State Farm Faces $8.5 Billion Claim 19 Years After Damage Award

(Bloomberg) -- Planning for the caper involved finding the right man for the mission, organizing front organizations to dole out $3.5 million to ensure the job got done, and then creating a disinformation campaign to disguise their handiwork.

This wasn’t the premise of a spy novel. It’s what policy holders allege a unit of State Farm, the biggest U.S. auto insurer, did to get a friendly judge onto Illinois’s highest court so he could overrule a jury that ordered the company to pay $1 billion in damages.

More than a decade after the award was reversed in state court, customers will get another chance before a federal judge starting Tuesday, this time alleging a company conspiracy to block the payments. State Farm denies any wrongdoing, but the stakes are now higher. Plaintiffs are seeking more than $8.5 billion, which includes the original judgment handed down in 1999, plus 19 years of interest, and the tripling of damages under civil racketeering law.

In such cases, a final judgment “can be devastating to even a deep-pocket defendant like an insurance company,’’ said law professor David Logan at Roger Williams University in Bristol, Rhode Island. Just using the the word “racketeering’’ in a trial “can be highly prejudicial to defendants,’’ Logan added. “But challenges have been generally unsuccessful.’’

U.S. District Judge David Herndon, who is presiding over the trial, in July rejected State Farm’s request to throw out the claim under the Racketeer Influenced and Corrupt Organizations Act, or RICO.

Triple Damages

Should State Farm lose, the federal jury in East St. Louis, Illinois, would determine the initial damages. Judge Herndon would determine how much interest should be paid, and the tripling of the award would be mandated by law.

In their original lawsuit, State Farm customers claimed they were given generic car parts of lower quality than original equipment over more than a decade, violating the terms of their insurance policies. In 1999, an Illinois state court jury awarded them $456 million for breach of contract, and the trial judge added $730 million in damages on a fraud claim. An appellate court reduced the verdict to $1.056 billion, but it was one of the largest class-action awards in U.S. legal history.

In 2004, Lloyd Karmeier, a Republican who had been a circuit judge in rural Washington County for almost two decades, was elected to the Illinois Supreme Court. A year later, the Illinois Supreme Court threw out the award, and the U.S. Supreme Court refused to review the case, seemingly ending the litigation.

New Hope

But policyholders found new hope in 2009, when the U.S. Supreme Court, ruling in a lawsuit involving the coal-mining company Massey Energy Co., found that judges have to recuse themselves in some cases involving their top campaign contributors, said Bob Clifford, the plaintiffs’ lawyer.

Citing emails and other internal communications between State Farm and people working in the Karmeier campaign, including political groups that served as intermediaries, the plaintiffs argued that State Farm was the dominant player in recruiting the judge and funding his campaign.

The company sent its cash through advocacy groups that didn’t disclose donors, which would “enable State Farm to falsely deny its role in funding the campaign so that Justice Karmeier could participate in deciding’’ the 1999 damage verdict if he were elected, lawyers for the plaintiffs said in court papers.

Ed Murnane, who was president of the Illinois Civil Justice League, and William Shepherd, an attorney for the insurer, were named in the lawsuit as taking part in the conspiracy to elect Karmeier to a vacant seat on the state high court. The insurer “held a majority of the votes on the committee that controlled” Murnane’s compensation, the plaintiffs said in court filings.

New Appeal

After the Massey Energy case was decided, the State Farm customers asked the Illinois Supreme Court to reinstate the judgment, citing new evidence on the insurer’s efforts to elect Karmeier. The plaintiffs claim State Farm continued to conceal its actions and lied to the court in September 2011 by denying it contributed to the Karmeier campaign.

The appeal was rejected, and months later, the policyholders filed the new racketeering lawsuit in federal court. The plaintiffs are the same people who sued more than 20 years ago.

The Illinois Supreme Court election campaign of 2004, which saw Karmeier and his opponent spending more than $9 million, is considered the most expensive state court judicial race ever for a single seat, according to Alicia Bannon of the Brennan Center for Justice in New York, who studies state judicial election financing.

Outside Financing

In recent years, the prevalence of outside money in state elections “has increased dramatically,’’ Bannon said. “It’s become quite common that judges are hearing cases involving major campaign contributors.’’

Karmeier, 78, has been the state’s chief justice since 2016. He wasn’t sued in the civil racketeering case, but he will be a witness in the trial. The judge’s office, citing court rules, said Karmeier was barred from commenting on pending litigation.

State Farm, based in Bloomington, Illinois, also declined to comment. In court filings, the company has denied any wrongdoing, contending that the plaintiffs are attempting to revive a long-dead lawsuit by filing a meritless RICO claim. It also denied any conspiracy, fraud or improper campaign financing.

Supporters of Karmeier’s election didn’t act as a corrupt association, but an “amorphous group of persons and entities,’’ State Farm lawyers said in an Aug. 21 filing. “Plaintiffs can provide no evidence that the alleged association members had a common purpose of obtaining reversal of the Avery judgment or any other common purpose that continued after Justice Karmeier’s election on Nov. 4, 2004.”

Karmeier wasn’t aware of any “alleged’’ financing by the insurance company, State Farm said.

On Merits

In the decision to reverse the verdict on appeal, the Illinois Supreme Court in 2005 found that the policy holders shouldn’t have been combined together in a class action and that there was no evidence of fraud. That ruling was decided on its merits, with all six participating Illinois Supreme Court justices reversing the judgment, the company noted.

The unanimous vote doesn’t indicate State Farm would have won anyway, said Clifford, the plaintiff’s attorney.

Karmeier wasn’t present for oral arguments on the appeal, but weighed in after he was elected, breaking a deadlock at the Illinois Supreme Court, Clifford said. Plaintiffs claim Karmeier knew State Farm was financing his election and that they were denied the right to be judged by a court that was uncontaminated by politics.

The case is Hale v. State Farm Mutual Automobile Insurance Co., 12-cv-00660, U.S. District Court, Southern District of Illinois (East St. Louis).

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