Bloomberg Article The Insurance Hoax Finalist for Prestigious Journalism Award

Lord knows I don’t have time to write this post but I made the “mistake” of checking in on Sam Friedman’s blog at the National Underwriter and saw two pieces well worth noting. I’m going to concentrate on the Bloomberg story The Insurance Hoax that is a finalist for the Daniel Pearl Award for Investigative Reporting from the Deadline club in New York.

Mr Friedman’s opinion that the story is a hatchet job on the insurance industry has some validity in my opinion, from a straight industry point of view. He is very fair in his reporting on insurance issues and I respect his take. However, under the talking points do lie some very real problems with how insurers adjust their claims. As industry blogger David Rossmiller pointed out himself in a particularly insightful post on the legalities behind a “first party claim”:

An adversary relationship is assumed to exist between the insurer and insured from the time the claim is filed, and generally speaking, no fiduciary duty arises on the part of the insurer.  This doesn’t mean it’s OK for insurers to cheat you, merely that it is understood that an inherent conflict exists to an even greater degree than in third-party claims, where it could also be said that a conflict exists, because paying for the legal defense of an insured is expensive.  All this is inherent in the nature of insurance, and is why we have various rules ranging from bad faith laws to  interpreting ambiguities against the insurer in insurance law.

Notice the word “cheat” is not defined in his statement. For instance, in the Weiss case an important policy clause was not disclosed to the insureds by their insurer Allstate.  The jury found such action to be a extraordinary display of bad faith by Allstate. However it took litigation to make them pay what was due their customer. It is at this juncture that Bloomberg enters with their story which details how low balling claims, legally assumed to be fine due to the adversarial relationship described by Mr Rossmiller, has become part and parcel to the newfangled way claims are handled, from fender benders to a major catastrophes like the California wildfires or Hurricane Katrina. Insurers know the rules regarding bad faith only apply when a case is litigated. Insurers also know that for every person who actually litigates to protect their policy rights somewhere on the order of 20 do not. The economic result was stumbled upon by the consulting firm McKinsey and Company who devised a set of procedures for claims handling after Hurricane Andrew that is now the claims adjusting bible for insurers.

Unlike other blog moderators Sam Friendman is very fair in his posting comments to his blog. In response to his first post on the Bloomberg story there were two replies well worth noting, first from an industry guy who summed up the problems noted in the Bloomberg piece well:

I suppose the old saying, “Methinks thou doth protest too much” won’t hold water in this case, Sam?

Regardless of the level of protest of inaccuracies by industry associations, the public will never believe that the insurance industry is dealing with them fairly. As I have often said, we have been our own worst enemy, and when a disaster strikes, the dealings of a few overshadow the good works of many.

I live in San Diego, and some insurers following the San Diego fires came through for their policyhoders in outstanding fashion, (AAA is one that has been named as being superb) while others wrangled with policyholders for months, or years, or settling on the courthouse steps, or not at all.

In general, our industry has compiled a dismal record in public relations. All the rhetoric about how good a company is before a loss is just that–pure rhetoric–when you or a neighbor has problems settling their claims in a fair and equitable manner.

The second is from a consumer and is directly to the point:

Has no one in the insurance industry actually ever filed a claim? Or are employees of insurance companies treated far differently than regular customers?

I have personally experienced the insurance industry’s short-changing, penny-pinching, make-every-excuse-in-the-book claims evasion techniques on the few claims I have filed.

Do a consumer survey, or simply talk to your relatives and neighbors, for goodness sake! Ask them if they felt whether their insurer paid what was owed them. What more “proof” do you need?

One only has to be put through the claims ringer once to understand the sentiments of this commenter.  The Bloomberg story played so well with the public because the public knows someone who has been put through the ringer or has experienced it first hand. I intend to contact the Deadline Club but not to complain, rather I intend to praise the Bloomberg story, the Insurance Hoax as a great example of investigative journalism in the finest traditions of Daniel Pearl, a man who gave his life bringing us the real story. Without further commentary on my part here is the beginning of the Bloomberg piece, I highly encourage our readers to follow this link and read it in it’s entirety.

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.