The following is a post by PBS regarding its investigation into insurance claim denials and underpayments in the United States [since removed from the internet]. The story cites Trial Guides' book From Good Hands to Boxing Gloves. It is accompanied by a video "Home Insurance 9-1-1" [which has also since been removed]:
In the fall of 2003, one of the largest recorded wildfires in California's history destroyed over 2,200 houses and killed fifteen people. Soon after, many who'd lost their homes had a rude awakening: their insurance did not nearly cover their losses as expected.
The insurance industry, which claims to cover "more property, more lives, more liability-related risks than any time at history," is busy fighting allegations that customers are receiving smaller payouts than what they were promised. This week, NOW collaborates with Bloomberg Markets magazine to investigate tactics some insurance companies may be using to reduce, avoid, or stall homeowners' claims in an effort to boost their own earnings.
"The insurance industry...is purposely misleading customers," California Lieutenant Governor and former Insurance Commissioner John Garamendi tells NOW. "The first commandment of the insurance industry is, 'Thou shalt pay as little, as late, as possible.'...You go to financial heaven if you can carry out that commandment."
The insurance industry is enjoying record-breaking profits, but who's paying the price?
[The following is a transcript from a PBS NOW video "Home Insurance 9-1-1" since removed from the internet]
BRANCACCIO: Welcome to NOW on the road near San Diego, California.
Something always seems to be catching fire in this state this time of year, but when the worst California wildfire in over century swept through here a while back, it ignited a storm of controversy. It's about insurance and whether your home is in California or Carolina, or whether it's near the wild or in a city, you'll want learn what happened to homeowners here. The fire four years ago killed 15 people and also destroyed more than 2000 homes. But many residents here had planned for the worst and took some comfort in the insurance policies they purchased, coverage they expected to make them whole again if the worst ever happened.
After the fire, what many got instead was aggravation, and the bitter realization that home replacement insurance plans in many cases didn't pay to replace homes.
In collaboration with the investigative reporters at Bloomberg markets magazine, we found these controversial practices by insurance companies are widespread in an industry with little federal oversight. Brenda Breslauer produced our report.
October 2003. What became known as "the Cedar Fire" swept across an area 19 times the size of Manhattan, burning for eleven days.
CATHY KOLBENSCHLAG: It was like a barrel of fire. A huge, big barrel rolling—rolling up the, up the canyon.
LAUREN KOLBENSCHLAG: I was afraid that we weren't going to get out of there in time. It was scary
BRANCACCIO: More than 2000 homes were wiped out... altering the courses of lives.
CATHY KOLBENSCHLAG: I really don't know if it's something you ever recover from.
BRANCACCIO: Nearly four years after the fire, Cathy Kolbenschlag has been living in a motor home with her daughter and grandkids while her home is still under construction.
Rick and Kathleen Huneke had sunk all their retirement into building what was, before the fire, their dream house.
HUNEKE: Can't replace what you lost. Sixty years of working. Sixty years of everything from family, everything gone, wiped out.
BRANCACCIO: When they lost their homes, these California families thought things couldn't get any worse, until they talked to their insurance companies.
TUNNELL: We were all underinsured. It didn't matter who your agent was, which company you were with, when you bought your house, what kind of policy you had.
BRANCACCIO: Julie Tunnell's house burned in the cedar fire while she was away on a camping trip with her husband and son.
So it's from that morning?
TUNNELL: From that morning...
An accounting professor at San Diego City College, Tunnell is a homeowner who's comfortable around numbers and fine print.
TUNNELL: We had State Farm Insurance. We had a guaranteed replacement value. I never once gave it a thought that we weren't insured adequately to rebuild our home.
BRANCACCIO: But State Farm, the largest home insurer in the U.S., offered Tunnel and her husband much less than the amount State Farm's own contractor estimated it would cost to rebuild.
TUNNELL: You know, we came to find out the hard way that "replacement" doesn't mean replacement.
BRANCACCIO: So guaranteed replacement value is what you thought you had. What did you have in the end?
TUNNELL: Well, it turns out we had something called extended replacement value. And it ends up where that little change in the wording cost us about 60 percent of our insurance coverage. And that turned out to leave us about $280,000 short.
BRANCACCIO: The Hunekes also learned that their policy wasn't what they thought it was.
HUNEKE: When I first got my policy I got a full replacement insurance policy. And I found out that wasn't the case when the house burnt.
BRANCACCIO: State Farm's own contractor estimated it would cost $589,000 to rebuild. The insurance company offered about half that, just $305,000. If they wanted their house back they'd have to somehow come up with 284 thousand dollars.
MAN IN MEETING: You're looking at that agent to guide you.
BRANCACCIO: While many people had insurance companies that paid as expected, hundreds did not.
At this support group for victims of the California fire, I heard the same story again and again.
How many people here thought that they were covered for the full replacement value of their home to the time of the fire? How many people received that full replacement value from their insurance companies? A lot of the hands go down.
The experiences of these homeowners reflect a growing concern over how some of the largest companies in the insurance industry may be boosting their bottom lines by changing policy language or aggressively fighting claims from homeowners. And it raises a question: are insurers profiting from your losses?
LT. GOV. GARAMENDI: The first commandment of the insurance industry is, "Thou shalt pay as little, as late, as possible." And then you get the reward. You go to financial heaven if you can carry out that commandment.
BRANCACCIO: California lieutenant governor John Garamendi, a democrat, served twice as the state's insurance commissioner. A total of eight years battling with the industry over the many ways he says it tries to avoid high payouts where there's been a total loss.
LT. GOV. GARAMENDI: I'm telling you, the insurance industry, prior to the fire and probably even to this day, is purposely misleading their customers.
BRANCACCIO: Things really started to change in the insurance business after the Northridge earthquake in California in 1994. The quake caused widespread damage and rattled the insurance industry. After that, the terms of many homeowners' contracts around the country changed from full replacement to "extended replacement"... innocuous sounding language that placed a limit on how much those policies covered.
While the insurers point out they followed the letter of the law and mailed out news of the changes with policyholders' statements, many people didn't understand or even notice the change.
TUNNELL: Had we seen some type of notice that says, "For the same high premium, you will now get less coverage." I think that would've registered.
BRANCACCIO: Also just the word extended replacement coverage.
TUNNEL: Sounds good, doesn't it? We have extended coverage. That sounds even better than guaranteed coverage, doesn't it? That's where some people even reported that they were told by their insurance agents that it was actually better 'cause now you have extended coverage
BRANCACCIO: Rick Huneke says he was told just that by his state farm agent.
HUNEKE: It's a better policy, and don't worry about it. It's fine, you'll have plenty.
BRANCACCIO: And it's not just California. Reporters David Dietz and Darrell Preston of Bloomberg Markets Magazine have just completed a six month investigation of the insurance industry.
PRESTON: Since the early 1990's the industry's changed its whole approach to paying claims. They no longer just look at a claim, make sure it's legit and then pay it. Now, they drag their feet, fight it, challenge it, anything to keep from paying.
BRANCACCIO: In every kind of disaster from house fires to hurricanes to tornadoes, the Bloomberg reporters found similar patterns across the country. When there's a disaster, they found the companies that homeowners count on to make them whole again frequently pay less than what the homeowners think their policies promise, even when homeowners say they had firm assurance from their agents they were fully covered.
DIETZ: People were basically offered a lot less than what deserved. It's like calling 911 and getting hung up on.
BRANCACCIO: Meanwhile, the industry's overall profits have been soaring. Even in 2005, with hurricane Katrina becoming the costliest disaster in American history, insurers reported record profits of 47 billion dollars. Then last year, the industry racked up its highest profit ever of 67 billion dollars.
DIETZ: The profits are enormous at a time when they're continuing to put pressure on people to accept lower amounts of money.
BRANCACCIO: How did this happen? Well, consider one factor...in the early 1990s, Allstate insurance hired an influential New York based consulting company. McKinsey and company works with businesses to figure out ways to make more money. McKinsey began advising Allstate insurance to hold down costs by changing the way it dealt with policyholders.
To this day, the McKinsey documents are a closely guarded secret, but David Berardinelli, a Santa Fe, New Mexico attorney, managed to get a hold of them.
Berardinelli makes his living suing insurance companies and six years ago, during an accident case unrelated to the California fire, he gained access to more than 12,000 pages of documents McKinsey provided to Allstate in the early '90s. He's been fighting to use the documents in court ever since.
Why does Allstate work so hard to keep this information out of public view?
BERARDINELLI: It would be a public relations disaster. Because it is, when you strip away all of the fancy wording and all of the insurance company jargon, simply a plan to transfer money from the pockets of policyholders into the pockets of shareholders and top executive management.
BRANCACCIO: Berardinelli had to return the documents to Allstate in the course of his case, but he took copious notes and using these notes, he was able to show us what a jury has never seen, his recreations and excerpts of McKinsey's advice to Allstate.
So on the slide here, "Zero sum economic game." It reads, "Allstate gains, others must lose." These are the words of who? The consultant?
BERARDINELLI: Those are McKinsey's words.
BRANCACCIO: To Allstate.
BERARDINELLI: To Allstate.
BRANCACCIO: He said McKinsey was emphasizing the point that if Allstate was too generous to it's policyholders, there'd be less money left for it's shareholders. That's the zero sum game, he says.
BERARDINELLI: This is a very popular business term. It means, in essence, that to make money in business you have to take it away from someone else. Now that's okay for IBM or GE or Intel, but the problem, is that insurance is not a regular business. You're taking people's money on a promise. And you're promising to pay it out at a later time.
BRANCACCIO: It's quite a different picture than the one painted by the company.
For 57 years Allstate has advertised itself as the good hands people.
ALLSTATE COMMERCIAL: You're in good hands with Allstate
BRANCACCIO: Berardinelli says McKinsey also used the term good hands on a slide showing how to settle claims. It suggests that 90 percent of customers should get the good hands treatment. But, if they don't settle quickly, the other 10 percent should get boxing gloves.
You see this term "boxing gloves."
Is that your term?
BERARDINELLI: No, that's the term that was used by McKinsey.
BRANCACCIO: No longer good hands, but put on the boxing gloves is the idea
BERARDINELLI: That's correct. If you want full payment, you're gonna get boxing gloves. That means years of drawn out, no compromise, mad dog litigation
BRANCACCIO: David Thefeld's been fighting Allstate to rebuild this two bedroom, two bath home lost in that California fire in 2003...and he says he's seen those boxing gloves in action.
THEFELD: Deny, delay and defend. And the main one you experience is delay ya know, they want documents of everything. They want as many photos as you can find, videos you can find. Who gave you an estimate for hauling away debris? Who gave you an—engineering estimate? And then they subpoenaed all of those people. And then they cancel their appointment with them and then they reschedule them. And then they cancel it again and then they reschedule it. And they just drag it and drag it and drag it and drag it until you're almost four years out.
BRANCACCIO: Last month, after nearly three years of battle, Thefeld settled for $112,000; that's $56,000 less than Allstate originally offered... nearly a quarter of a million dollars less than his contractor told him he needs for rebuilding. But he felt victory in court was far from certain, and he realized he would lose financially, even if he "won."
THEFELD: It would have been a wash, because the attorneys would have cost so much. And then if I were to have lost, well then Allstate's attorneys is gonna come after—whatever value is left in me. Which, for me, is the lot here. So, stuck.
BRANCACCIO: What would be the point of spending so much money to fight a smaller claim?
BERARDINELLI: To set an example. To let other people know that if you challenge our values, we will spend obscene amounts of money to crush you.
BRANCACCIO: A number Berardinelli's slides dealt specifically with how to be tough in lawsuits. One advised "many plaintiff attorneys yield to more aggressive tactics." Another recommended "stand firm on final offer with no real negotiation." From the point of view of a guy who sues insurance companies for a living, these are fighting words.
You have a financial interest in reading into the original consultant's documents, a negative intent. I mean, you're a lawyer who represents people who feel they haven't gotten what is due to them. Didn't that color your perception?
BERARDINELLI: I think the slides speak for themselves. A "good hands to boxing gloves" style of claim handling is not something I made up. If you have a positive interpretation I will be surprised to hear it.
BRANCACCIO: And in case after case, Allstate has fought to keep the McKinsey documents out of court, claiming they contain trade secrets.
In this 2005 hearing in a Kentucky courtroom a judge heard evidence about the McKinsey documents.
HAGER VIDEO: "Allstate has stated in its motion process that they paid millions of dollars for these documents and if they fell into the wrong hands it could prove disastrous to Allstate because Allstate would lose its competitive advantage."
BRANCACCIO: Earlier in this case the judge had ruled the documents were, quote, "not...the colonel's secret recipe" and ordered Allstate to disclose the documents to the plaintiff's legal team. But that hasn't happened yet.
And Kentucky's not the only state. In New Mexico, in 2004 a judge ordered Allstate to turn over the documents. Allstate refused to comply, later characterizing its actions as "respectful contempt" of court. Instead, Allstate chose to voluntarily lose the lawsuit and appeal. And in Missouri, Allstate is being fined $10,000 per day since July 6th for not making the documents available publicly.
PRESTON: They hire attorneys that will just fight till the end to keep those documents from being made public.
BRANCACCIO: How much impact did the McKinsey documents have on Allstate? Allstate won't say...but consider the profits...in the ten years before McKinsey, Allstate was making an average of $82 million a year in pre-tax operating income, but in the ten years after McKinsey, that rose 30 fold, to an average of $2.7 billion dollars a year
PRESTON: Their profits have increased phenomenally in the last ten years.
BRANCACCIO: But Allstate wasn't the only company McKinsey was working for...
STATE FARM COMMERCIAL Like a Good Neighbor, State Farm is there.
BRANCACCIO: State Farm also hired McKinsey. They declined a request for an interview. But said in an email that McKinsey was hired for a short period of time in the nineties to go after insurance fraud. McKinsey, for its part, had no comment.
HARTWIG: There is no strategy on the part of insurers to avoid paying legitimate claims.
BRANCACCIO: Robert Hartwig is president of the insurance information institute, a trade group representing the industry.
HARTWIG: You can't serve your shareholders unless you treat your customers well. If you don't provide a good service, whether it's insurance or any other industry, you're ultimately going to do a disservice to your shareholders because you're going to be a company that loses customers, that loses market share, that sees its profit decline ultimately.
LT. GOV. GARAMENDI: The fact of the matter is that the insurance industry, for the most part, has to obey the Wall Street mandate of ever-increasing quarterly profits. How do you do that? Well, you can do that by increasing your book of business. Go out and sell more, sell more. Or you can do that by stiffing the customer. And you—the industry runs away from risk. They're supposed to be in the risk business.
HARTWIG: Well, that's a ridiculous statement by Mr. Garamendi not supported by any facts whatsoever. The reality is, is that the—the insurance industry is—is insuring more property, more lives, more liability related risks than any time at history.
BRANCACCIO: It's fair to say there are a lot of reasons for the industry's phenomenal growth including a 1999 change in federal law that allowed insurance companies to branch out into banking and investment work. But that's not the whole story.
At a financial conference last December, Allstate's then CEO Edward Liddy talked about saving money by limiting expensive claims in high risk areas.
LIDDY: "we've limited new business in some markets, and not renewed coverage in others."
BRANCACCIO: And it's not just Allstate...since the record hurricanes and other storms of 2004 and 2005, several of the leading insurance companies have stopped writing new policies in some high risk areas. These areas reportedly include earthquake and fire country of California, parts of the hurricane-prone south and even the quieter coastlines of the northeast.
HARTWIG: Is it the case that after several years of record catastrophe losses that some insurers have scaled back their exposure in places like Louisiana or Mississippi or Florida? Yes.
BRANCACCIO: Hartwig says this is the fault of state regulators who don't allow companies to charge significantly more in these areas.
HARTWIG: Insurers are left with no other option in a state like Florida which is the most disaster prone state in the United States other than to scale back their exposure there.
BRANCACCIO: So who is looking out for the 60 million U.S. homeowners who pay out more than $43 billion a year in insurance premiums? Well, it depends on what state you're in. Since 1945 insurance companies have been exempt from many federal antitrust laws that would, among other things, keep them from working together to set prices. Almost all regulation is left to the states.
DIETZ: The problem is that the regulation we have is so fractured, and so weak, that very, very few insurance companies get punished, in any significant way, when they commit wrong doing.
BRANCACCIO: In many cases, the only sheriff in town is the state insurance commissioner.
DIETZ: Many of the insurance commissioners are beholden to the industry because they take money from them to finance their campaigns. And if you look at the record, fines are very few and far between and relatively low.
BRANCACCIO: John Garimendi is an exception. As California insurance commissioner, he imposed more than $18 million in fines against carriers for mistreating customers. But when it came to preventing the problems that surfaced after the cedar fire, he could only do so much.
LT. GOV. GARAMENDI: Within the legislature, the insurance industry is one of the biggest contributors. And you know, money talks. And they, the insurance industry, were very effective in killing or weakening proposals that we put forth.
BRANCACCIO: Allstate declined our request for an interview but in an email, said the company's been doing a good job and said customer satisfaction with Allstate remains high. It's been four years since the cedar fires and the industry points out that homeowners are rebuilding... and that wouldn't be happening unless insurance companies were living up to their policies.
But in Julie Tunnell's case, her insurance check only stretched enough to pay off the $220,000 remainder of his old mortgage leaving her with just a scorched plot of land, so how did pay for her new home?
TUNNELL: One hundred percent debt.
BRANCACCIO: You borrowed the money for it.
TUNNELL: We borrowed all the money for it. Un—
You have to pay it back.
TUNNELL: To build any home, we had to take on debt. Our whole financial picture is completely different than before the fire. I would go back to that day any time.
BRANCACCIO: Julie Tunnel and her husband decided not to sue and to move on with their lives though she is still speaking out to warn others.
TUNNELL: Ultimately, I tell people, "You know what? You can't even rely on your agent. Insist. Go to a contractor. Find out how much it costs to build a home. You insist on buying that amount of insurance regardless of what your agent says."
BRANCACCIO: As for the [Huneke's], they've had a lawsuit grinding away for nearly three years. They just agreed to mediation.
HUNEKE: They're wearing me down. They're wearing me down. It's been a long time and no end in sight.
BRANCACCIO: But Cathy Kolbenschlag is fighting on; just this week she moved into her new home, but she says she's up to her neck in debt and she's filed a lawsuit against state farm to try and win back some of what she's lost.
CATHY KOLBENSCHLAG: I have done nothing wrong. I have been honest. I've been upfront. I haven't tried to cheat or anything. I don't want an—an exorbitant amount of money. I just wanna be able to pay for what I had to replace. That's all.
BRANCACCIO: You can find more on this story and the investigation by Bloomberg markets magazine of the insurance industry over on our website. PBS-dot-org is the way to begin that digital voyage.
Now here's a hint about what we're working on for next weeks' program:
With tours extended and pressures mounting on our soldiers in Iraq, a surprising number are taking a risky way out: they're deserting...
SOLDIER: I got back home—talked to my wife. You know, I said, "I think I'm gonna leave." It was like a 15 minute decision that I'm—I'm gonna leave—I'm gonna leave the Army
BRANCACCIO: And that's it for now. From lakeside, outside San Diego, California, I'm David Brancaccio. We'll see you next week.