Story Highlights• NEW: Judge leaves door open for revised State Farm agreement
• Judge refuses to endorse deal negotiated by Mississippi attorney general
• Settlement would have paid policy holders up to $500 million
• Those victims' claims were denied but they didn't sue company
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GULFPORT, Mississippi (CNN) -- A federal judge Friday rejected a proposed settlement agreement involving nearly 35,000 homeowners affected by Hurricane Katrina.
U.S. District Judge L. T. Senter Jr. said the bargain between State Farm Fire & Casualty Co. and the Mississippi attorney general did not establish "a procedure that is fair, just, balanced or reasonable."
But Senter left the door open for a new settlement agreement, rejecting the proposal "without prejudice."
Mississippi Attorney General Jim Hood said Tuesday, when the proposed class-action settlement was announced, that it could mean up to $500 million in payments to property owners in coastal Mississippi who were dissatisfied with their insurance payouts after Katrina.
The settlement, Hood said, 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 claim-handling practices.
But, Senter wrote in his opinion, "In the absence of substantially more information than I now have before me, I am unable to say, even preliminarily, that the proposed settlement establishes a procedure that is fair, just, balanced or reasonable."
In response to Senter's ruling, State Farm issued a statement saying, "We look forward to addressing Judge Senter's concerns." It added that it believed Senter might be persuaded to change his mind.
The Scruggs Katrina Group, which represents hundreds of State Farm policyholders and is participating in the settlement, pointed out in a statement on its Web site that while Senter refused to grant preliminary approval, "he made clear that the plaintiff's lawyers are 'in a position to address the concerns expressed in (his) opinion.'"
Hood issued a statement saying that while his office did not negotiate the terms of the proposal, he did have "reservations about some of the terms."
"Nevertheless, I knew that Judge Senter would make sure that the class was a fair procedure for all," he said. "I am confident that Judge Senter will make the plaintiffs and State Farm fix the problems he has raised in his order."
Judge spells out his objections
As part of the proposal, State Farm had agreed to change its claim-handling practices. It also agreed to re-evaluate Katrina claims using different adjusters and engineers for clients who filed claims but did not sue the company. The company agreed to make new offers; in case of disputes, binding arbitration would be used.
Senter detailed numerous items of concern in the proposed settlement, including the fact that neither Hood nor State Farm has provided any information for him to determine how many policyholders were within the proposed class, or how many fall within the five payment ranges based on the damage they sustained from Katrina.
And while State Farm has agreed to pay at least $50 million, "there is no way I can ascertain how this sum compares to the total claims of the members of the total class," the judge wrote.
Homeowners are allowed to opt out of the class action, but Senter said the settlement does not make opting out easy.
"It appears to me that a lay person confronted with this claims procedure will likely be unable to participate effectively without the assistance of counsel," he wrote.
Although State Farm pledged to re-evaluate Katrina claims, the settlement agreement provides for no oversight of that process and allows State Farm "a substantial measure of control."
"There is no evidence that State Farm will evaluate the class members' claims in any way different from the way these claims have already been evaluated," Senter wrote.
Company previously denied 'slab case' claims
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.
Senter said he was "struck," however, that under the agreement, even policyholders left with only a slab or pilings are not guaranteed any payment, noting State Farm's offer could be offset by policy limits of other insurance.
"Under the proposed agreement, the insured owner of a property worth $100,000 who insured the property against $50,000 in wind damage and $50,000 in flood damage, and who has collected his flood insurance benefits, would not be entitled to any recovery even if only a slab remained," the judge wrote.
Senter also disagreed with the binding arbitration portion of the settlement. Under the agreement, the arbitrator's decision would be final -- even if it is lower than State Farm's offer -- with no appeal process.
The judge pointed out that under binding arbitration, property owners would give up a variety of rights, including that of due process, and potential legal action.