McKinsey consulted with State Farm on Xactware estimates following Katrina – Schafer v State Farm

If you type “McKinsey” into “Search” at the top of the page, you’ll find a multi-page listing of related SLABBED posts. What you will read, however, is far from a glowing report on a Company that touts, “Our alumni number more than 18,000, and work in virtually every business sector in over 80 countries” on its website.

One of the recurring questions about McKinsey is what role the Company’s consulting played in the way insurers handled policyholders’ claims following Hurricane Katrina. McKinsey was a named defendant in the anti-trust case filed by former Louisiana Attorney General Foti who accused the Company of “advising insurers to ‘stop ‘premium leakage’ by undervaluing claims using the tactics of deny, delay, and defend’ “.

After the case was dismissed, State Farm spokesman Phil Supple commented, “We felt these allegations were completely unfounded from the outset, and we’re pleased the court today agreed with our position”. State Farm continued to maintain that position in Schafer v State Farm, according to the Schafer’s Reply Memorandum in Support of Motion to Compel.

In its Opposition, State Farm stated: “McKinsey has not provided any services or documents to State Farm in connection with the adjustment or handling of Hurricane Katrina property claims, and McKinsey materials accordingly are wholly irrelevant here.” The Gourgues affidavit (attached to State Farm’s Opposition) states, in part: “Since that time [1998], however, McKinsey & Co. has provided no services to State Farm that have impacted the handling of Hurricane Katrina property claims in Louisiana.”

However, the Schafers also say, “This is just not true” and provide supporting documentation for their claim.

On September 7, 2006 and November 17, 2006, the deposition of Susan Q. Hood was taken in the case of Watkins v. State Farm Fire & Casualty Company, No. CJ-2000-303 in the State District Court of Grady County, State of Oklahoma.  See Deposition of Susan Q. Hood, attached as Exhibit “A”. Ms. Hood identified herself as the highest ranking claims person in the State Farm organization.

When Ms. Hood was asked if McKinsey & Company was consulting with State Farm, she indicated they were currently working on “the materials that we use for building estimates . . .”.  She testified:

QUESTION: Is McKinsey & Company involved in any aspect of State Farm’s operation right now?
ANSWER: Yes, I think they are.
QUESTION: In what capacity?
ANSWER: I don’t know in every capacity.
QUESTION: Is it —
ANSWER: I don’t know all the different things McKinsey might be doing for the company.
QUESTION: Which ones do you know of?
ANSWER: I know some – some work that McKinsey is doing in my respective department.
QUESTION: Which is?
ANSWER: The work?
QUESTION: Yes.
ANSWER: They are working with us right now in reviewing the materials that we use for – for building estimates and the contents that – that – and how we replace contents for our policyholders.
QUESTION: Estimatics or Xactimate?
ANSWER: That’s the – Xactimate is –
QUESTION: Right.
ANSWER: It’s the same –is an estimatics platform.
QUESTION: Right.
ANSWER: I don’t know – they’re involved in the – the materials that are used in estimates, or helping us review the materials that we use in estimates.
Id. at 119-120.

QUESTION: Have you reported McKinsey’s involvement and what they’re doing to this member of the chairman’s council?
ANSWER: I believe – I have not personally reported on the work that McKinsey has done, or an interim report on the work McKinsey has done, but I believe the member of chairman’s council to whom I report is aware that we have engaged McKinsey.
Id. at 121-22.

Moreover, State Farm’s in house counsel and counsel in this case Hedi Dalenberg knew this:

QUESTION: Are State Farm’s in-house counsel participants in this program with McKinsey that’s going on currently?
ANSWER: I don’t know whether State – whether any of our corporate attorneys are involved in this work. I would – I would – I’d be specul – well, I’ll say it this way. I assume that there probably is an attorney working with us.
Id. at 124.

A footnote in the Reply backs up the Schafer’s claim about Ms. Dalenberg and states, “It should not go unnoticed that Heidi Dalenberg was at this deposition and is one of State Farm’s attorneys in the case at bar”.

Finally, Ms. Hood had numerous conversations with numerous McKinsey employees even before her deposition:

QUESTION: Okay. Well, give me some of the names of the McKinsey people that you do know?

ANSWER: I have had conversations with Mike Pertulla (phonetic). I’ve had conversations with Navdeep (phonetic) Aurora. I’ve had conversations with a person named Kevin Ratichis (phonetic), and those are the people that I remember right now.

Id.

Thus, State Farm’s highest claims person admitted under oath that McKinsey had provided services to State Farm that directly related to the adjustment of claims during the period of time Hurricane Katrina claims were being adjusted and would continue to be adjusted for years to come. State Farm’s numerous assertions to the contrary are, at best, half-truths using twisted word-play. State Farm hired a high priced consultant to make money and that consultant worked on Xactimate – which is the program used in adjusting the Schafer’s claim. Plaintiffs are entitled to discover information relative to this issue because it strikes at the heart of State Farm’s misuse of this program and its intentional undervaluation of the Schafer’s claim.

Now, the question is not if McKinsey played a role in State Farm’s handling of Katrina claims but how State Farm will respond to the evidence.

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