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Judge Nixes State Farm Katrina Settlement

State Farm and Richard Scruggs, the lead attorney for the homeowners, said they would amend the agreement to meet the judge's objections. Senter's ruling was "without prejudice," meaning a new settlement proposal may be submitted.

Mississippi Attorney General Jim Hood had also filed suit against State Farm but dropped his state court suit when State Farm agreed to the tentative federal court settlement. Hood had predicted the class action settlement would cost State Farm as much as $500 million.

Hood has also been pursuing a criminal investigation of State Farm, which he said he would drop when the class-action settlement is finalized.

Senter's objections included the complex claims procedure outlined in the settlement, which he said might be hard for the lay person to understand. He also raised an eyebrow at the $10 million to $20 million in attorney's fees included in the settlement.

Ever since the wind died down, controversy has swirled around insurers' approach to settling claims for homes destroyed by wind and water along the Gulf Coast. Hood has been sharply critical of insurers, who have vigorously defended their actions.

Homeowners policies cover wind damage but not flooding, which is covered by federal flood insurance.

Insurers rejected many claims filed by Gulf Coast homeowners, saying the homes were destroyed by flooding. But Hood and Scruggs -- whose own home was destroyed -- have argued that much of the damage was caused by wind-driven water and should be covered by homeowners' policies.

Scruggs is a noted trial lawyer who helped win $206 billion from the tobacco industry in 1998. His brother-in-law is Sen. Trent Lott (R-Miss.), who also lost his waterfront home in the storm.

In castigating Scruggs and the other attorneys for their fees in the State Farm case, Judge Senter said he could not determine how the fee was calculated.

"I have no evidence of any kind in the record which would allow me to determine what work class counsel has performed to earn even the substantial minimum fee set out in the proposed settlement agreement," Senter said.

Last week, Scruggs negotiated a separate settlement with other State Farm policyholders who had filed individual suits. The company agreed to pay $80 million to $89 million to settle with about 640 Scruggs clients.

Insurers Respond to Critics

In the most recent exchange over insurers' response to Katrina, USAA, which issues insurance to members of the U.S. military and their families, issued a statement replying to charges made by Hood, the Mississippi attorney general.

"When USAA adjusts claims in which there is both wind and flood damage, USAA pays for damage that was caused by wind ... Because flooding is not covered by homeowners policies, USAA encourages all of its members to seriously consider purchasing flood insurance," the company said.

To Hood's charge that a storm surge should be covered by homeowners policies, the company said: "This is not true."

"Storm surge is considered a flood by the United States Government, state governments, judges, and businesses -- as well as by insurance companies. For decades, damages caused by flood have not been covered by standard homeowners policies," USAA said in its statement.

The National Flood Insurance Program, administered by FEMA, pays for flood claims, including those caused by storm surge. In fact, FEMA has paid hundreds of millions of dollars in flood claims stemming from Hurricane Katrina storm surge, the company noted.

"For decades, state governments have approved the policy language excluding damage caused by flooding. In fact, the Mississippi Department of Insurance has approved the very language Attorney General Hood questions," USAA said.

USAA also rejected Hood's contention that it should settle a suit filed by Hood in light of the State Farm decisions, since it settles claims in a manner similar to State Farm.

In fact, USAA claimed, it adjusts claims differently from State Farm.

"USAA has -- from day one -- adjusted Hurricane Katrina claims responsibly, and we will continue to do so until every claim is closed," USAA said. "When USAA adjusts claims in which there is both wind and flood damage, USAA pays for damage that was caused by wind."

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