When Good Neighbors Go Bad -- The State Of Mississippi Versus State Farm

MayorBob.

Posted to Business on Tue Feb 20, 2007 at 08:29:28 AM EST (promoted by port1080). RSS.

State Farm Insurance is one of the biggest insurance companies in the US.  It was founded in 1922 as a mutual auto insurer (meaning the company was owned by its policy holders) in Illinois.  It is now an enterprise providing all sorts of insurance -- including homeowners insurance -- and has branched out into the world of financial services.  It earns over (US)$56 billion annually by servicing 71.6 million policies through close to 17,000 agents backed up by over 79,000 employees.  But, in 2005 an ill wind named Katrina blew into State Farm's path and, as a result, it looks like Mississippi is declaring war on State Farm.

The troubles between Mississippi and the insurance giant came when State Farm insisted on sticking to what it said its policies covered; damages from high winds would be covered while damages from flooding as a result of the storm surge would not.  According to State Farm, the company reacted heroically (pdf doc) to property loss claims of Mississippian policy holders.  According to any number of policy holders, the company isn't using the same dictionary the rest of us use to define "heroically."  A number of powerful and politically influential policy holders threatened to punish the entire insurance industry by removing its antitrust protection.  Another set of policy holders took State Farm to court and won.  In spite of threats to fight on through appeals court, State Farm and Mississippi settled a the matter which was to result in hundreds of millions of dollars going to Mississippians who were damaged by Katrina.  The agreement also ended the possibility of State Farm facing criminal charges brought by the state.  Within a month, a federal judge overruled the settlement and State Farm dropped its other foot in the matter of insurance coverage in Mississippi.  It announced it was now and henceforth out of the homeowner and commercial insurance market in Mississippi.

Considering that State Farm held 30 percent of the homeowner and 8.5 percent of the commercial policies in the state, the decision does leave a hole which the state will be hard pressed to fill in.  In response to the company's decision, Mississippi Attorney General Jim Hood called State Farm "robber barons" and said, "any company that writes automobile insurance and also writes homeowners in any other state would be required to write or make available insurance for homeowners and commercial properties in all parts of the state."  Which means the Mississippi Attorney General will move to leave 80 percent of Mississippi's motorists without insurance coverage.  Ted Frank, a legal observer, sides with State Farm on this, saying the state is blithely neglecting to realize that feeding its "malarial litigation climate" it is forcing a business to make a business decision with serious social consequences.  Walter Olson, another legal observer, warns of a "legal disaster" following in the wake of a "natural disaster."