Good Hands, Good Neighbors, and Not-So-Good Faith

This is a long post. But if you make it to the end, you get a prize.

CNN investigated how insurance companies handled minor car accidents:

Since the mid-1990s, most of the major insurance companies -- led by the two largest, Allstate and State Farm -- have adopted a tough take-it-or-leave-it strategy when dealing with such cases.

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In an affidavit in a New Mexico case where Allstate is being sued, one of the company's former attorneys said the strategy is to make fighting the company "so expensive and so time-consuming that lawyers would start refusing to help clients."

Shannon Kmatz, a police officer and former Allstate claims agent, said company employees were encouraged to get rid of claims quickly and cheaply and even offered accident victims as little as $50, telling them to take it or leave it.

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The strategy, according to former Allstate and State Farm employee Jim Mathis, relies on the three D's -- denying a claim, delaying settlement of the claim and defending against the claim in court.

Interesting strategy. Where did it come from?

For Allstate and State Farm, according to documents obtained by CNN, the strategy was developed in the mid-1990s with the assistance of consulting giant McKinsey & Co.

Looking for a way to boost profits, McKinsey focused on soft-tissue injuries incurred in minor crashes.

David Berardinelli provides an example of how the strategy can boost profits:

Berardinelli is the author of "From Good Hands to Boxing Gloves," a book based on some 12,500 PowerPoint slides that fell into his hands during a lawsuit against Allstate Insurance Co.

The slides had been presented to Allstate between 1992 and 1997 by management consultant McKinsey & Co. as part of an overhaul (the Claim Core Process Redesign) of the insurer's claims handling process. Much of the presentation encourages Allstate to adopt a hard-nosed approach to claims.

One typical slide picked from the book refers to taking a stricter stance on settlements: "Stand firm on final offer with no real negotiation."

Another - and the inspiration for the book's title - distinguishes between the treatment to be accorded to customers who hire a lawyer to press for a higher payout and those who don't: The unrepresented get the "good hands" approach (settlements within 200 days or so); the lawyered get "boxing gloves" (resolution that could take three years or longer).

Shannon Kmatz, also quoted in the previous article, shows that the recommendations from McKinsey were put into practice:

The strategy outlined in the slides sounds much like the marching orders Shannon Brady Kmatz says she got when she was an Allstate claims adjuster. Kmatz, who left Allstate in 2000, says she felt under constant pressure to "fast-track" claims - that is, settle quickly for as little as possible.

"We called it throwing them a bone," she said. "You offer $500 and hope they go away."

She said she was also evaluated on how successful she was at convincing people to accept the company's offer rather than try to get more money by hiring an attorney. Adjusters who excelled at these goals, Kmatz says, were rewarded with free dinners and bonuses that could add up to a few thousand dollars a year.

Berardinelli sums it up:

Claimants in the "good hands" category may get swift reimbursement, but they will end up with less than they're entitled to, he says. Those who hold out for more -- and retain a lawyer to help them get it -- face battering in the courts and potentially years of delay. "You can get your claims resolved promptly or fairly," he argues, "but not both."

CNN concluded that this strategy was used on car accident claims. But, if it was profitable in the car insurance division, why not in the homeowners division?

Gary T. Fye of Nevada, an expert in the analysis of disputed insurance claims, has testified for policyholders in insurance cases.

Fye said: "The ACE redesign [McKinsey’s strategy] is an example of a strategic initiative. A strategic initiative changes everything, including basic assumptions of claims handling. ACE has been very problematic for policyholders and their lawyers because it is so difficult to trace. The company has changed nomenclature and purged documentation to conceal the origins and scope of these strategies."

Fye said teachings from ACE filtered down to State Farm Fire and Casualty, a wholly owned subsidiary of State Farm Mutual, in 1997.

And it is hard not to see the “throw ‘em a bone” strategy and the “three D’s” being used in hurricane claims.

Throw ‘em a bone:

To date [Feb 10], State Farm says, it has paid an average of $25,030 for structural damage to 794 policyholders left with slabs or pilings. State Farm had been unwilling to release the figure before Friday.

If your house ain’t dere no more, I don’t think $25,030 is gonna get it back.

Denial is the biggest of the three D’s:

Where wind damage covered by State Farm and water damage covered by federal flood insurance could not be separated, the company denied claims, infuriating policyholders on the waterfront from state line to state line.

And this denial gem:

In September 2005, while Oklahoma City attorney Jeff Marr prepared his case against State Farm for using biased vendors to deny policyholder claims from a 1999 tornado, the company descended on the Mississippi Coast in response to Hurricane Katrina with the same cast in tow.

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He [Marr] represents 70 Oklahomans whose homes were subjected to the most severe category of tornado, an F5, on May 3, 1999.

No matter what the catastrophe, he said, in one interview, "the objective is the same: You go find an expert that's bought and paid for and you go get them to give you a report that justifies denial of the claim. Period.

"They represented that these engineers came up here to do an objective and fair assessment of these homes. And they got quite the opposite. Not one report agrees with the policyholder on the nature and extent of the damage. They all sided with State Farm."

A jury found in May that State Farm "intentionally and with malice breached its duty to deal fairly and act in good faith" with policyholders through the use of Haag Engineering Co. and independent adjusting firm E.A. Renfroe.

Haag, one of the companies State Farm used when it "intentionally and with malice breached its duty to deal fairly and act in good faith," then sent employee Timothy P. Marshall to the Gulf Coast to author a survey that would be used to determine claims:

In the survey, Marshall estimated Katrina's peak wind gusts at 115 mph in Bay St. Louis, the hardest-hit area. He concluded the storm surge arrived before peak winds and that there was no tornado damage along the Coast.

Reports from other sources measured wind gusts of 140 miles per hour, found evidence of tornados or tornadic winds and of wind damage well in advance of Katrina's unprecedented surge.

State Farm, Nationwide, Allstate and USAA relied on site-specific Haag reports, along with those of other engineering firms, to assess damage, Marshall has said in sworn testimony.

Attorneys who oppose State Farm believe the initial Haag survey played into the policy language the company used to deny hundreds of claims for homes and businesses Katrina swept away. The language purports to say no wind coverage exists if storm surge ultimately caused the loss. A federal judge has found the language "ambiguous" and "unenforceable," but State Farm has appealed the decision.

From tornados to hurricanes, insurance companies are acting in bad faith. And they are doing it following similar not-so-consumer-friendly strategies, sometimes formulated by the same consulting firm for several insurance companies, and sharing industry favorable estimates from the same company.

So, consumers are paying more for policies and insurance companies are paying less for claims, resulting in billions of dollars of profit for the insurance companies despite record breaking disaster losses. The insurance industry looks like it can do whatever it wants – not unlike a monopoly. Unfortunately, insurance companies are exempt from anti-trust laws.

Then again:

Senate and House leaders, including Sen. Minority Whip Trent Lott, R-Miss., and Rep. Gene Taylor, D-Bay St. Louis, moved to rein in the insurance industry Thursday by introducing legislation repealing the industry's federal antitrust exemption.

Lott, a fierce critic of the insurance industry's response to Hurricane Katrina, joined Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., and ranking member Sen. Arlen Specter, R-Pa., on the Senate floor to introduce the bill, S 618. In the House, Taylor, Rep. Pete DeFazio, D-Ore., Rep. Bobby Jindal, R-La., Rep. Walter Jones, R-N.C., and others announced the introduction of identical legislation.

"Federal oversight would provide confidence that the industry is not engaging in the most egregious forms of anticompetitive conduct - price-fixing, agreements not to pay, and market allocations," said Leahy. "Insurers may object to being subject to the same antitrust laws as everyone else, but if they are operating in an honest and appropriate way, they should have nothing to fear."

And now, your prize. It’s my...