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The twists and turns of State Farm’s $250 million class action

State Farm Insurance settled a class action lawsuit brought by 4.7 million customers. The plaintiffs alleged that the carrier, which is the largest property casualty insurance company in the country, cheated its customers by using substandard motor vehicle replacement parts. In a years-long case that seemed more like a fictional legal thriller instead of real life, State Farm opted to settle outside of court for a total of $250 million.

According to the original suit, State Farm Auto Insurance policies guaranteed that customers would get original manufacturer replacement parts, but instead, the customers got generic parts of lower quality that cost much less. When customers realized what was happening, they protested and asked for the parts promised as part of the contract; nevertheless, the carrier denied these subsequent claims.

The initial judgment

The class-action case, which was filed in Illinois, was initially won when a jury awarded plaintiffs $456 million for breach of contract. The judge then added $730 million in punitive damages, making the total $1.186 billion. This added up to one of the largest class-action verdicts in U.S. history, but the carrier appealed the judgment.

Allegations and RICO conspiracy

The Illinois Supreme Court got a new judge during the appeal process who subsequently reversed the billion-dollar reward. This prompted attorneys for the plaintiffs to investigate the election of the judge, claiming that State Farm funded the judge’s election so that he would tip the balance of the court and overturn the original decision.

This led to accusations of a RICO conspiracy and a subsequent RICO class-action lawsuit. RICO (which stands for Racketeer Influenced and Corrupt Organizations Act) is designed to prosecute criminal organizations, which the plaintiffs alleged State Farm was when the company supposedly bought the election. If the plaintiffs won the class-action RICO case, State Farm could have been obligated to pay $9 billion in damages because RICO cases triple the damages and then triple the award.

Settling out of court

The carrier opted to settle out of court at the last minute rather than risk paying the $9 billion. The company continued to deny that it was not involved in a RICO scheme, but it does circle back to the fact that the company was wrong in trying to pay claims on the cheap. That said, the settlement of $250 million seems positively reasonable in light of the potential award of billions that the company could have ended up paying.