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Consumer advocates are attacking an out-of-court settlement that State Farm Mutual Automobile Insurance obtained from the attorneys general of 49 states. The $40 million settlement covers thousands of rebuilt wrecks that State Farm admittedly put back on the roads over the last decade without disclosing that they had been totaled in accidents. The country’s biggest motor vehicle insurer first approached Iowa’s attorney general in November 2003 after discovering irregularities in auto titles. State Farm signed a settlement agreement last January with the attorneys general of 49 of 50 states plus the District of Columbia. (Indiana did not join in.) In September the attorneys general began sending out settlement notices to 32,000 vehicle owners offering compensation of roughly 25 percent book value on the rebuilt wrecks that owners unknowingly bought as used cars. In return, the owners would release their claims against State Farm. Consumers may opt out in order to pursue individual causes of action against the insurer in court. Automobile fraud litigator Bernard Brown, a solo practitioner in Kansas City, Missouri, alleges that State Farm, realizing it faced exposure to substantial liability, quietly worked out a “sweetheart deal” with the states’ attorneys general to settle the matter. He adds that the agreement was forged without either side saying a word to at-risk consumers while negotiations were pending. Jonathan Sheldon, a staff attorney at the National Consumer Law Center, a nonprofit national consumer law advocacy group in Boston, agrees with Brown, calling the compensation that was offered “laughable in comparison with the damages they’ve suffered.” Insurers will drop coverage of motorists who get notice that they are driving cars that should have salvage titles, both Brown and Sheldon say. Loss of coverage will prompt banks to call in loans on those vehicles, which, as rebuilt wrecks, are worth a fraction of the value of the used vehicles that consumers thought they had purchased. “There are clear indications that a number of attorneys around the country will be bringing suits for individuals,” says Brown. He has no clients yet, he says, and may not take any so he can continue to speak out about the case. William Brauch, the Iowa assistant attorney general and division director of consumer protection who was instrumental in negotiating the deal, calls Brown’s criticism “really baseless and ridiculous.” As one of eight states negotiating the settlement on behalf of the other parties, Iowa � along with California, Florida, Illinois, Nebraska, New York, South Carolina, and Texas � “got a $40 million settlement for consumers nationwide, one of the largest such settlements ever. For consumers, it’s a very good deal,” says Brauch. “State Farm really opened itself up here, it really took a gamble when it came to us,” say Brown. He adds that those “criticizing our action have every right to go out and hire an attorney, file a lawsuit, and do better.” Jeffrey Jackson, State Farm’s corporate general counsel and vice president, says that the title issue is more complicated than critics of the settlement imagine, “with lots of moving parts and lots of entities involved.” “It’s not easy to negotiate your way through the maze of [50 states' different] salvage title laws today,” says Jackson. He says State Farm needed to work with each state’s motor vehicle registering agency, and that it took the initiative by going directly to the attorneys general in order to update the histories of all the titles in question. By working through the attorneys general, the company was able to narrow 100,000 questionable titles down to about 32,000, Jackson and Brauch say. In the end, the company pledged not only to pay “a substantial sum of money” to people who own cars, but to defend lawsuits against those who opt out of the settlement, says Jackson. “I think we did the right thing, and I still believe that to this day,” he says. Indiana, the only state that did not join the settlement, settled a similar matter in Marion County superior court in 1998. That consent judgment included a permanent injunction against such activities in the future, a buy-back provision or $2,500 to owners who chose to keep their vehicles. That case also involved State Farm Mutual Automobile Insurance. The $40 million national settlement does not include an injunction. A version of this story first appeared in The National Law Journal, a sibling publication of Corporate Counsel.

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