Merlin pops the question: Should Rust family stay in State Farm’s power and ownership given the recent record of policyholder and corporate citizen ethics?

Like his grandfather and father before him, Edward B. Rust Jr. became the chairman and chief executive officer of State Farm Insurance Companies…Rust’s grandfather, Adlai H. Rust, was a young lawyer when he helped George Mecherle found State Farm and became his right-hand man. Mecherle’s son, Raymond, took over the presidency of the company in 1937, and when Raymond died in 1954, Adlai Rust took over as chief executive officer. His son, Edward B. Rust Sr., joined State Farm in 1941, succeeded him as CEO in 1967, and was named chairman in 1983…

In August 1985 Rust’s father died at the age of 66 and his namesake, only 35 years old, was promptly appointed the new chief executive officer.

With Rust’s family fortunes so intertwined with State Farm’s history, it was difficult clearly to distinguish the corporate culture from the CEO’s personal worldview… The company was so committed to controlling costs in the name of its policyholders that its corporate culture appeared to take on the zeal of religion, and to many it went too far….

In 1989 State Farm was accused in a policyholder lawsuit of being too conservative in maintaining reserves, with the effect of trimming dividend payments to policyholders… During the 1990s Rust would face a number of legal problems that critics said were an outgrowth of State Farm’s inbred culture and obsession with cost controls…

In 1998 State Farm was “rocked by a string of blistering punitive damage decisions,” as reported by BusinessWeek (“State Farm: What’s Happening to the Good Neighbor?” November 8, 1999).

[In Utah], the company was fined $25 million in punitive damages, in part for the “systematic destruction of documents” and “systematic manipulation of individual claim files to conceal claim mishandling.

With this background as reference, SLABBED turns to the Property Insurance Coverage Law Blog where policyholder attorney Chip Merlin pops the question: Should the Rust Family Stay in State Farm’s Power and Ownership Given the Recent Record of Policyholder and Corporate Citizen Ethics.

State Farm lost its most significant claims case while Ed Rust Jr. was the “owner/manager” of State Farm. Ed Rust Jr. was the person who ultimately decided that thousands of State Farm policyholders would be underpaid or denied benefits in Mississippi. He is the chief corporate leader of State Farm Mutual, the corporation that allows its wholly owned subsidiary, State Farm Florida, to essentially lie about its financial situation. Everybody—especially Rust–knows that State Farm Florida is paying millions that would otherwise be profits to State Farm Mutual. I suspect a number of highly qualified agents and claims adjusters wonder why there has been no change in the top management for two generations. After all, in the United States, we believe in earning leadership rather than being born into it.

Ed Rust Jr. is very capable and bright, but is he earning the position or does he just get to keep it because of his dad and long standing family ownership of State Farm’s management?

For example, in the 2001 case of Campbell v. State Farm Mut. Automobile Ins. Co., the Utah Supreme Court in 2001 found:

“2. The Nature of State Farm’s Misconduct

This factor specifically analyzes the nature of the defendant’s conduct in terms of its maliciousness, reprehensibility, and wrongfulness. It mirrors the “reprehensibility” factor described by the United States Supreme Court in BMW of North America, Inc. v. Gore, 517 U.S. 559, 134 L. Ed. 2d 809, 116 S. Ct. 1589 (1996). There, the Supreme Court stated that the defendant’s misconduct is “perhaps the most important indicium of the reasonableness of a punitive damages award.” …Repeated “trickery and deceit” targeted at people who are “financially vulnerable” is especially reprehensible and worthy of greater sanctions. … Moreover, “deliberate false statements, acts of affirmative misconduct, or concealment of evidence of improper motive” also warrant larger awards. …

With these standards clearly in mind, the trial court made nearly twenty-eight pages of extensive findings concerning State Farm ‘s reprehensible conduct. We summarize here three examples from those findings of State Farm ‘s most egregious and malicious behavior.

First, State Farm repeatedly and deliberately deceived and cheated its customers via the PP&R scheme. See Court’s Findings, Conclusions and Order Regarding Punitive Damages and Evidentiary Rulings, Campbell, at 17-27. For over two decades, State Farm set monthly payment caps and individually rewarded those insurance adjusters who paid less than the market value for claims… Agents changed the contents of files, lied to customers, and committed other dishonest and fraudulent acts in order to meet financial goals…For example, a State Farm official in the underlying lawsuit in Logan instructed the claim adjuster to change the report in State Farm’s file by writing that Ospital was “speeding to visit his pregnant girlfriend.” …There was no evidence at all to support that assertion. Ospital was not speeding, nor did he have a pregnant girlfriend. Id. The only purpose for the change was to distort the assessment of the value of Ospital’s claims against State Farm’s insured. As the trial court found, State Farm’s fraudulent practices were consistently directed to persons–poor racial or ethnic minorities, women, and elderly individuals–who State Farm believed would be less likely to object or take legal action.

Second, State Farm engaged in deliberate concealment and destruction of all documents related to this profit scheme….State Farm’s own witnesses testified that documents were routinely destroyed so as to avoid their potential disclosure through discovery requests….Such destruction even occurred while this litigation was pending… Additionally, State Farm, as a matter of policy, keeps no corporate records related to lawsuits against it, thus shielding itself from having to disclose information related to the number and scope of bad faith actions in which it has been involved.

Third, State Farm has systematically harassed and intimidated opposing claimants, witnesses, and attorneys… For example, State Farm published an instruction manual for its attorneys mandating them to “ask personal questions” as part of the investigation and examination of claimant in order to deter litigation… Several witnesses at trial, including Gary Fye and Ina DeLong, testified that these practices had been used against them… Specifically, the record contains an eighty-eight page report prepared by State Farm regarding DeLong’s personal life, including information obtained by paying a hotel maid to disclose whether DeLong had overnight guests in her room…There was also evidence that State Farm actually instructs its attorneys and claim superintendents to employ “mad dog defense tactics”–using the company’s large resources to “wear out” opposing attorneys by prolonging litigation, making meritless objections, claiming false privileges, destroying documents, and abusing the law and motion process…

Taken together, these three examples show that State Farm engaged in a pattern of “trickery and deceit,” “false statements,” and other “acts of affirmative misconduct” targeted at “financially vulnerable” persons…. Moreover, State Farm has strategically concealed “evidence of [its] improper motive” to shield itself from liability, which was furthered by State Farm’s treatment of opposing witnesses and counsel…. Such conduct is malicious, reprehensible, and wrong.

State Farm responds by arguing in its brief that even if its conduct was wrong, it does not “after all, involve murder, torture, or deliberate poisoning of the environment,” and thus cannot warrant millions of dollars in punitive damages. Additionally, State Farm argues that under Crookston II, willful calculated fraud was not sufficient to justify a higher than ordinary ratio of punitive to compensatory damages…

State Farm fails to realize that, while Crookston II held that fraudulent conduct alone was insufficient to justify a large punitive damage award, it also observed that fraud combined with other factors justifies a higher award….the company’s ‘calculated and calloused attitude’ toward settling valid claims.” …In this case, the jury was convinced, and the evidence shows, that State Farm engaged in a widespread pattern of fraud. Moreover, the evidence of its PP&R scheme demonstrates that State Farm specifically calculated and planned to avoid full payment of claims, regardless of their validity. Thus, the nature of State Farm’s conduct supports the imposition of a higher than normal punitive damage award.”

The United States Supreme Court reversed the amount of punitive damages and sent the case back further review of State Farms’s claims culture. This occurred in 2004, before Hurricane Katrina, and the conservative Utah court held:

” In insurance each party must take a risk. But it is inaccurate to assert that if the insured event does not occur then the insured receives nothing in return for the premium payment made. Each insured receives at the time of contract formation present assurance of compensation if the loss occurs which is a valuable peace-of-mind protection.


Insureds buy financial protection and peace of mind against fortuitous losses. They pay the requisite premiums and put their faith and trust in their insurers to pay policy benefits promptly and fairly when the insured event occurs. Good faith and fair dealing is their expectation. It is the very essence of the insurer-insured relationship. In some instances, however, insurance companies refuse to pay the promised benefits when the underwritten harm occurs. When an insurer decides to delay or to deny paying benefits, the policyholder can suffer injury not only to his economic well-being but to his emotional and physical health as well. Moreover, the holder of a policy with low monetary limits may see his whole claim virtually wiped out by expenses if the insurance company compels him to resort to court action.

….As the facts of this case make clear, misconduct which occurs in the insurance sector of the economic realm is likely to cause injury more closely akin to physical assault or trauma than to mere economic loss….When an insurer callously betrays the insured’s expectation of peace of mind, as State Farm did to the Campbells, its conduct is substantially more reprehensible than, for example, the undisclosed repainting of an automobile which spawned the punitive damages award in Gore….

This deceitful conduct can only be explained as part of a scheme to reduce State Farm ‘s economic exposure. The possibility that its dissembling would expose the Campbells to an excess judgment must have been apparent to State Farm . To react as it did when the excess judgment became a reality only confirms the toxicity of State Farm ‘s behavior.

When considered in light of all of the Gore reprehensibility factors, we conclude that a 9-to-1 ratio between compensatory and punitive damages, yielding a $ 9,018,780.75 punitive damages award, serves Utah’s legitimate goals of deterrence and retribution within the limits of due process.”

Unlike the vast majority of American corporations whose boards and regulatory audit committees would have cast out a CEO after such findings, State Farm’s board of directors and audit committees did nothing. This financial and independent giant thumbed its nose at regulators and the courts. It made no change. I would be more than happy to share anything that anybody has to offer to explain how such a small amount of punitive damages changed one of America’s largest corporations (allegedly non-profit).

Utah has Mormon conservatives, but what about Florida, where people from the north and south, liberal and conservative, must agree upon ethics? Is State Farm honest in Florida? How about this finding, which I reported in “State Farm’s Freakoutnomics:”

“The recommended Order from the Judge who reviewed the rate increase explains how State Farm’s theory of loss is sham economics. Starting at page 15:

“…State Farm Florida also paid State Farm Mutual $12.8 million for a credit risk provision….

Of the total $700 million paid to private re-insurers, State Farm Florida paid approximately $151 million to private re-insurers other than State Farm Mutual. State Farm Florida paid $549 million to its parent company, State Farm Mutual.

Payments to unrelated private re-insurers represent arms-length transactions between a willing buyer and willing seller of reinsurance coverage. However, the fact-finder is unable to determine from a preponderance of the evidence whether either the cost of reinsurance purchased from State Farm Mutual or the cost of the credit risk provision purchased from State Farm Mutual is excessive or reasonable….

The economic reality is that State Farm Florida is merely the legal form in which State Farm Mutual chooses to do business in Florida. State Farm Mutual and its wholly-owned subsidiaries, including State Farm Florida, comprise a “group or combination” that the Legislature defines as a “person” …

Transactions between State Farm Mutual and State Farm Florida for reinsurance and credit risk provisions totaling approximately $561.8 million, when viewed in the light of economic reality… may be transactions which State Farm Mutual engages in with itself and which lack any independent economic significance. Transactions with no independent economic significance would be sham transactions which may distort the economic costs… Such economic distortions may enable the group to derive a rate advantage from the legal form in which State Farm Mutual chooses to do business in Florida.”

That is what the judge said and this is what I said:

“The above findings cannot be overstated. The judge made these findings after State Farm and Florida’s Office of Insurance Regulation fought over the details of State Farm’s request for a rate increase. The bottom line is that what State Farm Florida wishes to report as expense, is largely payments made to its parent company. Essentially, it is moving income from one pocket to another, while claiming it as an expense.

If the media would report on this finding with headlines such as, “Judge Rules State Farm Engages in Sham Transactions,” I do not think that State Farm’s explanation of financial loss and threats to leave Florida would have such an impact. If people knew the whole story, they would know State Farm’s tales of financial loss in Florida are nothing more than propaganda.”

In Mississippi, so many clients had altered engineering reports that it was obvious the problem was not just a mistake. Every time the change was made, it was to lessen the amount owed. Who in any position of leadership would allow this to wrongfully happen without picking up the phone and asking to quietly resolve the matters? I have never spoken to Ed Rust Jr. Other insurers have been understanding enough to have their officers call their policyholders who have catastrophic claims. Slabbed and Anita Lee are reporting events necessary for an understanding of State Farm’s litigation culture.

This week, the Florida Appellate Court decided the issue against State Farm and for Florida policyholders. and for Kevin McCarty. The important thing is that a “sham” transaction and argument has been made to Florida Regulators and judges. Why should State Farm be able to hold a license in any state given the findings here and in Campbell? Because they have a tremendous amount of money and lots of really nice and friendly local agents? Maybe to keep the license throughout the rest of the country, State Farm should have to change culture at the very top. Do any of you think that you should run your family’s business by birthright? Why should Ed Rust, Jr.?

What do you think?

I think Merlin poses a question that has begged since Katrina.  What do you think?

15 thoughts on “Merlin pops the question: Should Rust family stay in State Farm’s power and ownership given the recent record of policyholder and corporate citizen ethics?”

  1. Very well done.

    Once again, where is the US Attorney’s Office? Where is the national media?

  2. By way of introduction, I used to work for Mr. Merlin (for 20 yrs. to be exact – 1985-2005) so I’m well versed in Plaintiff’s insurance law by way of “osmosis” among other things. I became Chip’s first Plaintiff’s Legal Secretary following his departure from a defense firm and his opening of his own Plaintiff’s firm in 2/85. Anyway, it was just Chip & I for many years and look at him now!!

    Anyway, I read his Blog daily and usually respond.

    The following response concerned Ed Rust, Jr.’s “inheritance” of State Farm – it’s not entirely “on point” w/the problems yall are having in your State, but it appears State Farm affects EVERYONE EVERY WHERE.

    Here are 2 responses to Chip’s 7/24/09 Blog:

    shirley heflin – July 24, 2009 10:26 PM
    Dear Mr. Merlin:

    You may speak for SOME Americans when you say that

    “…in the United States, we believe in earning leadership rather than being born into it,”

    This is certainly not true for ALL Americans. I know of many who have inherited the family business without performing the hard work, sacrifices, dedication, etc., that their Grandfather, Great-Grandfater, and Father paid and endured. This silver spoon generation may have been lucky enough to have inherited jewelry stores, insurance agencies, law firms, medical practices, real estate offices, ballroom dancing store branches, or an insurance company! Indeed, once the requisite educational requirements have been met – if they’re even necessary for some of the mentioned businesses and/or practices – I’ve witnessed situations where the “silver spoon” has to practically be force fed to the “inheriting” child and/or children.

    So maybe this is the deal for Ed Rust, Jr.; I don’t know because I haven’t spent any time researching his life. I take it there must be an “Ed Rust, Sr.” though – do you know? He must have taught his son something for him to have stayed in power this long, or, believe it or not, maybe Mr. Rust’s mother taught him a thing or two. 🙂


    shirley heflin – July 25, 2009 1:24 AM

    I have a penchant for quoting you:

    “…But, there truly is a problem when a corporate citizen can think through its upper management that it can “game” the political and judicial process so much that when it is caught, there are no ramifications to management.”

    Can you say Bernie Madoff? I realize he’s doing his prison time alone, but I doubt he ran all that money through his personal account – there had to have been “corporations” established and other illegal shenanigans performed to aid in his stealing from the innocent. It’s his “business associates” and/or “friends” that came forward and provided evidence and testimony in exchange for their freedom and resulted in the loss of Madoff’s freedom.

    It’s the old “LET’S MAKE A DEAL” concept. Nothing new in corporate America – as usual, it’s the little people (in this case, the policyholders) who suffer THE MOST.


    Chip Merlin – July 25, 2009 10:26 AM

    I appreciate your passion for the “liitle person.”

    I think that most people in general and managers in corporations are very good people. I really do not subscribe to the theory that people become bad or callous because they work or manage in a corporate culture–even a large one.

    As a matter of fact, many corporations push for social progress. Many corporations require diversity training, teach tolerance and respect for different religious views, promote respect for colleagues regardless of race or sexual preference.

    However, there are many management concerns of organizational behavior where parts of corporations, trying to achieve one goal, sometimes lose focus of the ethics of what is being done and how the goal fits into the larger picture of the corporate mission.

    Ed Rust, Jr. and the upper management of State Farm are very sofisticated and capable. But, somebody should question how they can approve of such tactics as a business that supposed to be helping policyholders.

    TO ALL OF YOU @ SLABBED: I’m very impressed w/your site and, in addition to reading Chip’s Blog daily, I now read yours! You’re all doing a great job and are a compliment to the world of journalism! 🙂

    (Tampa, FL)

  3. Welcome to SLABBED, Shirley. I’m with one of my children this weekend and have had difficulty getting on/staying on the site.

    I had not done any research on Mr. Rust until I wrote the introduction to Chip’s post here, although I had wondered how it must feel to have soiled the family business.

    Mutual companies don’t seem very “mutual” to me – particularly when Mr. Rust’s compensation was $11,000,000 for recent year and his “mutual owners” AKA “the little people” had their rates go up.

    I enjoy your comments on Chip’s blog and now I see that you’re just keeping him on his toes!

    Thank you for the kind words about SLABBED and for your interesting comment. The latch string is always out;.


  4. Well, thanks, Nowdy. The reason I said maybe Ed Rust, Jr.’s mother may have taught him a thing or two is because I’m a single mom w/a 13 y.o. son. I note you’re w/one of your children this w/e. I can’t imagine more than one !! Of course, if I had more than one, I’d feel differently (obviously) because children sure put things in perspective for you – it’s like they “complete” you. I made it through my 20’s w/o children, got married around 30, had Dillon @ 33 and then divorced in 2000 !! All in the midst of being Chip’s “right hand” running this HUGE INS. EMPIRE LAW FIRM!! Anyway, 20 yrs was enough and now I’m pursuing my dreams. I’m finishing my Bachelor’s in Criminology (school starts again in Sept.) and after that I’d like to go to law school. I know one thing – I’ll certainly have the “inside scoop” on Legal Secretaries and how to treat a client. 🙂

    Best wishes,

    P.S. Criminal law and family law have always fascinated me the most – they just don’t pay as well – go figure !!

  5. Shirley your great. If you love criminal law than go for it. Keep up the good work in life. I like to see people living their dreams.

  6. Steve, thanks for your kinds words ! 🙂 I’m gonna work as hard as I can focusing on myself and my dreams(for once).

  7. TO THE UNTOUCHABLES. Edward B. Rust, Jr., will be happy to tell you that he is the Chief Executive Officer of State Farm Mutual Insurance Company. He has deep family ties to State Farm, as his father and grand father have both served in that capacity. He will also tell you that he is an educated man who has been to law school and is a past practicing attorney. In addition, he was the chairman of the Coalition for Excellence in Education and a member of George W. Bush

    1. Good issue, Mel:

      “This practice exposed policyholders to judgments above the limits of their policies, when the company was attempting to make an effort to win smaller decisions.”

      Not only that, we cannot forget that defense counsel are running the meter as they play in court. I’ve been on both sides and in my wildest dreams as an attorney on the defense I never had the notion of filing the crap summary judgment motions which I see from the admiralty/personal injury defnse bar which I see in both fed and state courts. All of that costs the policyholder.

  8. My grandfather started State Farm and built to what it is today. I know from personal experience that Ed Jr. worked is way up from the bottom and became CEO because of his merits and not his name, just as his father, my uncle, Ed Sr. did.
    You can write what you want about the company and the lawsuits that have been brought against them. All major corporations, especially insurance companies with the recent natural disasters our country has faced over the past decade, are going to have lawsuits brought against them from unhappy customers. We live in a society where litigation and the suing of large corporations for personal profit is the norm.
    You can take shots at the company all day long. But do you know Ed Rust? Do you know what kind of man he is? Do you know how much time and money he spends in giving back to his community, his country and his policyholders? No. You sit in front of your computer searching for negative things to write about people and companies. Maybe you should do a little research into the positive things that State Farm and my family has done. Take a look at the millions of lives and families that State Farm has helped over the years. If you want to take shots at insurance companies, take a look at the real bad guys, not the companies that lead the way in customer service and policyholder satisfaction. Or does that go against the view of your little world or your life’s purpose of digging up dirt and screaming out through your little blog, “Gotcha!”

    1. Today must be Slabbed’s lucky day. We’ll have to agree to disagree on State Farm’s conduct here after Katrina.

      Don’t know if you are still involved in the family business but I recommend you spend a week or two with a Renfroe or Avril adjuster after a major catastrophe if I may be so bold as to suggest that.

      Welcome to Slabbed Mr. Rust.

    2. State Farm tipped my 80 year old mother off big time. You steal from the insureds and then give donations in your name to different groups and reap the glory from it. You are disgusting, despicable criminals.

  9. *Edit. As I was writing this I see the “Gotcha” blogger has spoken. My perspective is hopefully different than his.*

    Ohmygosh! I have been soooo wrong! Thankyou eversomuch for lifting the scales from my eyes!

    I read this comment of your just at the right time. I can’t imagine what my day would have been like had I missed it. A VEERY important update to a long moribund discussion apparently.

    Just a few minutes ago I was reading about a state agency in trouble, and all the fine people who are now criticized for their volunteer service! This honorable group of volunteers are the face of the Mississippi CMR. That is I what I thought of as I read your observations. They are under a similar type “attack” by the local press,and some of the taxpayers. Also bedeviling their fishing excursions and their “inspection and sampling trips” are the very same negative nabloggery you describe as afflicting State Farm: “You sit in front of your computer searching for negative things to write about people and companies”.

    At this point in time may I direct your attention to the good men of the Mississippi Commission on Marine Resources, and all those contractors given the bum’s rush from their positions perhaps just because they had the misfortune to be hired by the former Director of the Mississippi Department of Marine Resources. Helloooo. Shouldn’t the director hire and fire?

    Anyway, Vern Asper could use a helpful prop or two right now, and the Walker family perhaps begins to resemble the Rust family and State Farm, being beset by negative type attacks and obvious douchebaggery. I defer to you or another member of the family to confirm the comparison, as I just know them by their press reports. For sure the Walkers and Vern need some kind words as much as friendly attorneys and lobbyists.

    I’d also like to take the opportunity to bring to your attention some other persons from the Gulf Coast currently looking for employment for various reasons. The nabloggers and newspaper reporters have quite a list of those who might fit right in at State Farm.

    Thank you for your attention to these matters Mr. Rust.

  10. “Take a look at the millions of lives and families that State Farm has helped over the years. ”

    Helped? I think what you had meant to say was “provided our customers with the product they paid for”

    Not that State Farm did that either.

    1. Feel good blather from a beneficiary of a state regulated and assisted industry.

      Not Now, you hit the nail on the head. Give the customer the product he sought by conventional obligation. Don’t jack over the costomer and then seek protection from the state in order to avoid performance on an obligation.

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