The United States Court of Appeals for the Fifth Circuit recently vacated a portion of a November 2007 ruling against State Farm Fire and Casualty Company, in which plaintiffs Judy and Michael Kodrin were awarded damages arising out of State Farm’s alleged bad faith failure to timely pay their claim for Hurricane-Katrina related wind damage. Kodrin v. State Farm Fire Ins. Co., No. 08-30092 (5th Cir. Mar. 11, 2009). (Click here for a copy of the court's decision.)

In November 2007, a jury in the Eastern District of Louisiana awarded $365,000 to the Kodrins as against their homeowners insurer, State Farm. In reaching its decision, the jury rejected State Farm's defense as to why it did not initially pay the Kodrins' claim (based on State Farm's belief that non-covered flooding caused the damage to the home as opposed to covered wind damage). Two weeks after the jury's verdict, the judge held that State Farm had to pay the Kodrins’ attorneys’ fees.

On March 11, the Fifth Circuit held that even though the jury rejected State Farm's rationale for non-payment, the decision not to pay the claim was made with reason, and, therefore, State Farm did not act in bad faith. Specifically, the Fifth Circuit stated, "the Kodrins… essentially ask this court to find bad faith any time an insurer denies coverage and a jury disagrees. This would unduly pressure insurers to pay out claims that they have reason to believe lie outside the scope of coverage, solely to avoid penalties later."

As the Kodrins failed to prove that State Farm acted in bad faith, the Fifth Circuit vacated the district court’s award of penalties, damages and attorneys’ fees that had been awarded to the Kodrins.