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The Insurance Hoax
Property insurers use secret tactics
to cheat customers out of payments--as profits break records.
By David Dietz and Darrell Preston
Bloomberg Markets September 2007
Julie Tunnell remembers standing in
her debris-strewn driveway when the tall man in blue jeans approached. Her
northern San Diego tudor-style home had been incinerated a week earlier in the
largest wildfire in California history. The blaze in October and November 2003 swept
across an area 19 times the size of Manhattan, destroying 2,232 homes and
killing 15 people. Now came another blow.
A representative of State Farm Mutual
Automobile Insurance Co., the largest home insurer in the U.S., came to the
charred remnants of Tunnell's home to tell her the company would pay just
$220,000 of the estimated $306,000 cost of rebuilding the house.
"It was devastating; I stood
there and cried," says Tunnell, 42, who teaches accounting at San Diego
City College. "I felt absolutely abandoned."
Tunnell joined thousands of people in
the U.S. who already knew a secret about the insurance industry: When there's a
disaster, the companies homeowners count on to protect them from financial ruin
routinely pay less than what policies promise. Insurers often pay 30-60 percent
of the cost of rebuilding a damaged home--even when carriers assure homeowners
they're fully covered, thousands of complaints with state insurance departments
and civil court cases show.
Paying out less to victims of catastrophes
has helped produce record profits. In the past 12 years, insurance company net
income has soared--even in the wake of Hurricane Katrina, the worst natural
disaster in U.S. history. Property- casualty insurers, which cover damage to
homes and cars, reported their highest- ever profit of $73 billion last year,
up 49 percent from $49 billion in 2005, according to Highline Data LLC, a
Cambridge, Massachusetts-based firm that compiles insurance industry data.
The 60 million U.S. homeowners who pay
more than $50 billion a year in insurance premiums are often disappointed when
they discover insurers won't pay the full cost of rebuilding their damaged or
destroyed homes. Property insurers systematically deny and reduce their
policyholders' claims, according to court records in California, Florida,
Illinois, Mississippi, New Hampshire and Tennessee. The insurance companies
routinely refuse to pay market prices for homes and replacement contents, they
use computer programs to cut payouts, they change policy coverage with no clear
explanation, they ignore or alter engineering reports, and they sometimes ask
their adjusters to lie to customers, court records and interviews with former
employees and state regulators show. As Mississippi Republican U.S. Senator Trent
Lott and thousands of other homeowners have found, insurers make low offers--or
refuse to pay at all--and then dare people to fight back.
"It's despicable not to make
good-faith offers to everybody," says Robert Hunter, who was Texas
insurance commissioner from 1993 to '95 and is now insurance director at the
Washington-based Consumer Federation of America. "Money managers have
taken over this whole industry. Their eyes are not on people who are hurt but
on the bottom line for the next quarter."
The industry's drive for profit has
overwhelmed its obligation to policyholders, says California Lieutenant
Governor John Garamendi, a Democrat. As California's insurance commissioner
from 2002 to '06, Garamendi imposed $18.4 million in fines against carriers for
mistreating customers. "There's a fundamental economic conflict between
the customer and the company," he says. "That is, the company doesn't
want to pay. The first commandment of insurance is, 'Thou shalt pay as little
and as late as possible.'"
Although the tension between insurers
and their customers has long existed, it was in the 1990s that the industry
began systematically looking for ways to increase profits by streamlining
claims handling. Hurricane Hugo was a major catalyst. The 1989 storm, which
battered North and South Carolina, left the industry reeling from $4.2 billion
in claims. In September 1992, Allstate Corp., the second-largest U.S. home
insurer, sought advice on improved efficiency from McKinsey & Co., a New
York-based consulting firm that has advised many of the world's biggest
corporations, according to records in at least six civil court cases.
State Farm, based in Bloomington,
Illinois, and Los Angeles-based Farmers Group Inc., the third-largest home
insurer in the U.S., also hired McKinsey as a consultant, court records show.
McKinsey produced about 13,000 pages
of documents, including PowerPoint slides, in the 1990s, for Northbrook,
Illinois-based Allstate. The consulting firm developed methods for the company
to become more profitable by paying out less in claims, according to videotaped
evidence presented in Fayette Circuit Court in Lexington, Kentucky, in a civil
case involving a 1997 car accident.
One slide McKinsey prepared for
Allstate was entitled "Good Hands or Boxing Gloves," the tape of the
Kentucky court hearing shows. For 57 years, Allstate has advertised its
employees as the "Good Hands People," telling customers they will be
well cared for in times of need. The McKinsey slides had a new twist on that slogan.
When a policyholder files a claim, first make a low offer, McKinsey advised
Allstate. If a client accepts the low amount, Allstate should treat the person
with good hands, McKinsey said. If the customer protests or hires a lawyer,
Allstate should fight back.
"If you don't take the pittance
they offer, they're going to put on the boxing gloves and they're going to
batter injured victims," plaintiffs attorney J. Dale Golden told Judge
Thomas Clark at the May 12, 2005, hearing in which the lawyer introduced the
McKinsey slides.
One McKinsey slide displayed at the
Kentucky hearing featured an alligator with the caption "Sit and
Wait." The slide says Allstate can discourage claimants by delaying
settlements and stalling court proceedings. By postponing payments, insurance
companies can hold money longer and make more on their investments-- and often
wear down clients to the point of dropping a challenge. "An alligator sits
and waits," Golden told the judge, as they looked at the slide describing
a reptile.
McKinsey's advice helped spark a
turnaround in Allstate's finances. The company's profit rose 140 percent to
$4.99 billion in 2006, up from $2.08 billion in 1996. Allstate lifted its
income partly by paying less to its policyholders. Allstate spent 58 percent of
its premium income in 2006 for claim payouts and the costs of the process
compared with 79 percent in 1996, according to filings with the U.S. Securities
and Exchange Commission. The payout expense, called a loss ratio, changes each
year based on events such as natural disasters; overall, it's been decreasing
since Allstate hired McKinsey.
Investors have noticed. Allstate's
stock price jumped fourfold to $60.95 on July 11 from its closing price on June
3, 1993, the day of its initial public offering. During the same period, the
Standard & Poor's 500 Index rose threefold. State Farm's profits have
doubled since 1996 to $4.8 billion in 2006. Because State Farm is a mutual
company, meaning it's owned by its policyholders, it doesn't have shares that
trade publicly.
"This is about as good a stretch
as I've seen," says Michael Chren, who manages $1.5 billion at Allegiant
Asset Management Co. in Palm Beach Gardens, Florida, and has followed the
property-casualty industry for 20 years. The industry's performance during the
past five years has been superb, even with payouts for Katrina, he says.
"All the stars have been in alignment. There has been decent pricing of
products and an extremely attractive and very low loss ratio."
Reducing payouts is just one way the
industry has improved profits. Carriers have also raised premiums and withdrawn
from storm-plagued areas such as the Gulf Coast of the U.S. and parts of Long
Island, New York--to lower costs and increase income, says Amy Bach, executive
director of United Policyholders, a San Francisco-based group that advises
consumers on insurance claims. "What this says is that the industry has
been raking in spectacular profits while they're getting more and more
audacious in their tactics," she says.
Allstate spokesman Michael Siemienas
says the company won't comment on what role McKinsey played in lowering the
insurer's loss ratio and boosting its profits. Allstate did change the way it
handles homeowners' insurance claims, he says. "In the early 1990s,
Allstate redesigned its claims practices to more efficiently and effectively
handle claims and better serve our customers," he says.
"Allstate's goal remains the
same: to investigate, evaluate and promptly resolve each claim based on its
merits," Siemienas says. "Allstate believes its claim processes
support this goal and are absolutely sound."
McKinsey doesn't discuss any of its
work for clients, spokesman Mark Garrett says.
Jerry Choate, Allstate's chief
executive officer from 1995 to '98, said at a news conference in New York in
1997 that the company's new claims-handling process had reduced payments and
increased profit, according to a report in a March 1997 edition of National
Underwriter magazine. Insurers can't make significantly more money just from
cutting sales costs, he told reporters. "The leverage is really on the
claims side," Choate said. "If you don't win there, I don't care what
you do on the front end. You're not going to win."
The more cash insurers can keep from
premiums, the more they can invest. This pool of assets--most of which the
companies invest in government and corporate bonds--is known as float.
"Simply put, float is money we
hold that is not ours but which we get to invest," billionaire Warren
Buffett, CEO of Berkshire Hathaway Inc., wrote in his annual letter to
shareholders this year. "When an insurer earns an underwriting profit,
float is better than free," he wrote in 2006. Omaha, Nebraska-based
Berkshire Hathaway generated 51 percent of its $11 billion profit in 2006 from
insurance.
Claims payouts for the entire
property-casualty industry have decreased in the past decade. In 2006, carriers
paid out 55 percent of the $435.8 billion in premiums collected, according to
the Insurance Information Institute, a trade group in New York. That compares
with a 64 percent payout ratio on $267.6 billion in premium revenue in 1996. As
companies pay less to policyholders, their investment gains are growing,
according to the trade group and research firm A.M. Best Co. in Oldwick, New
Jersey. The industry has increased profits by an annual average of 46 percent
since 1994, Institute data show. In 2006, carriers invested $1.2 trillion and
recorded a net gain of $52.3 billion, up from $713.5 billion invested for a
gain of $39.1 billion in 1994.
Louis J Sheehan
Louis J Sheehan, Esquire
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Insurance companies are no longer
following their mandate to take care of policyholders' money and then pay it
out when needed, says Douglas Heller, executive director of the nonprofit
Foundation for Taxpayer and Consumer Rights in Santa Monica, California.
"The whole purpose of insurance is evaporating before our eyes as we
continue to send checks to the companies," Heller says. "Insurers are
looking to shed their purpose as a risk bearer and become financial
institutions."
That kind of criticism is unwarranted,
says Robert Hartwig, chief economist at the Insurance Information Institute. He
says about 1 percent of policyholders contest what they're offered. "The
insurance industry can be justifiably proud of its performance," Hartwig
says. "It's in the insurance industry's best interests to settle claims as
fairly and as rapidly as possible."
Companies have sharpened the use of
technology in the past 20 years to help tighten claims payouts. Insurers
following McKinsey's advice on claims processing have adopted computer programs
with names such as Colossus and Xactimate. Colossus, made by El Segundo,
California-based Computer Sciences Corp., calculates the cost of treating
people injured in auto accidents, including the degree of pain and suffering
they'll endure and any permanent impairment they may have, according to
Computer Sciences' Web site. Xactimate, made by Xactware Solutions Inc. of
Orem, Utah, is a program that estimates the cost of rebuilding a home.
Insurers sometimes manipulate these
programs to pay out as little as possible, lawsuits have asserted.
"Programs like Colossus are designed to systematically underpay
policyholders without adequately examining the validity of each individual
claim," former Texas insurance commissioner Hunter told the U.S. Senate
Committee on Commerce, Science and Transportation on April 11. He also
criticized Xactimate. "If you don't accept their offer, which is a low
ball, you end up in court," Hunter said. "And that was the recommendation
of McKinsey." Computer Sciences and Xactware declined to comment.
Farmers Group, a subsidiary of Zurich
Financial Services AG, agreed in 2005 to stop using Colossus to evaluate claims
filed by policyholders who have accidents with uninsured or underinsured
drivers. The move was part of a $40 million settlement in a class-action
lawsuit in Pottawatomie County District Court in Oklahoma in which the
plaintiffs claimed the company had repeatedly and wrongly failed to pay enough
for crash injuries.
An internal e-mail introduced in the
Farmers lawsuit shows the company had pressured its adjusters, whom it calls
claims representatives, or CRs, to pay out smaller amounts--and rewarded them
when they did.
"As you know, we have been
creeping up in settlements," David Harding, a Farmers claims manager,
wrote in an e-mail to employees on Nov. 20, 2001. "Our CRs must resist the
temptation of paying more just to move this type file. Teach them to say,
'Sorry, no more,' with a toothy grin and mean it." Harding praised a
worker for making low settlements. "It can be done as Darren consistently
does," he wrote. "If he keeps this up during 2002, we will pay him
accordingly."
Farmers said in court papers that it
didn't seek to pay less than customers were due. "The e-mail speaks for
itself," Farmers wrote. "Plaintiff's characterization of it is
denied."
Edward Rust Jr., CEO of State Farm,
testified in a 2006 civil case that his company revamped its claims handling
through a project called ACE, or Advanced Claims Excellence. McKinsey suggested
the use of ACE, according to evidence presented in the district court of Grady
County, Oklahoma.
"Technology has allowed us to
really streamline our claim organization to be more efficient and
responsive," Rust testified. He said the company wanted to cut expenses
for claims. In the Oklahoma case, Bridget and Donald Watkins, whose Grady
County house was destroyed during a tornado in 1999, accused State Farm of
misrepresenting the damage from the storm and won a $12.9 million judgment in
May 2006. Watkins and State Farm agreed to an undisclosed settlement after the
judgment.
Hunter, who also headed the federal
flood insurance program under Presidents Gerald Ford and Jimmy Carter, told
Congress that Allstate, with McKinsey's guidance, gave the name Claim Core
Process Redesign to its strategy to change payout practices.
As pervasive as computers have become
in insurance, the key actor in settling claims is still the adjuster, the
person who talks to policyholders and decides how much they should be paid.
Allstate has asked adjusters to deceive customers, says Jo Ann Katzman, who
worked as a claims adjuster for Allstate in 2002 and '03. She says managers
regularly came to her office in Farmington Hills, Michigan, to give pep talks on
keeping claim payments down. They awarded prizes such as portable refrigerators
to adjusters who tried to deny claims by blaming fires on arson without
justification, she says. "We were told to lie by our supervisors,"
says Katzman, 49, who quit by taking a company buyout in 2003. "It's tough
to look at people and know you're lying."
Katzman says an adjuster at Allstate,
on orders from a supervisor, told an 89- year-old Detroit fire victim that
Allstate wouldn't replace cabinets in her home even though the insurance policy
said they were covered. In another case, Katzman says Allstate wouldn't replace
a fire-damaged refrigerator--an appliance she says was covered. Katzman now
runs Accurate Estimating Services, an independent adjusting company in
Bloomfield Hills, Michigan. Allstate's Siemienas declined to comment on
Katzman's statements.
Insurers sometimes order employees to
offer replacement cost settlements that have no connection to actual prices of
home contents, according to testimony in a civil trial. A jury in November 2005
awarded Larry Stone and Linda Della Pelle $5.2 million in punitive damages and
$616,000 to construct a new house after finding that Fidelity National
Insurance Co. of Jacksonville, Florida, had underpaid the couple by $183,000 when
it offered them $433,000 to rebuild their two-story Claremont, California,
residence.
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During the trial in Los Angeles
Superior Court, Ricardo Echeverria, the couple's attorney, questioned Kenneth
Drake, president of Canyon Country, California- based RJG Construction Inc.,
who had been hired by Fidelity's lawyers to evaluate damage estimates.
"Are you telling us that
sometimes, because the insurance carriers dictate what amounts they are willing
to allow for unit costs, estimators then have to comply with that?" asked
Echeverria, according to the court transcript.
"That's absolutely true,"
Drake said.
"Do you think that's fair?"
Echeverria asked.
"Fair or not, it's the name of
our business," Drake said.
Drake declined to comment on his
testimony. Fidelity is appealing the award.
A New Hampshire case involving a home
destroyed in a fire exposed another insurance company tactic: changing a policy
retroactively. In April 2003, the Rockingham county attorney in Kingston, New
Hampshire, found that a unit of Hartford Financial Services Group Inc. had
deleted the replacement cost portion of the homeowner's policy of Terry Bennett
after his five-bedroom house burned to the ground in 1993. Bennett, a
physician, sued Twin City Fire Insurance Co., claiming his home and its
contents--including antiques and fine art--were worth $20 million, not the $1.7
million the insurer paid him. After an 11-year battle, he settled with Hartford
in 2004 for an undisclosed amount. "Fighting an insurance company is like
staring down the wrong end of a cannon," Bennett says.
An unprecedented number of people
stared down that cannon after Hurricane Katrina. The August 2005 storm killed
more than 1,600 people in Louisiana and Mississippi, left 500,000 people
homeless and cost insurers $41.1 billion. More than 1,000 homeowners sued their
insurers in the wake of the storm--the largest- ever number of insurance
lawsuits stemming from a U.S. natural disaster.
For insurers, the multibillion-dollar
question regarding Katrina was how much of the destruction was caused by wind
and how much by water. Property insurance policies don't cover damage caused by
flooding; homeowners have to purchase separate insurance administered by the
U.S. government. The wind/water issue has spurred allegations that insurers
manipulated the findings of adjusters and engineers.
Ken Overstreet, an engineer based in
Diamondhead, Mississippi, who examined destroyed Gulf Coast residences, says
someone altered his findings on the cause of the damage to at least four homes.
"We were working for insurance companies, and they wanted certain
results," says Overstreet, who has been a licensed civil engineer since
1981. "They wanted to get a desired outcome, and that's what they
did."
Overstreet, who was working for
Houston-based Rimkus Consulting Group Inc., prepared a report on the Gulfport,
Mississippi, home of Hubert and Joyce Smith for Meritplan Insurance Co. The
engineer found that both wind and water had damaged the house. "The winds
out of the east would have racked the entire structure to the west and simply
lifted the footings up," he wrote.
Meritplan declined to pay anything to
the Smiths, telling them that all of the damage was caused by water. The
company sent the Smiths what it said was Overstreet's engineering report.
"Due to the extent of the structural damage to the residence, the storm
surge accounted for the damage," the report they got said. The Smiths
called Overstreet and asked him to look at what Meritplan had sent them.
Overstreet says he looked at both reports side by side and then told the couple
that someone had changed his conclusion after his inspection.
"If they defrauded me, how many
more did they defraud?" asks Hubert Smith, 88, a retired chiropractor.
"There's a lot of crap going on."
Six lawsuits against Rimkus allege the
company altered engineering reports. "Those allegations are absolutely
false," says Arch Currid, a Rimkus spokesman. "There's no fact to
those claims. We're going to vigorously defend ourselves in court, and we're
confident we will prevail."
Ed Essa, a spokesman for Calabasas,
California-based Countrywide Financial Corp., the parent of Meritplan, says the
company confidentially settled a lawsuit with the Smiths in March.
Another engineer involved in Katrina,
Bob Kochan, CEO of Forensic Analysis & Engineering Corp., says State Farm
asked him to redo his reports because the insurer disagreed with the engineers'
conclusions. Kochan sent an Oct. 17, 2005, e-mail to his staff saying State
Farm executive Alexis "Lecky" King asked for the changes. "Lecky
told me that she is experiencing this same concern with other engineering
companies," Kochan wrote. "In her words, 'They are all too
emotionally involved and working too hard to find justifications to call it
wind damage.'"
Kochan says he complied so State Farm
didn't cut its contract with his company. "They didn't like our
conclusions," he says. "We agreed to re-evaluate each of our
assignments."
Randy Down, an engineer at Raleigh,
North Carolina-based Forensic, wrote this Oct. 18, 2005, e-mail response to
Kochan: "I have a serious concern about the ethics of this whole matter. I
really question the ethics of someone who wants to fire us simply because our
conclusions don't match theirs." The e-mails were made public in a civil
case against State Farm in Jackson, Mississippi.
State Farm spokesman Phil Supple says
Kochan's e-mail comments are out of context. He says sometimes information in
engineering reports doesn't support the conclusions.
One State Farm policyholder in
Mississippi was Senator Lott, who lost his home in Katrina. He sued State Farm
for fraud in U.S. District Court in Jackson, after the insurer ruled that his
home had been damaged by water and refused to pay him anything. "It's long
overdue for this industry to be held accountable," Lott, 65, says. Lott
and State Farm agreed to a confidential settlement in April.
Lott has introduced legislation to
have insurers regulated by the federal government. That would supplant a
patchwork system of regulation by states. Insurance has no body analogous to
the SEC, which can refer cases to the Justice Department for criminal
prosecution. That doesn't happen with insurers. The most that state insurance
departments typically do is impose civil fines when companies mistreat
customers. Such sanctions are weak and infrequent, says Hunter, the former
Texas insurance commissioner. Before Katrina, no state or federal prosecutor
had ever investigated a nationally known property-casualty company for criminal
mistreatment of policyholders. Mississippi Attorney General Jim Hood says a
federal grand jury is probing insurance company claims handling after the
hurricane.
There was no criminal investigation
after State Farm offered just 15 percent of replacement costs to Michele and
Tim Ray, whose house was wrecked by a tornado in April 2006. A contractor
estimated the cost to rebuild the Hendersonville, Tennessee, home at $254,000.
State Farm made three inspections of the property, Ray says, and sent the Rays
a check for $36,000, which the couple returned. A year after the twister, the
couple remained in the damaged home, with their tattered roof covered by
tarpaulins. In April, after Bloomberg News submitted questions to State Farm
about the Ray case, the company inspected the house again. This time, it gave
the Rays $302,000. "We decided to call it a total loss and agreed to pay
the policy limits after deciding the damage was caused by the storm,"
State Farm spokesman Shawn Johnson says.
State Farm won't discuss what role
McKinsey played in helping the insurer shape its approach toward customers.
Similarly, no official at any insurer that hired McKinsey is willing to talk
about the consulting firm.
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Privately held McKinsey, which has
14,000 employees in 40 countries, has worked for many of the largest companies
in the world, according to its Web site. "We take pride in doing what is
right rather than what is right for the profitability of our firm," Managing
Director Ian Davis says in a quote posted on the site.
McKinsey pioneered the overhaul of the
property casualty industry at Allstate. The company hired McKinsey in 1992
after the insurer was spun off from what's now Sears Holdings Corp. of Hoffman
Estates, Illinois, says David Berardinelli, a Santa Fe, New Mexico, lawyer who
won access to view the McKinsey documents for a limited time during a lawsuit
involving an auto accident. McKinsey advised the insurer to pay claims quickly
at low amounts while delaying payments for as long as possible for those who
wanted large settlements, Berardinelli says. "They're capitalizing on the
vulnerability of people," he says.
Berardinelli says McKinsey suggested
that Allstate hold so-called town hall meetings with claims adjusters to urge
them to pay less to customers.
Shannon Kmatz, a former Allstate
claims adjuster, says she attended some of those sessions. She says managers
told employees to keep claim payouts as low as possible. "The leaders of
those town hall meetings were always concerned that we were doing our part to
help the stock price by keeping claims down," says Kmatz, 34, who worked
for Allstate for three years in New Mexico in the late 1990s and is now a
police officer. "It was obvious from the get-go that all they were
concerned about was the bottom line."
Just once, at the May 2005 hearing in
Lexington, Kentucky, the PowerPoint slides McKinsey prepared for Allstate were
made public. William Hager and his wife, Geneva, who suffered neck and back
injuries after the family's car was rear- ended in a 1997 accident in
Lexington, sued the insurer, claiming the company failed to cover her medical
expenses. The case is scheduled to go to trial in October.
One McKinsey slide prepared for
Allstate was called "Zero-Sum Economic Game," a videotape of the
court hearing shows. The slide explains that there are winners and losers, and
the insurance company can win by paying out small amounts. "There is a
finite pool of money," Golden, the plaintiffs attorney, told the judge at the
hearing. "Either it goes to the injured victim or it goes to Allstate's
pocket as surplus."
Allstate's attorney at the hearing,
Mindy Barfield of Lexington, didn't say anything about the McKinsey slides. She
didn't return phone calls seeking her comments.
Former federal flood insurance
commissioner Hunter says the McKinsey approach exploits policyholders.
"McKinsey presented it as a zero-sum game in which the winners would be
Allstate and the losers would be the claimants," Hunter says. "I don't
think a claims system should be viewed in that light. It's against any
principles on how you should settle insurance claims. They should be settled on
their merits."
Allstate convinced the judge to seal
the McKinsey slides before and after the Lexington hearing. The insurer has
resisted attempts to make the consulting firm's work public in courts across
the U.S., arguing it contains trade secrets. In 2004, the company was
sanctioned by the Bartholomew Circuit Court in Indiana and fined $10,000 for
refusing to turn over the records to attorney Richard Enyon, representing an
auto accident victim. Allstate held on to the documents and appealed the
punishment. The 7th Circuit Court of Appeals upheld the sanction. Allstate then
appealed to the Indiana Supreme Court, which hasn't yet made a decision.
Lawsuits in California, Florida and
Texas have asserted that McKinsey's work for Allstate helped the insurer cheat
claimants. Records show that through the company's Claim Core Process Redesign
project, Allstate encouraged policyholders to accept small settlements on the
spot.
The redesign also became a blueprint
for fighting more claims in court as Allstate increased its legal staff,
according to a 1997 company newsletter obtained by David Poore, a Petaluma,
California, attorney who has represented homeowners in lawsuits against
carriers. "The bottom line is that Allstate is trying more cases than ever
before," the newsletter said. "If the offer is not accepted, Allstate
will go to court, if necessary, to prove the evaluation process is sound."
McKinsey-style tactics have spread to
insurers large and small--as homeowners discovered after three wildfires
ravaged Southern California in 2003, including the one that hit northern San
Diego. While Katrina struck thousands of low- income families in New Orleans,
the San Diego fire affected mostly affluent homeowners, who fared no better
with their insurance companies.
The fire obliterated large sections of
Scripps Ranch, a community of 30,000 that sits atop a sagebrush and eucalyptus
mesa, where homes can cost more than $1 million. After flames swept through the
area on winds of up to 50 miles per hour, residents say they expected their
insurance companies to live up to coverage promises and pay the full cost to
rebuild. The Southern California fires led to 676 formal complaints to the
state saying insurers offered payouts that fell far short of actual costs and
delayed on paying claims.
One of the Scripps Ranch houses that
went up in flames, a four-bedroom, gray- stucco home on a sloping cul-de-sac,
belonged to J.P. Lapeyre, a division director at JDS Uniphase Corp., a
Milpitas, California, maker of telecommunications equipment.
Lapeyre, 41, who is married and has
two children, says he had no inkling as he viewed the remains of his house that
his insurance would leave him $280,000 short of what he would need to rebuild.
Representatives of Pacific Specialty Insurance Co. of Menlo Park, California,
told him the most the firm would pay out was $168,075, not even half of the
estimated reconstruction cost of $448,000.
The Pacific Specialty representative
told Lapeyre in November 2003 that the insurer would pay $75 a square foot
(0.09 square meter) to rebuild his 2,241- square-foot house. "What
frustration," Lapeyre says. "I had to try to prove to them that it
would cost $200 a square foot." That figure came separately from two
builders, Norton Construction and TLC Contractors, both of San Diego. In
February 2005, Lapeyre filed suit in San Diego County Superior Court against
his insurer and the independent broker who sold him the policy, alleging
negligence, breach of contract and fraud for leading him to believe that he was
properly covered. After a fight of 19 months, Lapeyre dropped the suit when
Pacific Specialty told a mediator assigned to the case it wouldn't raise its
offer, he says. "We decided it was time to get on with our lives and move
forward," says Lapeyre, who borrowed money to build a new house.
Karen and Bill Reimus, both lawyers,
fought their carrier, Liberty Mutual Insurance Co., when it told them it
wouldn't pay the couple enough to rebuild their burned Scripps Ranch house.
Karen, 40, says an agent for Boston-based Liberty Mutual assured her and her
husband when they bought their house four months before the 2003 fire that
their insurance would replace the home if it were destroyed.
In a December 2003 letter, two months
after the fire, Liberty Mutual offered to pay $40,000 less than the limit of
the couple's policy, Karen says. In early 2004, San Diego-based Gafcon
Construction Consultants determined the cost to rebuild was well above the
limits of the couple's policy.
The Reimuses began a phone and letter
campaign to convince the company its offer was too low, Karen says. "It
has now been almost seven months since the loss and we are still not agreed as
to the numbers," Karen wrote in a May 13, 2004, letter to Liberty Mutual.
Two weeks later, Liberty Mutual agreed
to raise the couple's limits by $100,000, Karen says. "This is clear
evidence that the original estimate was a low ball," she says. Liberty
Mutual spokesman Glenn Greenberg says the company won't discuss the case
because its dealings with policyholders are private.
"The system is set up to take
advantage of people when they're at their weakest," Karen says. "We
went to one of the most-expensive companies in the country because we wanted to
be ready for a rainy day. We asked for coverage that would replace the house.
We thought replacement meant replacement." Scripps Ranch couple Leslie
Mukau and Robin Seaberg sued Allstate for alleged fraud and negligence for
failing to pay the $900,000 that contractors estimate it would cost to replace
their two-story home. Allstate offered the Seabergs $311,000, according to the
2004 San Diego County Superior Court suit. Allstate says in court papers the
couple hasn't shown the company was negligent and asked for dismissal of the
suit, which is pending.
The California Department of Insurance
examined the practices of Allied Property & Casualty Insurance Co., AMCO
Insurance Co. and Allstate in connection with the California fires. It fined
Allied and AMCO, both based in Des Moines, Iowa, a total of $20,000 for
misleading nine policyholders into believing they were insured for full value.
The regulators cited Allstate for six rule violations, including that it
ignored complaints that it underinsured homeowners. The state didn't fine
Allstate, which told the department it had done nothing wrong.
"Fines by state regulatory
agencies have been far too small and infrequent to deter unfair business
practices," United Policyholders' Bach says. "It's clear that
cheating by insurers is a big, profitable business and regulators can't muster
the will or political strength to stop them."
Most homeowners take what insurers
offer because they don't realize they're being deceived or conclude that
fighting is too costly and difficult, Bach says. "Virtually everyone who
settles for what the insurer offers is taking less than they're owed," she
says.
Homeowners across the U.S. have found
themselves in the same situation. Kevin Hazlett, a lawyer, sued Farmers Group
after an April 2006 tornado struck his home in O'Fallon, Illinois. Farmers had
offered to pay him $470,000 to rebuild the house. Royal Construction Inc.,
based in Collinsville, Illinois, estimated the cost at $1.1 million. Hazlett,
52, accepted a settlement for an undisclosed amount.
Hazlett says Illinois Farmers, a
subsidiary of Farmers, used the Xactimate software program to first determine
what it would pay out. "They're just pulling numbers out of thin
air," he says. "There's no rhyme or reason." Farmers spokesman
Jerry Davies didn't respond to requests for an interview.
Bo Chessor, owner of Royal
Construction, says he sees insurers refusing to pay coverage limits all the
time. "Most people just roll over and take it because they don't have the
money to fight it," Chessor says. "What the insurance companies are
doing is purely robbery."
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http://louis1j1sheehan.us/ImageGallery/CategoryList.aspx?id=36f0e6c9-8b8a-4f0a-8630-e5d3b879fad4&m=0
It may be robbery, but it's rarely a
crime. State insurance departments don't prosecute insurance companies, and the
federal government has no oversight. The insurance industry wants to keep it
that way. To make their voice heard on federal regulation and other government
decisions, insurers spent $98 million on lobbying in Washington in 2006,
according to PoliticalMoneyLine, a unit of Congressional Quarterly. That's the
second-largest amount spent on lobbying by any group, behind $114.4 million by
pharmaceutical companies.
Property-casualty companies do want
something from the government: bailouts. Insurers beseech states and the
federal government to foot more of the bill for rebuilding private homes after
natural disasters. Florida has a catastrophe fund that insures some homes to
reduce payouts by carriers. The fund paid out about $8.45 billion for storm
damage in 2004 and '05, according to its annual report. The federal flood
insurance program covers $800 billion of property nationally, which helped the
industry increase profits by 25 percent in 2005, the year of Katrina.
Homeowners whose properties have been
destroyed by catastrophes contend with low payouts, higher premiums, software
programs that underestimate rebuilding costs and sudden changes in policy
values--all of which have been calculated methods for insurers to increase
profits.
Tunnell, the San Diego accounting
teacher whose home burned to the ground, says she thought State Farm had
adequately insured her family when they bought their three-bedroom house in
1992. She says the policy, destroyed in the fire, provided for "full
replacement coverage." It guaranteed to rebuild the house, no matter the
cost, she says. The company offered to pay $220,000--which was $121,600 less
than a $306,000 figure her family got from State Farm's own estimator, Hersum
Construction Inc. of San Diego, for rebuilding the 1,700- square-foot house.
State Farm spokesman Supple says the
company sent letters in 1997 to the Tunnells and other policyholders saying
that it would no longer offer full replacement coverage. "Policyholders,
by regulatory order, were sent prominent notices of the coverage change at that
time," he says. Tunnell says she doesn't recall being notified. She says
her family debated hiring a lawyer and suing, and eventually decided the battle
would be too stressful. The Tunnells took the $220,000 and borrowed money to
build a new house.
"Why is this happening to people
over and over again?" Tunnell asks. "State Farm keeps underinsuring
people, and they get away with it. This is unthinkable." As long as
insurers make the rules and control the game, Tunnell and homeowners across the
U.S. won't know whether their homes are fully insured, no matter what their
policies say.
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WASHINGTON -- Scientists think they
have figured out why pregnant women don't lose their balance and topple over
despite ever-growing weight up front.
Evolution provided them with slight
differences from men in their lower backs and hip joints, allowing them to
adjust their center of gravity, new research shows.
This elegant engineering is seen only
in female humans and our immediate ancestors who walked on two feet, but not in
chimps and apes, according to a study published in Thursday's journal Nature.
"That's a big load that's pulling
you forward," said Liza Shapiro, an anthropology professor at the
University of Texas and the only one of the study's three authors who has
actually been pregnant. "You experience discomfort. Maybe it would be a
lot worse if [the design changes] were not there."
Harvard anthropology researcher
Katherine Whitcomb found two physical differences in male and female backs that
until now had gone unnoticed: One lower lumbar vertebra is wedged-shaped in
women and more square in men; and a key hip joint is 14 percent larger in women
than men when body size is taken into account.
The researchers did engineering tests
that show how those slight changes allow women to carry the additional and
growing load without toppling over -- and typically without disabling back
pain.
"When you think about it, women
make it look so very damn easy," Whitcomb said. "They are
experiencing a pretty impressive challenge. Evolution has tinkered ... to the
point where they can deal with the challenge.
"It's absolutely beautiful,"
she said. "A little bit of tinkering can have a profound effect."
Walking on two feet separates humans
from most other animals. And while anthropologists still debate the
evolutionary benefit of walking on two feet, there are notable costs, such as
pain for pregnant females. Animals on all fours can better handle the extra
belly weight.
The back changes appear to have
evolved to overcome the cost of walking on two feet, said Harvard anthropology
professor Daniel Lieberman.
When the researchers looked back at
fossil records of human ancestors, including the oldest spines that go back 2
million years to our predecessor, Australopithecus, they found a male without
the lower-back changes and a female with them.
But what about men with stomachs the
size of babies or bigger? What keeps them from toppling over?
Their back muscles are used to
compensate, but that probably means more back pain, theorized Shapiro, who
added: "It would be a fun study to do to look at men with beer bellies to
see if they shift their loads."
Computer giant IBM will build the
world's most powerful supercomputer at a US government laboratory.
The machine, codenamed Roadrunner,
could be four times more potent than the current fastest machine, BlueGene/L,
also built by IBM.
The new computer is a
"hybrid" design, using both conventional supercomputer processors and
the new "cell" chip designed for Sony's PlayStation 3.
Roadrunner will be installed at the
Los Alamos National Laboratory, New Mexico.
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