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Allstate Corp. (NYSE:ALL) has suffered a legal set back in the huge unresolved claims controversy in Mississippi. As reported by AP, Reuters and Wall Street Journal OnLine a Mississippi couple has been awarded $2.5 million in punitive damages because State Farm Fire & Casualty refused to recognize their claim from Katrina. The punitive award was jury decided. The judge has also awarded $223,292 to cover the actual property damages. This blog first alerted readers on Oct 11, 2006 about the seriousness of the issue.

AP quoted “Robert Hartwig, chief economist for the Insurance Information Institute in New York, said before the jury announced its decision that a punitive damage award would be 'distressing' for insurers.”

If punitive awards are ten times the underlying claim, Allstate has a very huge problem. The State of Mississippi Attorney General, Jim Hood, is attempting to negotiate overall settlements with the entire industry. There are approximately 600 lawsuits and thousands of disputed claims. Allstate and other insurance companies are looking at some very ugly numbers.

State Farm spokesman Phil Supple says he is disappointed in the ruling. State Farm plans to appeal.

It seems to me that the present value of settling the claim is much cheaper than the cost of litigation and the inevitable punitive damages that are piled on top. The insurance industry cannot screw an entire state and expect that this is just another disputed claim, which may go to litigation.

If, as and when the settlements occur and are paid out, expect significant building activity, housing starts, temporary labor shortages and consumer rip offs as a well-funded boom takes off. Which stocks are well positioned for this wave? Also next time your insurance agent wants to review your policy, accept the appointment but make sure your lawyer is present.

ALL 1-yr chart:

ALL 1-yr chart

Source: Allstate's Latest Trouble: Mississippi's Burning a Hole Through Its Pocket