Are You In Good Hands?

That's the question posed by an article in the Biloxi Sun Herald out of South Mississippi.  Investigative research indicates that a number of insurers -- State Farm, Allstate, Nationwide and USAA -- may have relied on an initial report from Haag, an engineering company, to deny Hurricane Katrina claims outright. Haag said that damage was from "storm surge" in wording that may have played directly into insurance policy language, giving insurers a basis to deny claims.

In fact, based on the intial survey of Katrina damage, it appears many claims were denied without even a cursory review of the specific claim or specific damages, even though State Farm promised policyholders that engineers would review individual properties.

Apparently, this approach to claims -- find an expert that will support policy wording and a denial of coverage -- may be linked to secretive work that State Farm and other insurers have done with a consulting thinktank, McKinsey and Co. McKinsey is known for its highly-intelligent staff, and is often seen with a kind of reverence in the business community for its work on corporate strategy. State Farm appears to have worked with McKinsey specifically on its claims operation. The McKinsey work said that large severe storms, such as hurricanes, were driving underperformance in premium retention.

In other words, it was time for State Farm to find a way to deny claims so it kept more of its customers dollars in the company pockets.

This company initiative has been called "Advancing Claims Excellence" or ACE, and has been cited in a number of litigations. Gary T. Fye, an expert in the analysis of disputed insurance claims, has testified that ACE has completely changed claims handling inside State Farm, and yet has been extremely hard to trace.

Allstate has also apparently worked with McKinsey. Neither Allstate nor State Farm have publicized this work, but the Allstate connection with McKinsey made it into the news after a CNN report on Allstate's treatment of customers.

Back to the claims environment post Katrina: Haag, the engineering company that did the initial survey says that there now is "more authoritative data available" than the initial survey that was used to deny claims. Obviously, Haag does not want to be seen as biased. But the integrity of Haag is questionable: this company has been linked to other insurance fiascos where engineering experts were brought in by insurers to support a quick denial of claims.

In fact, this same pattern of insurer behaviour happened in Oklahoma, after a 1999 P5 tornado destroyed homes and property and resulted in 36 deaths directly attributed to the storm. Again, many claims were denied.

Where does this leave the policyholders? Are we to expect that just when we need our insurance that our insurer is going to find any technicality to deny coverage?

It's quite possible. In fact, State Farm announced Wednesday the company would suspend new property and casualty business in Mississippi because the company perceives Mississippi as an "untenable" business and legal environment. In other words, they are being forced to pay claims, and they don't like it.

Can't say I feel sorry for them. This is a company that has seen a steady climb in net worth since 2002, despite four hurricanes that caused billions in total damage in 2004 and again in 2005. Although on the mend, New Orleans still isn't completely rebuilt 2 years later, and the average payout to a Katrina claim by State Farm was a measly $13,000.

Monique L. Attinger
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