STATE FARM AGENTS LOSE APPEAL OVER LIMITS TO RISK THEY CAN WRITE.

The Ninth U.S. Circuit Court of Appeals has rejected an appeal by present and former State Farm agents of a lower court's ruling dismissing their claim the company breached their contract when it decided to reduce its exposure in high-risk areas like the site of the 1994 Northridge earthquake.

The 2-1 ruling in Appling et al. v. State Farm (00-16521) also rejected a separate lawsuit by the agents claiming State Farm's counsel, Orrick Herrington & Sutcliffe, committed a fraud on the court in its response to a subpoena for information from a former company executive.

Since 1966, State Farm's standard contract with agents provided that fulfilling it "shall be your principal occupation, and you will not directly or indirectly write or service insurance for any other company, other than a State Farm affiliate or through an assigned risk plan, or for any agent or broker, except in accordance with the terms of any written consent we may give you."

The contract gave either the company or its agents the right to terminate it by written notice. "In the event we terminate his contract, you are entitled upon request to a review" in accordance with procedures approved by the board of directors.

In 1994, State Farm announced an exposure management program, limiting new business in geographic areas considered at high risk of catastrophic loss. It refused to let affected agents place the rejected business with other carriers.

The agents sued for breach of contract, and in the course of lengthy litigation sought evidence from a former State Farm executive. Orrick objected to the subpoena and allegedly assured plaintiffs' counsel the executive didn't have any documents or knowledge on the situation.

The agents say they later learned he did, and they sued Orrick for fraud on the court.

U.S. District Judge Martin Jenkins of the Northern District of California found for State Farm on summary judgment, and the company appealed.

The Ninth Circuit affirmed the lower court.

Writing for the majority, Judge Stephen Trott said the contract allowed agents to be terminated at will; the company was entitled to reduce its risk exposure; and it hadn't breached the covenant of good faith and fair dealing.

The majority further said Orrick hadn't committed a fraud on the court. "Even if the nondisclosure worked an injustice, it did not work a 'grave miscarriage of justice'" as required for that claim, the panel said.

Judge Alex Kozinski joined Trott in the majority.

Judge Betty Fletcher dissented.