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Defend your rights, lose, pay punitives

We don't (alas) have a general "loser pays" rule in American tort law. But if you're a corporation, especially an insurer, and you are a defendant, and you lose a tort suit, sometimes we have a "loser REALLY pays" rule. In this Mississippi case (here's the Baltimore Sun summary), State Farm used its "flood exclusion" clause to refuse to pay for a home lost in Hurricane Katrina. The federal judge (taking this issue from the jury, interestingly) found State Farm liable (the issue in these cases is often whether a house was lost due to wind or to water -- a fine issue often involving conflicting expert testimony). State Farm had its experts, and though I have not read the trial transcript (and so am a bit tentative here) it's pretty hard to see how $2.5 million in punitives (right at the multiplier limit established by the Supreme Court in another case involving State Farm) are merited when a bona fide defense can be made.

In the Broussard case, plaintiffs said a tornado (covered by the policy) had destroyed their home before the floods of Katrina (not covered) hit. State Farm disagreed. [Note that the policy excludes combinations of water and wind, though Judge Senter has found that clause ambiguous (Sep. 7 and links therein).]

The plaintiff's attorney, in his closing argument Thursday, said State Farm had breached their contract "in a bad way" by denying the Broussards' claim. State Farm "acted like a chiseler," he said, adding, "The pocketbook is what they listen to."

Is a corporation supposed to minimize income? Is an insurer supposed to maximize future premium increases?

Earlier POL Katrina coverage.



Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.