  The couple was among a class of 70 families that filed suit against the insurer over coverage denials. State Farm settled the class-action suit earlier this year.

  The plaintiffs in the latest suit allege that the key figures behind the Oklahoma claims process are the same ones who controlled the insurer's actions on the Gulf Coast following Katrina.

  The dispute between the Scruggs Katrina Group and State Farm grows more contentious every day.

  In January the insurer agreed with Mississippi Attorney General Jim Hood and lawyers for Gulf Coast homeowners, including Scruggs, to settle all the Mississippi Katrina-based litigation pending against the company for $80 million.

  State Farm also said it would pay $50 million to resolve the disputed claims of those who had not filed suit.

  The deal eventually fell through after Judge L.T. Senter of the U.S. District Court for the Southern District of Mississippi refused to sign off on a court-supervised mediation process for resolving the non-litigated claims.

  In March State Farm reached a deal with Mississippi Insurance Commissioner George Dale to re-evaluate all the nearly 35,000 Katrina damage claims filed by Gulf Coast policyholders.

  The Scruggs Katrina Group has consistently criticized the deal, calling it a "watered-down version" of the original settlement with no real protection for policyholders' rights. The original deal had included court oversight.

  The latest lawsuit comes less than a week after an Alabama federal judge asked prosecutors to file criminal contempt charges against Scruggs over his refusal to turn-over thousands of State Farm documents obtained from two whistle-blowing sisters formerly employed by Renfroe.

  State Farm spokesman Phil Supple described the lawsuit as an attempt by Scruggs to deflect the attention from the possible contempt charges.

  "This is Scruggs using one of the oldest tricks in the book," Supple said. "If attacked, deflect. As he said himself last summer, 'If you don't win it, spin it."

  To comment, ask questions or contribute articles, contact West.Andrews.Editor@Thomson.com.

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  Shows et al. v. State Farm Fire & Casualty Co. et al., No. 07 CV 00709, complaint filed (S.D. Miss., S. Div. June 20, 2007).
  Disaster Recovery Law Report
  Volume 02, Issue 01
  06/25/2007
  
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