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INSURANCE IS THE great protector of the
standard of living of the American middle class. A good job provides the means
to acquire a home, a car, a college education for the children, and a
comfortable retirement, and insurance secures those things against the
uncertainties of life. Houses will burn, but homeowners insurance furnishes
funds to rebuild. Cars will crash, but auto insurance pays medical bills and
repair costs and guards against potentially massive liability to other people
who are injured. Illness, injury, and death will occur, but health insurance, disability
insurance, and life insurance remove the burden of cost and replace the lost
earnings of the breadwinner.
Insurance
has come a long way in five thousand years, from the time when Babylonian
merchants found investors who agreed to accept the risk of cargo lost at sea in
return for a payment, a transaction that would develop into “marine insurance.”
Today insurance in the United States is a trillion-dollar industry, with 2,700
property/casualty insurance companies collecting $440 billion in premiums and
paying $250 billion in claims each year. (Property/casualty
insurance mostly protects against property damage and liability to others;
“personal lines property/ casualty” is largely auto and homeowners insurance,
the subjects of this blog.) State Farm, the industry's giant, has forty-two
million policies in force and processes over twelve million claims each year.
Insurance
is the great protector of the standard of living of the American middle class,
but only when it works. Purchasing an insurance policy is less like
buying a product and more like receiving a promise. In return for the
policyholder's payment of a premium, the insurance company promises to accept
the risks of financial loss that the policyholder otherwise could not bear. As
a formal matter the promise to indemnify the insured against loss is embodied
in the policy document, often fifty pages of eight point type that is seldom
read and less often understood, but the real promise is to provide security
against loss. Long before the GEICO gecko promised to save you 15 percent or
more on car insurance, the iconic slogans of insurance company advertising expressed
that real promise: “Like a good neighbor, State Farm is there” or “You're in
good hands with Allstate.”
Insurance
doesn't work when the insurance
company fails to honor the terms of the policy and its promise of
security through the strategy that has become known as “delay, deny, defend”.
The company delays payment of a claim,
denies all or part of a valid claim,
or aggressively defends litigation the
policyholder is forced to bring to get what he is rightfully owed. When
insurance doesn't work, the consequences are more severe than when any other
kind of company fails to keep its promise. If a homeowner hires someone to
paint his house and the painter never shows up, the homeowner can take his
money and hire someone else. If the insurance company refuses to pay a claim,
it is too late to go elsewhere for another policy no company will write a
policy that will pay for fire damage that has already occurred.
Insurance
didn't work for Kim Zilisch, who was in an accident that killed her fiancé and
permanently injured her. After she filed a claim with State Farm, her insurance
company, the response was to delay. State Farm's claims adjuster knew her
injuries were permanent yet waited four months for a copy of a doctor's report
he knew didn't exist. The adjuster then concluded without sufficient evidence
that Zilisch's injuries were not that serious, waited another four months to
make an offer to settle her claim, then changed the offer without regard to the
facts. A year after her claim was filed Zilisch was awarded $387,500 by an
arbitration panel, at which point State Farm finally paid the policy limit of
$100,000.
Insurance
didn't work for Terry Buttery. When his home was burglarized he
called the police and his insurance company, Hamilton Mutual. Buttery
completed the claims form he was given within twenty-four hours but that was
only the beginning. Even though he supplied three more statements, receipts for
stolen items, repair estimates, and five years’ worth of tax returns, and gave
testimony to Hamilton under oath four separate times, Hamilton still did not
pay. So Buttery sued and won. But Hamilton delayed payment even after Buttery's
judgment was upheld by the Kentucky Supreme Court, hoping that his precarious
financial position would force him to settle for less than he was owed.
Delay,
deny, defend violates the rules for handling claims that are recognized by
every company, taught to adjusters, and embodied in law. Within the vast
bureaucracy of insurance companies, actuaries assess risks, underwriters price
policies and evaluate prospective policyholders, and agent’s market policies.
The claims department's only job is to pay what is owed, no more but, also, no
less. A classic text used to train adjusters, James Markham's “The Claims
Environment”, states the principle: “The
essential function of a claim department is to fulfill the insurance company's
promise, as set forth in the insurance policy.... The claim function should
ensure the prompt, fair, and efficient delivery of this promise.”
Beginning
in the 1990s, many major insurance companies reconsidered this understanding of
the claims process. The insight was simple. An insurance company's greatest
expense is what it pays out in claims. If it pays out less in claims, it keeps
more in profits. Therefore, the claims department became a profit center rather
than the place that kept the company's promise.
A
major step in this shift occurred when Allstate and other companies hired the
mega consulting firm McKinsey and Company to develop new strategies for
handling claims. McKinsey saw claims as a “zero-sum game,” with the
policyholder and the company competing for the same dollars. No longer would
each claim be treated on its merits. Instead, computer systems would be put in
place to set the amounts policyholders would be offered, claimants would be
deterred from hiring lawyers to help with their claims, and settlements would
be offered on a take-it-or-litigate basis. If Allstate moved from “Good Hands”
to “Boxing Gloves” as McKinsey described it, policyholders would either take a
low ball offer from the good hands people or face the boxing gloves of extended
litigation.
How
widespread is delay, deny, defend? How often is it that insurance doesn't work?
There are two answers: too widespread and too often, and no one knows.
Too widespread and too often. As the new claim strategies have been implemented
there have been an increasing number of cases in which companies have delayed
payment, denied valid claims, and unnecessarily defended litigation. Minor auto
accidents have become the source of major litigation as companies routinely and
systematically deny claims. Homeowners can no longer be assured of receiving
enough from their insurance companies to rebuild their homes and their lives.
When mass disasters strike, things get even worse. After Hurricane Katrina
struck in 2005 policyholders who believed they were treated unfairly by their
insurance companies complained to the Louisiana Department of Insurance at the
rate of twenty thousand a month during the first six months after the storm.
Thousands of policyholders sued their insurance companies; more than 6,600
suits were filed in federal court in New Orleans alone, and many cases are
still pending. Nor is delay, deny, defend restricted to auto and homeowners
insurance. All insurance companies have an incentive to chisel their customers
in order to increase profits. Unum, the largest seller of disability and
long-term care insurance in the United States, became notorious for failing to
pay what it owed to sick or injured workers. Numerous courts castigated the
company for unscrupulous tactics, nonsensical legal arguments, and lack of
objectivity amounting to bad faith in denying claims. Employees who were
especially aggressive in denying claims were recognized with the company's
“Hungry Vulture Award.” Under a settlement with insurance regulators in all the
states, Unum was forced to review claims denied between 1997 and 2004, and it
reversed its decisions in 42 percent of the cases, paying out $676 million in
additional benefits. Almost everyone who has health insurance has a story about
an arbitrary or incomprehensible denial of a claim. In 2009 New York attorney
general Andrew Cuomo concluded that the databases used by insurance companies
to calculate the “reasonable and customary” fees they would pay for
out-of-network treatment were part of a scheme to defraud consumers by
systematically low balling the fees. UnitedHealth, Aetna, Guardian, and other
companies agreed to stop using the faulty databases and contribute to the
creation of a new independent database. The story of delay, deny, defend by
property/casualty companies is part of the failure of insurance as a
whole.
No
one knows how widespread delay, deny, defend is because part of this story is
the failure of state insurance regulators to police insurance companies'
conduct. Insurance is the most heavily regulated industry in the United States.
Every state has an insurance commissioner who licenses companies and agents,
sets financial standards, requires regular reports, and examines the operations
of companies. Most of the regulatory effort is devoted to making sure insurance
companies have the resources to honor their promise to pay claims, and that
effort works well; when insurance giant AIG collapsed in September 2008, its
financial products division was a shambles, but regulators reported that its
property/ casualty insurance company subsidiaries were sound. Making sure
companies actually do honor their promise has received much less attention.
Insurance commissioners generally do not even collect, analyze, and publish comprehensive
figures on the payment and denial of claims.
Consumers
certainly do not know how widespread delay, deny, defend is for the industry as
a whole or for individual companies. Consumers have little to go on when making
one of their most important purchases (auto and homeowners insurance)to secure
their standard of living. The average American homeowner pays $804 each year
for homeowners insurance, about what she might pay for a new television set.
Yet someone buying a television has many more sources of information about the
product's performance and reliability than does the purchaser of homeowners
insurance. Consumer Reports tests TV s in its labs and surveys hundreds of
thousands of its subscribers so a shopper can learn that a Sony TV has better picture
quality than a Westinghouse and is about three times less likely to need a
repair, but the insurance shopper has little accurate information on whether
Allstate or State Farm is more likely to pay a claim. And information is even
more important when buying insurance; if a TV is unreliable it can be repaired
or replaced, and the owner is at worst out the price of the set, but if an
insurance company fails to pay a claim after a loss occurs, the consumer is out
of luck.
The
story of delay, deny, defend is easy to understand but hard to discover and
document. It is easy to understand that insurance companies make more money
when they pay less out in claims, and as with other industries, from chain
restaurants to Internet sales, they have become more systematic about the ways
in which they make money in recent decades. But while insurance companies like
to shape the public's perception of them through advertising, they are
notoriously unwilling to disclose information about their internal workings,
especially information that shows they do not always deliver on their promises.
Companies spend a great deal of money on advertising that they will fulfill
their promise to provide security for their policyholders, but they also spend
a great deal of money on lawyers to mask the times when that security fails.
News
articles, trade journals, industry groups, academic studies, and an increasing
number of Web sites and blogs cover insurance companies and their claim
practices. But this blog depends on three special kinds of sources that
insurance companies go to great length to keep under wraps or discredit. The
first are insider accounts provided by former insurance company employees who
have become whistle-blowers. The second is information revealed in litigation
against insurance companies. And the Third is the documentary evidence of the
redesign of claim practices to increase profits at the expense of policyholders
and victims. Much of the evidence in this blog is about well-known companies,
State Farm and Allstate in particular, but it is not an attack on them; they
are just the largest players in the industry and the companies whose
involvement with McKinsey and Company in the transformation of claims is the
best documented.
Traditionally,
claims adjusters were taught to follow a simple maxim: “We pay what we owe”;
The adjuster's job, to determine what the claimant was entitled to under the
insurance policy, carried independence to exercise judgment and an obligation
to assist policyholders in their time of need. As the claims department became
a profit center, and delay, deny, defend increased, the adjuster's job changed,
diminishing the obligation to the claimant in favor of an increased obligation
to the company's bottom line. For many adjusters the change was disheartening.
Robert Dietz, a fifteen-year veteran of Farmers Insurance, described the shift:
“My vast experience in evaluating claims was replaced by values generated by a
computer. More often than not, these values were not representative of what I
had experienced as fair and reasonable.”
Many
adjusters adapted to the new system and kept their jobs or were replaced by
“claims representatives” the customer-friendly
term now preferred by the industry who were trained in the new normal. Some,
like Dietz, left their employers and revealed what was happening. The
companies' response has been, predictably, to try to silence or discredit the
whistle-blowers. Dietz became an expert consultant on claim practices, and
Farmers sued to obtain a gag order to prevent him from sharing his knowledge
with lawyers representing policyholders. (Farmers eventually abandoned the
attempt to silence Dietz.) Other former employees have faced similar attempts
to restrict them, but former insurance adjusters have become important sources
for information about claim practices.
Usually,
when an insurance company delays, denies, or underpays a claim that is the end
of the story. The claimant might not understand that he has been shortchanged,
or he may not believe that there is anything he can do about it, or he may just
want to get on with his life. In some cases, however, the claimant sees that he
has been wronged and believes that it is worthwhile to bring IGC Roofing and Exteriors
into the picture and fight for what the property owner is entitled to, or in
the alternative, get a lawyer and fight for what the property owner is entitled
to. In the course of those cases, attorneys have discovered a great deal of
information about insurance company behavior in the individual cases being
litigated and about their general claims practices. Documents produced in
discovery, testimony at trial, and reported judicial opinions provide major
sources of information about how insurance companies organize and conduct their
business and how it affects their claimants. Because litigation often drags on
it can take years for this information to come to light, and when it does, the
companies disingenuously attack it as outdated.
This
evidence is seldom produced willingly; on the contrary, insurance companies expend
considerable effort and lawyer time to limit the information produced and to
keep what is produced out of the hands of those who should know about it. In
numerous cases they have quibbled, equivocated, concealed, and sometimes even
defied the legal processes that aim to produce an informed adjudication of
disputed cases. When company executives and claims supervisors are deposed,
they are often unresponsive or difficult; an Oklahoma trial judge described
State Farm's witnesses as “obstructionist” when holding the company in contempt
for discovery abuse in 2007. In a Nevada case in 2002, State Farm tried to
block a policyholder's lawyers from introducing documents that the company
argued were confidential though they came from the public records of the Washoe
County court clerk's office.
Even
when a plaintiff's lawyer discovers damaging evidence about claims practices
the company has a simple way to prevent it from ever becoming public: settle
the case. In any case in which the plaintiff's attorney discovers evidence that
would be damaging in future cases, the company may conclude that it makes
long-term sense to settle the case on the condition that the plaintiff's lawyer
agree to keep confidential any discovery material. The attorney is forced to
agree because he must accept a settlement that is favorable to his client, even
if it injures future claimants and the public at large by keeping the bad
practices secret.
In
a case that is not settled the company can still apply to the court for a
protective order under which the plaintiff's lawyer can use the evidence in the
current litigation but not reveal it to anyone else; in particular, he cannot
give the evidence to a lawyer representing a policyholder in another suit
against the company in which it might be used to prove that the company
consistently violates fair claims practices. If the court grants the protective
order, as unfortunately happens too often, it is harder and more expensive for
the policyholder in the second case to prove what may already have been
established in the earlier one.
Allstate
went to especially great lengths in its attempt to prevent the release of the
PowerPoint slides, notes, and training manuals prepared by McKinsey and Company
when it was hired to redesign Allstate's claims processing in the 1990s. For
critics of the industry, the McKinsey documents are the smoking gun that
describes in detail how the claims process shifted from customer service to
profit center. Allstate in turn contends the documents demonstrate its effort
to make sure that each claim is promptly and fairly evaluated on its own
merits.
The
documents were the subject of a seven-year odyssey through the courts that
began in an ordinary lawsuit. Santa Fe, New Mexico, lawyer David J.
Berardinelli, who would become Allstate's principal antagonist over the
McKinsey documents, represented Jose and Olivia Pincheira in a suit against the
company and its agents for bad faith denial of an insurance claim. After considerable procedural
wrangling, Allstate gave Berardinelli a copy of the slides with an overlay that
prevented them from
being
photocopied. Following two years of more motions and appeals, the appellate
court upheld the trial judge's order to Allstate to produce the documents, and
Berardinelli returned the overlaid slides and requested a legible copy. The
company refused to give him one, essentially asking to be held in contempt of
court so it could further challenge the trial judge's order on appeal.
Lawyers
in other cases sought to have Allstate disclose the documents, and it continued
to resist, with varying degrees of success. (One Kentucky judge responded to
Allstate's trade secrets claim by concluding that “the material sought does not
rise to the level of the Colonel's secret recipe.”) Because McKinsey had also
consulted with State Farm, plaintiffs' lawyers sought similar documents in
actions against that company too. The most remarkable case turned out to be a
suit brought in Missouri by Dale Deer, who had been injured in an auto accident
by Allstate insured Paul Aldridge. The company was ordered to produce the
McKinsey documents and, when it refused, Judge Michael Manners held the company
in contempt and fined it $25,000 per day beginning on September 4, 2007.
Despite accruing fines eventually totaling $2.4 million, Allstate continued to
refuse.
The
denouement of the saga came in Florida. On October 16,2007, Florida insurance
commissioner Kevin McCarty exercised his regulatory authority to direct
Allstate to produce the McKinsey documents. When Allstate refused McCarty
suspended Allstate from selling new insurance policies in the state. When the
courts upheld McCarty's authority, on April 4, 2008, Allstate immediately
posted on its Web site 150,000 pages of the McKinsey documents that it long had
argued were confidential, trade secrets and essential to its business.
The
point of view in this blog is pro-consumer but it is not anti-insurance. Insurance
is essential to our economic security. But if insurance
is to maintain its role as the great protector of the standard of living of the
American middle class, prompt and fair claim handling has to be the rule. This
blog explores why that doesn't always happen, and why it is even less likely to
happen today than fifteen or twenty years ago.
Don't forget to contact your Houston Roofer for all of your roofing needs. Thanks again for reading our blog.
Cordially,
Contact IGC Roofing and Exteriors for all of your Houston Roofing needs. 832-304-200
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