KATRINA: State Farm refusing appraisal, despite its own policy language

State Farm Fire and Casualty Co. refuses to engage in the appraisal process to resolve Hurricane Katrina claims, even though its own policy mandates appraisal on demand when the amount of an insured loss is in dispute.

Instead, records show, the company is urging policyholders to settle disputes through a mediation program sponsored by the Mississippi Department of Insurance and funded by insurers.

Two attorneys, one who was personally denied appraisal and another whose clients have been turned down, think they know why.

"State Farm is just plundering and victimizing its policyholders in the mediation process," said Ocean Springs attorney Earl Denham. "That's why they're doing this. If you get in the appraisal process, they're not going to be able to do that because somebody else makes the decision."

Denham represents Henry and June Kuehn of Ocean Springs, who asked State Farm about appraisal after the company offered them only $10,765.48, minus depreciation and deductible, to cover the wind damage to their waterfront home.

A woman who identified herself as Tina, in a State Farm catastrophe office, told Kuehn in a conversation he taped April 17: "That's what our management is saying. We're not offering appraisal at all because mediation overrides it."

Her statement is not true. The emergency regulation that created mediation does not restrict a policyholder's right to opt for appraisal instead.

After he demanded appraisal in writing, Gulfport attorney William Weatherly received a written response from State Farm claim representative Paul Forziati that said, in part, "I explained State Farm is not utilizing appraisal as a remedy for dispute at this time. State Farm is offering mediation, which was outlined to you in the letter I previously sent."

The insurance company controls the final settlement offer in mediation. A professional mediator has no authority to tell an insurance company how much money it owes a policyholder, instead serving as an impartial facilitator during negotiations.

In appraisal, an appointed umpire can side with either party, resulting in a decision that is final and binding. Appraisal can be used only when a settlement is in dispute. It would not apply in cases where coverage has been denied.

Insurance Commissioner George Dale also has urged policyholders to try mediation. He says the program works and that policyholders retain the right to pursue other avenues when it doesn't. There's nothing to lose, he says.

But attorneys and homeowners dissatisfied with mediation contend the process is humiliating. Also, mediation reveals the homeowner's case for damages, attorneys say, which gives the insurance company an advantage should the parties wind up in court.

With Dale and insurance companies promoting mediation, more than 2,000 insured residents have signed on.

Because policyholders are often unfamiliar with the terms of their policies, many are unaware the appraisal process exists. But advocates say appraisal is faster and less painful than a lawsuit, and more likely than mediation to result in a fair settlement.

That is, if insurance companies cooperate.

The Sun Herald called Deputy Insurance Commissioner Lee Harrell, an attorney and Commissioner Dale's right-hand man, to find out if he had heard anything about State Farm's stance on appraisal. Harrell checked with State Farm's regional counsel and said he was told the company is offering appraisal where appropriate.

State Farm spokesman Richard Luedke told The Sun Herald, "The insurance contract is very specific about when appraisal can be used. It's pretty narrow.

"It's used to help determine the amount of a loss, but it's not used to determine whether there was a loss, any other question that might come up.

"The wind vs. flood issue would not apply at all. Most of the issues that I'm aware of that have grown out of Katrina in Mississippi wouldn't apply at all. In fact, I did ask if we had any of these cases, any appraisal situations pending in Mississippi resulting from Katrina, and I have a guy checking for me, but he doesn't think we have one.

"Our position is that this applies when the contract says it does."

State Farm's policy, which is a binding contract, says, "If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser."

The appraisers then agree on an impartial umpire, or petition a court to appoint one if they can't agree. Each appraiser sets the amount of the loss, then they submit their differences to the umpire.

"Written agreement signed by any two of these three shall set the amount of the loss," the policy says.

The wording in the policies of other companies is similar. Gulfport attorney Weatherly said he's gotten cooperation from other insurance companies for clients who want appraisals. But he's had no luck with State Farm on his two rental property claims where the amount owed is in dispute.

"I didn't think it was worth filing a lawsuit over," Weatherly said. "I thought it was very clear that you have this right to appraisal."

"It looks like I'm going to have to file a lawsuit to compel them to appraise the losses. I think it's important that the courts speak on the issue of do they have to appraise or not.

"Mediation simply does not work. The people we know who have tried to mediate their claims have simply had no luck in getting a fair offer from the company."

The Kuehns said they will take attorney Denham's advice on how to proceed. Their claim also involves water damage, but it was fully covered by their flood insurance policy.

Denham is undecided about his next step. He doesn't see the point of filing a lawsuit to force State Farm into appraisal when the whole point of the process is to avoid litigation. He thinks a conventional lawsuit, which could take years to resolve, might be the only option for the Kuehns.

Denham concluded, "State Farm says, we'll fight you here, we'll fight you there. Maybe we just need to go ahead and sue (them) to get it on down the road."



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