Federal judge rejects $50M State Farm settlement

NEW YORK (CNNMoney.com) -- A federal judge in Mississippi Friday rejected a $50M settlement between State Farm Mutual Fire and Casualty Company and policyholders whose claims the insurer had denied after Hurricane Katrina, CNN has learned.

The deal would have impacted nearly 35,000 homeowners whose property was damaged or destroyed by Hurricane Katrina.

A judge threw out a landmark settlement for State Farm policyholders whose claims were denied after Hurricane Katrina.

Mississippi Attorney General Jim Hood said Tuesday, when the proposed settlement was announced, that the landmark settlement could mean up to $500 million in payments to property owners in coastal Mississippi who were dissatisfied with their insurance payouts after Katrina.

In the so-called "slab cases" - where homeowners were left with only a slab - State Farm was required to offer the owners at least 50 percent of their policy limits, Hood said. The company previously had denied those claims, maintaining the destruction came from water and that it was unable to find any separate wind damage, which was covered under its policies, the Biloxi Sun-Herald has reported.

The settlement, he said, would have resolved the civil lawsuit he filed against State Farm on behalf of the company's Mississippi clients and ended a criminal investigation of State Farm's handling practices his office had launched.

The motion for approval of the settlement, a deal between the company and Mississippi's Attorney General Jim Hood, was denied because District Judge L.T. Senter, Jr. couldn't tell how the $50 million agreement compared to the value of the claims made by the policyholders.

"We look forward to addressing Judge Senter's concerns. We believe, given the opportunity, he will come to view the proposed settlement as fair, just, balanced and reasonable," said a State Farm representative.

The Attorney General said he supported the judge's decision.

"I knew that Judge Senter would make sure that the class was a fair procedure for all," said Hood in a statement. "I am confident that [he] will make the plaintiffs and State Farm fix the problems he has raised in his order."

The proposed class-action settlement agreement also involves the Scruggs Katrina Group, who represents hundreds of State Farm policyholders. Neither Hood nor the Scruggs Katrina Group issued an immediate comment on Senter's decision Friday.

Earlier this month, the company was ordered by a jury to pay $2.5 million to a Mississippi couple whose claim they'd denied after the hurricane.