In addition to allowing policyholders with closed claims to reopen them, the agreement settles 639 suits including 300 claims for total losses.

Since many policies did not include the term "storm surge," Mr. Hood said the language had to be construed against them. State Farm in the settlement agreed to send out annual homeowner notices that storm surge is not included in their windstorm coverage.

Phil Supple, a spokesman for State Farm, said the proposed agreement would involve millions of dollars, but the company felt it should not give out many details until the settlement was examined and approved by Judge Senter.

He said the agreement "works toward Judge Senter's goal of a just, speedy and efficient resolution of these matters."

Mr. Supple said the agreement covered the policyholders in the lower three counties of Mississippi, Harrison, Hancock and Jackson.

Robert P. Hartwig, president of the Insurance Information Institute, called the arrangement bad for the industry and said insurers faced a "stacked deck" in Mississippi.

Mr. Hartwig said the whole issue in the settlement is very unsettling for the insurance industry. "Fundamentally what is happening is that insurers are being forced to pay hundreds of millions, if not ultimately billions in excluded flood loss--a type of loss for which insurers have never collected a penny in premiums."

In the end, he said, the settlement will see "very substantial amounts to go to trial lawyers rather than those whose homes have been destroyed," adding that "the deck is stacked against you in a state like Mississippi."

Attorney General Hood explained that under the agreement, policyholders were entitled to see anything in their claim files and could request to have the claim reevaluated by a different adjuster or engineer.

In approximately 1,000 claims involving homeowners left with only a foundation slab, State Farm agreed to make a minimum offer equal to 50 percent of the structural policy limits--less any payments already made--and write a check immediately if the offer is accepted.

Mr. Hood said the agreement would affect 800 slab owners who had never brought suit.

On average, homes close to the coast were worth about $400,000, according to Mr. Hood, who added that a rough estimate puts the cost of a minimum offer for slabs at $80 million.

Should a policyholder disagree with the 50 percent amount, they can ask for an arbitration proceeding, with both sides picking the arbitrator. Homeowners would pay for their own attorney and experts, but the arbitration proceedings are paid for by the insurer.

Mr. Hood said he hoped the State Farm agreement provides a template that would be used by other insurers to reach settlements.

The attorney general, who was scathing in his criticism of the insurance industry's claims handling, said his protracted negotiations with State Farm were "like a death roll with an alligator...but we've called a truce."

He said in a statement that while State Farm's claims-handling warranted a criminal investigation, veteran prosecutors felt the matter "would be better handled in civil court and in the United States Congress."

A recent Katrina storm-surge case against State Farm that was heard by Judge Senter resulted in a verdict including $2.5 million in punitive damages, but Mr. Hood said he thought a threat of federal intervention led State Farm to settle.

"I believe that the election of the Democratic Congress forced the insurance industry to the bargaining table," he said, adding that he hoped Democratic U.S. Representatives Bennie Thompson and Gene Taylor of Mississippi and Barney Frank of Massachusetts, along with U.S. Sen. Trent Lott, R-Miss., would conduct a full Congressional probe and pass a National Insurance Reform Bill.

The attorney general added that he intended to continue monitoring claims handling, which has been the subject of allegations charging improprieties in adjuster findings and engineering reports prepared for the insurer.

Plaintiff attorney Richard Scruggs of the Scruggs Katrina Group of private plaintiffs' attorneys, who were part of the settlement negotiations, called the agreement something that would bring "prompt and fair relief" to residents in the three coastal counties.

"Thousands of families now have a second chance to have their claims reopened and receive money to rebuild," added Don Barrett, another attorney involved in the negotiations.

The agreement was praised by Sen. Lott, who, like Rep. Taylor, filed suit against State Farm over Katrina damage to a Gulf Coast home. Both their cases were settled by the agreement.

Sen. Lott has secured legislation requiring a Homeland Security Department investigation into insurer hurricane claims handling.

"We've been waiting for a development like this. This is good for Mississippi, and is so important to people along the Gulf Coast and in South Mississippi in getting on with their lives and rebuilding their homes," said Sen. Lott.

"This is a big step in the right direction," said Mississippi Insurance Commissioner George Dale. "I'm pleased that this agreement will quickly put money into the hands of those along the Gulf Coast without lengthy litigation."