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State farm wins $1B court ruling
Reversal of judgment in top Illinois court is a huge win for insurer. May bode well for Altria, too.
August 18, 2005: 5:26 PM EDT

NEW YORK (Reuters) - Illinois' Supreme Court on Thursday reversed a $1.06 billion judgment against State Farm Mutual Automobile Insurance Co. in a case that accused the company of using unsafe parts to repair damaged vehicles.

The ruling may help Altria Group Inc., whose Philip Morris USA unit is appealing to the same court a $10.1 billion verdict over whether it deceived smokers into thinking that "light" cigarettes were safer than regular ones, analysts said. Altria shares soared to a record high.

Illinois' top court voted 6-0 that the State Farm trial court erred in certifying the case as a nationwide class action, saying the plaintiffs' claims were not similar enough to be grouped together. A 4-2 majority found that the plaintiffs failed to show damages.

The case affected about 4.7 million policyholders of the biggest U.S. insurer of autos and homes.

Robert Clifford, who argued the plaintiffs' case, said: "We're obviously disappointed. The ruling allows insurance companies to mislead customers through contract language that ultimately limits their remedies when things go wrong."

State Farm spokesman Phil Supple said the insurer was pleased with the ruling, and that it would benefit consumers by encouraging competition. "As in all consumer products areas, the public benefits from open competition in the replacement parts business," he said.


Rob Campagnino, a Prudential Equity Group LLC analyst, said the ruling might lead to a reversal of the Philip Morris verdict, adding that the cigarette case involved far more distinctions among claimants.

"Given the decision to decertify in a case also based on alleged fraudulent misrepresentations to consumers, we think it is clear that this Court will decertify (the smoker) class," he wrote.

Altria declined to comment. But George Zelcs, a lawyer for Korein Tillery who represents customers in the cigarette case, said that case involves only Illinois smokers, while State Farm involved customers nationwide.

He also said the State Farm case involved different contract terms for different plaintiffs. "I don't see any similarity between the two" cases, Zelcs said.

Altria shares rose $2.53, or 3.7 percent, to close at $70.39 on the New York Stock Exchange, where they earlier hit a record high of $71.08.


The State Farm plaintiffs accused the Bloomington, Illinois-based insurer of breach of contract and consumer fraud in requiring auto repair shops to use generic replacement parts rather than manufacturers' parts.

State Farm said the generic parts were neither poor quality nor unsafe, and that using them saved policyholders hundreds of millions of dollars.

In 1999, a judge ordered State Farm to pay $1.19 billion in damages. An appeals court reduced the sum to $1.06 billion.

In her opinion for the Supreme Court, Chief Justice Mary Ann McMorrow said Illinois' consumer fraud act does not apply outside the state, and that plaintiffs may invoke the act only on matters that are "primarily and substantially" in Illinois.

"The only putative class that can exist in this case under the (Act) is a class consisting of policyholders whose vehicles were assessed and repaired in Illinois," she said.

She also said the plaintiffs could not show fraud by saying State Farm breached promises to use parts of "like kind and quality" or to restore vehicles to their "pre-loss condition."

Three justices joined McMorrow's opinion. Two partially dissented, saying the court erred in concluding that the plaintiffs could not prove breach of contract. The seventh justice recused himself from the case.

"It's an empty day for automobile insurers in Illinois, and across the country," said Michael Hyman, a partner at Much Shelist PC in Chicago who also represented the plaintiffs.

He said his clients might appeal to the U.S. Supreme Court, or seek a rehearing. Hyman added that many states have consumer fraud laws similar to Illinois' law. "This can create a Balkanization in class-action cases," he said.  Top of page