Good Neighbor?

State Farm has finally seen the light. Hundreds of Mississippi policyholders sued State Farm after the insurer partially or fully refused to pay claims following hurricane Katrina. Two weeks ago, one of those policyholders won his case in federal court, and was awarded $2.5 million on top of the funds required to pay for the destroyed house.

Today, State Farm entered into an agreement with the attorney general of Mississippi to resolve the many outstanding claims. The Reuters article linked here is somewhat misleading, however. The writer says that State Farm has agreed to "resolve" the hundreds of pending claims. In this instance, "resolve" does not mean that State Farm is going to pay every claim. Those insureds that have already sued will receive settlements averaging about $125,000 per claimant. However, for those insureds who have not already sued, it appears that under the terms of the agreement, State Farm will re-examine each claim, and if the policyholders disagree with State Farm's conclusions, they may submit the matter to binding arbitration.

Although State Farm will surely hear about the lawsuit victory from every insured, the effect of that judgment has been significantly blunted. State Farm gains at least one very important concession by this agreement: no claim may be brought into court, which is an inherent characteristic of binding arbitration (absent very unusual circumstances). Also, although I am not privy to the terms of the agreement, I suspect that the only issues that may be arbitrated are those pertaining to the substance of the claim itself, and that State Farm's claims handling practices are no longer part of the equation. If this is so, State Farm has also now insulated itself from claims of bad faith claims handling, which is the foundation for punitive damages awards. That's a good day for State Farm, for both PR and the bottom line.