A State Farm attorney, Sheila L. Birnbaum in New York, was quoted in McClatchey Newspapers as stating she could "easily explain that this is in the best interest of the policyholders and the people of Mississippi. I don't want to see this settlement fall apart and there be no way to get money to these people."

The Scruggs Group--in addition to working on the agreement for homeowners in the proposed class action--also reached a final settlement for 639 homeowners, which reportedly will net them $26 million. They said they would go forward "with the initial disbursement of settlement payments to the hundreds of families we represent apart from the proposed class."

Judge Senter said he had not been shown any evidence to determine whether plaintiffs attorneys involved in the proposed class-action settlement had done enough work to justify getting a minimum of $10 million in fees, or any basis for calculating how they should receive up to $20 million.

The judge said he also lacked information as to the possible number of policyholders who might be covered by the class action and could not determine how thinly spread among class members the minimum $50 million proposed payout would be.

According to a discussion of the settlement by Mr. Hood on Jan. 23, the proposed agreement covering policyholders in three coastal counties could include more than 1,000 insureds, and the eventual payout could exceed $500 million.

State Farm rejected many claims in that area, arguing the damage was caused by wind-driven storm-surge waters and that policyholders' windstorm policies excluded flood-related losses.

Judge Senter ruled that before they could totally reject a claim, they had to prove flooding caused all the damage--and, if not, pay any portion caused by wind damage.

The proposed class could reopen closed claims and accept a formula for immediate partial payment, go to arbitration, or opt out of the settlement and sue, using information they could obtain about their claims from case files State Farm would be required to provide.

Judge Senter questioned a portion of the settlement that, in addition to settling claims against State Farm, would end the possibility of lawsuits against the company's agents, adjusters and companies related to the insurer.

He questioned how arbitrators would be trained for the job and how their independence and neutrality would be assured. He also said nothing had been shown regarding the competence and impartiality of Poorman-Douglas Corp., the proposed claims administrator.

The scope of the settlement, he said, should be broadened to include other lawyers with similar suits already underway.

He also complained that the claims process was so involved that he judged it too complicated for a lay person to figure out without a lawyer.

Judge Senter said he was uncomfortable sending large numbers of policyholders into arbitration and depriving them of their right to trial by jury, and concerned that the settlement did not allow other litigants and their attorneys to comment on its fairness.

He also said he was worried that state court actions brought by Mr. Hood rely on an arbitration program "administered by this court. There is currently no such procedure in place, and there may never be such a procedure unless I am satisfied that basic standards of fairness are met."

Mr. Hood, who ballyhooed the proposed settlement a few days before the judge's rejection, appeared to be trying to distance himself in a later statement. "Our office did not negotiate the terms of the proposed federal court class action," he said. "In fact, our office had reservations about some of the terms of the class agreed to by the plaintiffs and State Farm."

Meanwhile, before the settlement was waylaid by Judge Senter, Mr. Hood had urged Allstate and other insurers--naming Allstate, Nationwide, Mississippi Farm Bureau and USAA--to "do the right thing" and follow State Farm's lead in settling similar disputes. He also urged stockholders with interest in affected insurers to press the carriers to settle, "rather than have a state court decision declaring their anti-concurrent causation clauses and water exclusions void."

He warned that "a ruling to that effect could spawn more litigation in other states and cause tremendous instability in insurance stock prices and in the insurance industry along all of the hurricane-prone coastal areas of America."

An Allstate representative, Mike Trevino, said the State Farm agreement does not impact his carrier "because our policy and our claim-handling practices were different. We are continuing to work with our customers and their lawyers on settlements. We have settled the vast majority of actions and closed 98 percent of claims. The company has paid billions of dollars already in Hurricane Katrina claims."

A representative for Nationwide, Joe Case, said company attorneys are reviewing the latest legal developments in the Katrina related litigation.

"I cannot confirm or deny whether there are settlement talks on any existing litigation," he said, adding that Nationwide claim practices and procedures "are different and unique from State Farm's."

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

As part of the rejected settlement, Mr. Hood had agreed to drop his grand jury investigation of the company's claims-handling practices. He said in a statement that while State Farm's actions warranted a criminal probe, veteran prosecutors felt the matter "would be better handled in civil court and in the United States Congress."

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.