State Farm accused of Katrina racketeering

Federal lawsuit claims insurance company manipulated damage reports

updated 5:39 p.m. ET June 20, 2007

NEW ORLEANS - State Farm Fire & Casualty Co. engaged in a "pattern of racketeering" by manipulating engineering reports on Hurricane Katrina damage so the company could deny policyholder claims, lawyers for a group of Mississippi homeowners allege in a lawsuit filed Wednesday.

The federal suit against State Farm represents a new legal strategy for attorney Richard "Dickie" Scruggs, who has played a prominent role in challenging the insurance industry for its handling of Katrina claims.

Hundreds of homeowners in Mississippi and Louisiana have sued their insurers for denying their claims after the Aug. 29, 2005, storm. The suits typically accuse insurers of bad faith and breach of contract for refusing to pay for damage from Katrina's storm surge.

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Wednesday's lawsuit on behalf of Mississippi Gulf Coast homeowners is the first in which Scruggs and his legal team accused an insurer of violating the civil Racketeer Influenced Corrupt Organization Act, commonly known as RICO.

Scruggs, who helped negotiate a multibillion dollar settlement with tobacco companies in the mid-1990s, said he had filed similar civil RICO suits against tobacco companies. They are tougher cases to build, but can carry stiffer penalties, he added.

"The facts call out for this kind of remedy," he said. "It puts their license to do business at risk if they lose (the case), for one thing."

Phil Supple, a spokesman for the Bloomington, Ill.-based State Farm, said the lawsuit is nothing more than Scruggs' "PR machine working overtime."

"This is a regurgitation of everything he has said for two years," Supple said. "We couldn't find anything new here."

Scruggs' 103-page lawsuit claims State Farm engaged in racketeering by procuring "scientifically dishonest" inspection reports and conducting "sham re-inspections" of homes so that damage could be falsely attributed to Katrina's flood water.

State Farm and other insurers say their homeowner policies cover damage from wind but not rising water, including storm surge.

The RICO Act is typically associated with criminal prosecutions of organized crime figures. Randy Maniloff, a Philadelphia-based attorney who has closely followed the wave of litigation spawned by Katrina, said the civil RICO Act is rarely invoked in lawsuits over insurance coverage.

"Nothing surprises me at this point," Maniloff said of the frequent legal twists in post-Katrina insurance cases. "Every day is something new."

Also named as defendants in Scruggs' suit are Forensic Analysis & Engineering Corp. of Raleigh, N.C., and E.A. Renfroe Co. Inc. of Hoover, Ala. Forensic's engineers inspected homes for State Farm, while Renfroe helped the company adjust claims.

Scruggs accuses State Farm of pressuring its engineers to alter reports on storm-damaged homes so that water, not wind, could be blamed for damage.

Scruggs filed the lawsuit a day after State Farm asked a federal judge to disqualify the Scruggs Katrina Group from representing a Biloxi couple who sued the company for denying their claim.