Last week State Farm Insurance Company announced it would no longer offer homeowner insurance and commercial policies in the state of Mississippi.  The reason: the “untenable” legal and political climate left in the debris strewn aftermath of Hurricane Katrina.

Translation: Too many lawsuits.

According to a recent article, “State Farm and other insurers say their homeowners policies cover damage from wind but not from water - and exclude damage that could have been caused by a combination of both, even if hurricane-force winds preceded a storm’s rising water.”

Hmmmm, you think you’re covered for wind damage, but if it happens to rain at the same time you’re out of luck?  That may be what the policy said, but that’s not how homeowners interpreted their coverage. 

The “misunderstanding” has led to hundreds of lawsuits, including one resulting in a $2.5 million punitive damage award against State Farm.  The judge ultimately reduced the award to $1 million but chided the company for its “grossly negligent way.”

Even Mississippi Attorney General Jim Hood jumped into the fray saying, “If they paid what the owed in the first place, there never would have been a lawsuit filed.”  Apparently delays in processing claims and denied coverage forced policyholders to resort to the court system.

Sounds like a huge failure to communicate and manage expectations well.  But that lesson still seems to be lost on State Farm.  It’s vice president of public affairs, Mike Fernandez, defended the company’s recent decision by saying “we don’t want to write new policies under a contract that [current policyholders] are calling into question.”

So why not do a better job of anticipating questions and explaining them up front before a Katrina-type catastrophe occurs? 

Contracts should not be a game with “loopholes.”  Indeed, loopholes are potholes filled with misunderstanding that derail expectations and cause deep disappointment.  Worst of all, crater size loopholes cause people to feel tricked and the fundamental unfairness of the situation opens the door for punitive damages and LEGISLATION.  

It looks to me like even a little bit of legal literacy could go a long way to pave the way toward a smoother business relationship.  Policyholders would understand the level of coverage they are buying and insurers would be better able to match a product to the customers needs and expectations.

When everyone gets what they want the need to sue vanishes.

An article appearing in the current issue of Inside Counsel illustrates Rule #4 of my 12 Rules for Avoiding Smoking Guns: choosing and using communications wisely.

Indeed!  “What you don’t know about BlackBerrys could land you in court,” writes Adele Nicholas.  Apparently the 24/7 culture that PDAs, like BlackBerrys, have helped cultivate has now triggered a wave of overtime claims from non-exempt employees who do not fall under the Fair Labor Standards Act’s definition of executive, administrative, or professional worker.  Ironically, it is the electronic evidence of the PDA’s off-hours use that is being used to support the wage-and hour-claim.

In another example, Nicholas cites the case of a driver who ran a red light while on company business and crashed the company van into a vehicle piloted by a 70-year-old woman.  The woman went through multiple reconstructive surgeries to repair injuries sustained during the crash.  In the personal injury suit that followed it was discovered that the company driver was looking at his BlackBerry at the time of the accident. 

The PDA was a date stamped smoking gun. 

So beware of how you use your BlackBerry.  It’s convenience and portability can also be it’s Achilles heel.

For more information about how to avoid the creation of smoking guns and reduce unnecessary liability see chapter 6 of The Business Guide to Legal Literacy: What Every Manager Should Know About the Law (Jossey-Bass, 2006).