January 12, 2007

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.