Behind door #1 – Xactware come on down!

A number of complaints have been filed with the Justice Department regarding what appears to be an effort to fix prices in the property insurance claims repair business. It involves a company called Xactware, which is a wholly-owned subsidiary of the Insurance Services Organization.

The writer,  an independent business owner, was concerned because the practices in question impact my business, my employees and my family – raising the question:  What practices?

As a practice, insurers, through their adjusting procedures, attempt to impose compliance with these “pricelists” by contractors as a broad group. Because of Xactimate’s position in the industry, at the very least I believe they should be enjoined from presenting their data as a “pricelist”.”

Again, a question is raised: What is Xactware’s data in Xactimate if it isn’t a “pricelist”?

They produce a pricing database, which they market as a “pricelist”, which is actually a database of information of previously submitted settlement numbers for typical processes heavily dependent on “feedback” from insurance companies and from captive contractors who have agreements with those insurers to use the database as a “pricelist”. This methodology results in a self-fulfilling prophecy as insurers and their contracted companies feed back information to establish a “pricelist”…

There is also no doubt that these so-called price lists can be manipulated BOTH downwards and upwards if the client requesting the “price” has a vested interest in doing so.

But, wait, “these client” are insurers –  insurers that own a controlling interest in ISO and ISO owns Xactware.

August 10, 2006: ISO has acquired the assets of Xactware, Inc., the leading provider of estimation software and services for the property insurance, remodeling and restoration industries. Terms were not disclosed…

Founded in 1986, Xactware’s customers now include 16 of the top 20 property insurers and approximately 80 percent of insurance repair contractors and service providers. During the record-breaking hurricane seasons of 2004 and 2005, Xactware’s products were used to settle more claims than all its competitors combined.

Bam Bam explained, ISO slipped out of a deadly anti-trust case this way… ISO was organized as a non-profit arm of the insurance industry until the Attorneys General of 20 states questioned the propriety of an insurer-owned and controlled organization gathering data from those insurers and then issuing advisory pricing information based on that data. The lawsuit was settled when the industry converted ISO from a non-profit to a stock corporation – a front door strategy that allowed the industry to come in the back with 85% of the stock and controlling ownership.

In that context, ISO makes the perfect owner for Xactware – a purchase that took place slightly less than a year following Hurricane Katrina with attorneys from both Mississippi and Louisiana  knocking on the door of Xactware.  Among those knocking loudest were the Rigsby Qui Tam and the Qui Tam filed by the Branch Consultants in Louisiana that, unlike Rigsby, named Xactware as a defendant.

In the Rigsby case,  the use of Xact Total to  “hit limits” when adjusting flood claims versus the NFIP approved use of Xactimate, a program that produces a stick built estimate, was identified as a specific element of State Farm’s allegedly fraudulent billing of claims to flood damage covered by the NFIP.  The Branch Consultants named adjusting companies along with insurers as defendants in an alleged fraud of overbilling NFIP.

Neither of those cases, however, makes allegations the company violated antitrust law.  However, Louisiana Attorney General Foti raised the issue in a case filed against insurance companies claiming violations of the state’s antitrust statue.

Perhaps, Foti’s case would have been framed differently had the distinction between a “pricing data base” and “price list” made by restoration contractors been the common understanding of the service Xactware provided the insurers.

Shafer v State Farm (Eastern District Louisiana Federal Court) however, challenges the Xactware price lists:

This is a case about State Farm’s uniform, corporate-wide practice of undervaluing Louisiana insured’s property damage after Hurricane Katrina and Xactware’s active and intentional collusion. State Farm required its adjusters to use the computer program Xactimate to compute the replacement value of damaged property for as much as 60% below the actual market place value.

Xactimate is an estimating computer program used to determine the value to replace damaged property. Defendant Xactware, Inc., designed the program. The Xacimate program is a computer program where the dimensions of the damaged property (e.g., sheet rock) are inputted into the program and a value is assigned to it, typically by square feet or linear feet.

The Xactware program itself is not at issue in this case but the price lists used to value the damage is at issue. Xactware contends to have divided the state of Louisiana into separate territories and issued pricelists for each of those areas, purportedly reflective of the market rate. Xactimate has approximately 10,000 line items in the price lists, ranging from sheet rock to roofing, painting to flooring.

However, Xactware created more than one version of the price lists. Xactware created price lists for Xactimate to be sold publically to contractors or estimators or anyone who wanted to purchase the program. Yet, Xactware created another version of the price lists for State Farm and other insurers that was far below not just the market price, but also far below its own publicly offered price lists. Xactware intentionally colluded with State Farm and other insurers to create this alternate price lists to drive down the value of the claims of Louisiana insureds after Katrina.

…Xactware’s wholly owned subsidiary Xactnet is a network which acts as the conduit for State Farm to assign claims to adjusters (through the Xactimate program), and for those adjusters to, in turn, submit estimates back to Defendant State Farm for final approval.

Still, there are no alleged violations of the antitrust exemption to McCarran-Ferguson as defined by the Antitrust Division of the Justice Department in response to an ISO request for business review written a year before the non-profit reorganized as a stock company.

To be exempt from antitrust challenge by virtue of the McCarran-Ferguson Act, conduct must not only be the business of insurance but that business must also be regulated by state law.

Perhaps the states of Mississippi and Louisiana regulate the pricing database used by insurance companies.  The State of Florida, on the other hand, is an Xactware customer.

The original Xactware contract was awarded by the Board in May 2006 following an RFP process.

For the Xactanalysis components, competitive solicitation is not required for the following reasons:

• This is the only product that works with the XACTIMATE estimating platform which Citizens has contracted with until July 31, 2008. This extension of the Master Agreement to May 31, 2009, coincides with the termination of our Independent Adjuster agreements which are required to use Xactimate.

• To utilize another tool for trending estimate results would require Citizens to find and implement another analytical software program in lieu of XactAnalysis.

• The XactAnalysis management tool of XACTIMATE is a seamless system of delivery and enables Citizens to compare and review estimates prior to and after payment of claims have been made. It also enables Citizens to more closely compare loss costs on Daily and Cat claims against industry averages.

Mississippi and Louisiana could be Xactware customers, too; but, thus far there is just suggestion of what goes on behind the closed door of  ISO-owned Xactware:

Dealing with the pricing department at Xactware is kinda like the pickin’ up a hooker in Las Vegas, they may dress nice and look good,they may have a pretty smile and tell you how wonderful you are and, if you ask, they’ll even tell you they love you, they are somebody’s daughters and inside they’re really nice girls. But in the end they’re…….well, you know what they’re doin’ to you for the money.

3 thoughts on “Behind door #1 – Xactware come on down!”

  1. Great link, Steve. I scrolled all the way down and found entry saying the conversion from non-profit to private, for profit did not take place until 1997. I gather from that, given the information that I found, that the process took place over several years – starting with insurers giving up their seats on the non-profit board in ’95 as I recall.

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