A new federal lawsuit accuses State Farm of running a decade-long program to systematically deny water damage claims across California.
The suit, filed March 3 in the US District Court for the Northern District of California, goes well beyond a single disputed claim. It alleges that State Farm General Insurance Company - described in the filing as the largest carrier in California - instituted what is referred to as a "Water Initiative" or "Water Forum" around 2016. According to the filing, State Farm had received reporting from outside retained consultants hired to design strategies to reduce claims expenses and indemnity, and concluded it was spending too much money investigating and paying water losses in California. The program that followed, the filing alleges, was built to cut those costs through aggressive denial practices.
The filing describes specific tactics: reducing adjuster authority on water losses so larger claims faced added scrutiny from senior staff, holding seminars statewide to reinforce coverage positions and encourage aggressive application of policy exclusions, discouraging adjusters from hiring licensed building professionals to determine the true cause of a loss, and relying on a small group of experts and vendors who could be counted on to provide cover for the company's denial decisions.
The case was brought by Ashley Hernandez and Samson Dallas Shake, homeowners in Seaside, California, whose property was damaged on or about March 8, 2025, when a water supply line failed in and around their bathroom, rendering the home uninhabitable. State Farm denied the claim on March 31, 2025, citing the policy exclusion for water "below the surface of the ground." According to the filing, the insurer reached that conclusion without ever inspecting the property or retaining a plumber, leak detection company, engineer, or contractor to investigate.
The homeowners' retained plumber found the failed pipe was not below the slab but laterally adjacent to it — a distinction the filing argues makes the exclusion inapplicable.
What makes this case particularly notable is the allegation that State Farm already knew its reading of the exclusion had been rejected. The filing cites Varela v. State Farm General Insurance Company, a 2021 published decision from the Eastern District of California, which found that water escaping from a failed plumbing line does not qualify as water "below the surface of the ground." Despite that ruling, the filing alleges, State Farm kept applying the same rationale.
The filing further alleges that State Farm has denied at least thousands of similar water loss claims over the past decade, and that California juries have repeatedly found the company acted in bad faith over these practices - yet the insurer has not changed course because the strategy remains immensely profitable.
The homeowners are seeking policy benefits, consequential damages including emotional distress, exemplary damages, and trebling under California Civil Code §3345. They have demanded a jury trial. No determination on the merits has been made.
Case: Hernandez et al. v. State Farm General Insurance Company, Case No. 5:26-cv-01831 (N.D. Cal.)
