The Herald Tribune Takes the Allstate Challenge and Slams Claims Practices

I saw a link posted today on the Yahoo ALL board where Nowdy and I also post that I can’t let slide by today.  Before I jump to today’s Herald Tribune story some background is needed. This post will be long out of necessity. I hope our readers can hang with us while the story is developed.

First stop is the Allstate corporate website and a press release issued just hours after Commissioner McCarty suspended Allstate from doing business in Florida.

Allstate announced today that it publicly released approximately 150,000 pages of documents pertaining to a review of its claim practices conducted in the 1990s. Allstate was assisted in the review by business consulting firm McKinsey & Co.

The documents relate to a complex body of work that as a whole demonstrates a careful, fact-based analysis to better enable the company to more promptly investigate and more consistently and effectively evaluate claims based upon their own merits.

Public criticisms by people with a vested interest in creating an inaccurate picture of the company’s claim practices have been based unfairly on only snippets from the documents taken out of context……….

Some of the facts about Allstate’s claims practices that have been overlooked in the debate over these documents include:

  • As a regulated company, Allstate’s claims practices are available to and regularly reviewed by state departments of insurance.
  • Allstate resolved millions of homeowners and auto claims last year and continued to earn very high rates of policy renewal.
  • The company regularly communicates with our customers and claimants about their claim and what they can expect from the process.
  • Allstate is aggressive in fighting fraud to protect our customers and reduce the cost of insurance. The company employs a special investigative unit (SIU) that is specifically charged with identifying and combating fraud.

“We became the largest publicly held personal lines insurance company in the United States in no small part because we built a reputation of being there for our customers in their time of need by resolving claims fairly, accurately and in a timely manner,” said Allstate spokesperson Rich Halberg. “The fact that we have added millions of new customers over the past 15 years speaks to the outstanding claim service we provide.”

When aired in the unbiased setting of a court of law, allegations about the documents have been shown to be without merit. Most recently, some of the documents were seen and explained in context to a jury during a two-week trial in Kentucky (Hager v. Allstate). The jury unanimously ruled in Allstate’s favor in deliberations that lasted less than two hours.

I read the PR and thought, “Oh really”. The Kentrucky case was cited but Allstate did not make mention of cases that went the other way in Indiana or the substantial contempt of court fines being incurred in New Mexico and Missouri over these documents.

Paige St John at the Herald Tribune in Florida took the Allstate challenge and penned a news report that could very well join Rebecca Mowbray’s insurance reporting in the award winner’s circle for journalistic excellence. Point by point she debunks the Allstate PR with facts rather than corporate spin.  Her story is in two parts, first she gives some background, then she details the tactics. Both stories can be found using the same hyperlink and due to length I will post some excerpts rather than the full report which can be found here. However, following is Ms St john’s setup piece in it’s entirety.

For more than a decade, Allstate Insurance Co. fought to keep under wraps work papers and other documents that describe how the insurer has made money by reducing payments to some policyholders.

That changed abruptly late Friday, when Allstate unexpectedly posted 150,000 pages of the documents on its Web site. The insurer declared it had had enough of media reports based on inflammatory “snippets” taken from the files.

“We still believe the documents deserve protection,” said spokesman Mike Siemienas, “but it’s outweighed by the need to address the misunderstanding of the public.”

In that act, Allstate reversed its longstanding policy to fight the release of documents that show how it determines payouts. Among the most contested documents are the so-called McKinsey files.

From 1992 through 1997 and beyond, a team of Allstate executives and their consultants from McKinsey & Co. huddled at the insurer’s Northbrook, Ill., campus, to craft a top-to-bottom overhaul of Allstate’s claims system.

After each session, Allstate and its consultants were careful to retrieve and pack up the confidential files that had been handed out with their references to zero sum games and “boxing gloves.”

It was not until midway through this decade that trial lawyers realized a treasure trove lay buried in those records … if they could get them.

The originals were kept in guarded locations, and trial lawyers’ efforts across the country to obtain copies for litigation were blocked through a Phoenix, Ariz., firm. Where Allstate failed to convince a judge to seal the files, it took default judgments or defied orders for production — including in a Missouri case where the contempt fine now exceeds $4.1 million.

At one point, Allstate said, it even sought criminal prosecution of those attempting to publish the files.

According to an Allstate lawyer testifying before the New Mexico Supreme Court last month, the sequestered records were akin to the secret recipe for Coca-Cola.

“And that formula has been kept secret for 100 years,” said Ben Cooper.

Until Friday, the clearest public insight to what lay within Allstate’s McKinsey files was the product of a 2000 accident injury case in New Mexico.

Santa Fe attorney David Berardinelli obtained temporary possession of four boxes of Allstate’s claims files, and made copious notes before returning the records in 2004.

Berardinelli’s plan to publish a book for the general public next month, and a Florida appellate court decision against Allstate on Friday, may have finally convinced Allstate it was losing the war.

Florida Insurance Commissioner Kevin McCarty last year ordered Allstate to produce the McKinsey files and other documents. The insurer balked. On Friday, an appeals court upheld McCarty’s punitive order for Allstate to cease writing new policies in Florida.

The court said the state had the right to demand the McKinsey documents because they might prove or disprove the allegation that Allstate had arbitrarily cut auto insurance claims by 20 percent — an allegation that, if true, posed an “immediate danger to the public health, safety or welfare.”

Within hours, Allstate posted its documents.

The announcement was a striking reversal of Allstate’s past efforts, including its stance when the Herald-Tribune sought the documents.

In Indiana, Allstate was fined $10,000 for disobeying a judge who ordered a public production of the files. The fine is unpaid while the insurer’s appeal is before the Indiana Supreme Court. In Missouri, Allstate faces a $25,000-a-day contempt fine that now tops more than $4.1 million for defying a similar demand. An appeal is on hold until a trial on the underlying car accident claim.

As recently as early March, Allstate argued in New Mexico that releasing the files would give its competitors an unfair edge.

Allstate over the weekend said it would now advise the appropriate judges of its new position on the files.

Listening to Cooper’s arguments in court a month ago was Jose Pincheira, the 78-year-old Santa Fe man whose 1997 accident fueled much of the national battle over Allstate’s claims system.

Pincheira worked at a Sears store in 1961, when that company owned Allstate. Allstate agents helped teach him English at night. In 1997, Pincheira and his wife were injured in an accident, but Allstate rejected his claim and is still contesting medical payments.

During his case, some of Allstate’s McKinsey documents have briefly been forced open only to be closed again after court arguments.

Come Monday, Berardinelli said, he will file a new motion that Allstate be sanctioned “for abusing the court system.”

“Why have they taken years and years of the court’s time and resources? As recently as a month ago, they were telling courts they would suffer financial harm if these documents were released,” Berardinelli said.

For Pincheira, the battle over files is eclipsed by his sense of a personal wrong.

“I don’t care if they ever pay me,” he said outside the New Mexico Supreme Court last month. “I care they lose, because they are crooks. You are in good hands, what a lie.”

In a previous post that received a notice in the Silicon Investor BB I spoke of insurers and their lawyers using the court system as instruments of institutionalized bad faith.  Indeed Allstate has taken much criticism for ignoring lawful subpoenas over these documents as well as substantial fines as noted by Ms St John. This brings me to the beginning of the main story.

For more than a decade, Allstate Insurance Co. kept a secret from its auto policyholders — a national strategy to force customers to accept reduced cash payouts or face years in court.

Thousands of pages of Allstate documents reviewed by the Herald-Tribune detail how the nation’s second-largest insurer systematically cut payments to customers as a way to boost profits.

The documents describe a two-pronged strategy.

First, the company evaluates claims with a computer program designed to reduce payouts by as much as 20 percent of what the company once paid for the same injuries.

Second, Allstate pushes policyholders to accept quick settlements without the help of lawyers. Policyholders who try to fight for more money face Allstate attorneys coached to refuse to negotiate and to drag out litigation.

The approach often forces car accident victims to take what Allstate offers right away or spend years in court while their bills go unpaid — a strategy Allstate spelled out in guidelines for claims adjusters that “forces the claimant and attorney to think about the obstacles they must overcome …”

Indeed it appears we have a road map of how tort reform is being used against us. Limits on damages only make it easier for these large insurers to get away with outragious behavior. The story continues:

It was a “Zero Sum Economic Game. Allstate gains … others must lose,” declared a consultant’s PowerPoint slide from a 1994 presentation to executives.

During the next five years of Allstate’s claims overhaul, the same consultant, New York-based McKinsey & Co., chose confrontational words to describe the new system. In PowerPoint presentations and discussion papers drawn up for Allstate executives, McKinsey used “boxing gloves” to characterize how Allstate should treat policyholders who balk at settlements. For customers who hired lawyers, McKinsey urged, “align alligators,” adding these instructions: “sit and wait.”

The documents also show:

Allstate removed much of the discretion of local claims agents to set payouts, requiring them to base their recommendations on a computer program called Colossus. Under that program, average payouts for bodily injuries dropped more than 20 percent in the first few years, internal documents show, a big step toward reaching McKinsey’s goal of “establishing a new fair market value” of such injuries.

Allstate recognized that when an injured driver hired a lawyer, the insurer lost money. In repeated presentations to Allstate executives, McKinsey coached tougher and increased legal action. By 1996, Allstate had doubled its legal force, hiring 225 more lawyers. “The bottom line is that Allstate is trying more cases than ever before,” a corporate newsletter said.

We have noted many times the anti trust exemption enjoyed by the insurance industry allows them to collude on items such as claims practices. How did Allstate boost their profits? One way was by resetting claims payment data in the widely used Colossus software. No longer were claims paid based upon their merit, instead claims were paid strictly on the best interest of the insurance company, not their insureds.

The insurer hired consultants from McKinsey & Co. — one of the world’s largest management consulting firms — to guide an overhaul of its claims practices, and hopefully, improve flat profits.

McKinsey drafted an often adversarial relationship between Allstate and its customers.

Paying policyholders more than needed was “leakage” and later “opportunity.”

“Win by exploiting the economics of the practice of law,” a slide encouraged.

McKinsey’s “claims organization of the future” revolved around two axes — standardizing claims awards across the board; and stopping policyholders from hiring lawyers.

The first was accomplished with Allstate’s adoption of Colossus, replacing subjective claims agents who the redesign plan labeled as prone to giving policyholders too much.

The program, created by Computer Sciences Corp. and now a mainstay in the insurance industry, calculates injury awards based on factors such as severity of injury and policyholder age. Individual insurers can then “tune” the unregulated software to change payout amounts, making adjustments based on hundreds of factors.

Allstate concedes that it has tuned Colossus numerous times, but says that it has never done so unfairly.

A 15-year-old memo — not included in the files Allstate has made public — shows Colossus was set to produce claim awards that were, across the board, 20 percent below the prior average. Further, it instructs that claims agents and their managers “will want to stay within the Colossus range or below it in most cases.”

Not everyone at Allstate buys into the system though most notably the front line adjusters that deal with the public as Allstate argues that setting Colossus was a single event. However as Ms St John notes:

Current records are not available to show how Allstate uses the computer program to set cash payouts nationwide. Insurers are not required to provide details of the computer programs they use to drive claim settlements, and they fight fiercely to keep those records private. Allstate, court affidavits show, has even sought criminal prosecution of those trying to publish details of its claims system.

Though details are not available, Allstate’s own records show the insurer’s average payment for bodily injury cases dropped 20 percent as it adopted Colossus nationwide. Automation put Allstate at the forefront of a change in the insurance industry — most major insurers now use the software to evaluate claims. At a business conference in 2006, Allstate announced it was spending another $95 million to add to the technology.

The movement caused some discomfort within Allstate. A 1996 presentation by the McKinsey team noted resistance from some of Allstate’s claims agents, saying there was a “lack of buy-in in some markets due to belief that tuning is not proper.”

Robert Healy from Tampa knows the score. As a former Allstate lawyer he has a front row seat to the new fangled way of adjusting auto claims:

PowerPoint slides show the McKinsey consultants also advised Allstate to convince policyholders they did not need lawyers, and then to target those who disregarded that advice for denials, delays and litigation.

Other claims were to be marked early on for trial “to send a message to the market.”

In this new game, the consultants said, 90 percent of Allstate’s claimants would get a settlement check within weeks — “good hands” treatment.

But the remaining 10 percent of accident victims would wait and wait — three years or more according to a chart drawn by McKinsey and labeled “boxing gloves.”

Tampa trial lawyer Robert Healy says the reality today of doing business with Allstate reflects McKinsey’s tactics.

“They pay less than every single insurance company, and they certainly will spend more on litigation,” said Healy, a former Allstate lawyer who was with the company after it implemented its current claims strategy.

“They put pressure on people by establishing that they are a bully in the market.”

Remember the Allstate press release I quoted at the beginning of this post? The first bullet point on how Allstate claims practices were misunderstood?

As a regulated company, Allstate’s claims practices are available to and regularly reviewed by state departments of insurance.

Ms St Johns exposes the talking point for the sham message it conveys as her story continues:

However, regulators in Virginia and South Carolina reviewing hundreds of claims files found that some policyholders, those who suffered contestable injuries in minor accidents and hired attorneys, were unfairly targeted for outright denials or “nominal” offers of $1,000.

“Allstate’s goal of paying only what is owed on any given claim is commendable,” Virginia regulators wrote in 1999. “However, the method the company chose to reduce overpayments has led to violations of the Unfair Claims Settlement Practices Act.”

Tilting the economics of claims handing back in the direction of fairness over corporate profits will require legislative action.  As Ms St John concludes her story with this observation:

Allstate has been sanctioned by regulators in at least two states, Virginia and South Carolina, and sued by policyholders claiming bad faith, forcing it into confidential settlements and large jury verdicts, including a $20 million award in 2006 (later reduced to $8 million) to an Indiana man hurt in a car accident 11 years earlier.

But Allstate’s incentives to keep the system have proven larger.

Since changing the way it regards claims, Allstate has reported the largest profits of its 77-year history. It had a record profit of $4.9 billion in 2006. In 2007, it reported a $4.6 billion profit.

Lt Gov Bryant and Chairman Clarke, the people of Mississippi are waiting for you to put them ahead of corporate profit.

sop

3 thoughts on “The Herald Tribune Takes the Allstate Challenge and Slams Claims Practices”

  1. I agree completely. They have denied our claim against them to fix our vehicle and pay for the tow and rental from their insured hitting our car in the rear. As well as Linda said she would pay only 10% of the $500 DV (deminished Value) that is legally owed. I did file suit and am waiting for trial. If any one would like to come to the SC trial and speak your peace to them feel free. Witnesses against them for their bad faith and illegal tactics will help.

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