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Bad Neighbor Policies by State Farm, Allstate and other Insurance Companies are Bad News for Consumers: Solutions for Stopping the Insurance Abuse

The “redesign” of insurance claim departments by State Farm, Allstate and other insurance companies harms policyholders and consumers. The courts have held these insurance companies responsible for wrongful conduct in redesigning claims departments to stop fairly paying claims in order to maximize corporate profits.  These changes in insurance industry practices have been publicized as shown by the recommended reading and viewing list in the appendix below.

         State Farm led the auto insurance industry with its claim department redesign in 1979 for the purpose of increasing revenues by reducing or denying benefits.  This was accomplished by abandoning insurance industry standards for good faith claim handling, and “redesigning” its claims procedures to require its adjusters to “delay, deny and defend” injury claims regardless of merit.  This dishonest conduct has cheated consumers, including its own policyholders with first party underinsured motorist and uninsured motorist coverage, out of billions of dollars in policy benefits.  These benefits were purchased by policyholders in good faith for protection and peace of mind should a claim arise (but unfortunately for those having a claim, their claim was predetermined to be adjusted for low value).

         State Farm’s cheating created a competitive advantage over other automobile insurance companies, motivating some to follow State Farm’s lead in redesigning their own claim departments.  These insurance companies spent hundreds of millions of dollars to rewrite their claims manuals to require their adjusters to use dishonest claim handling tactics.  Allstate alone spent $250 million on its claim department redesign, the results of which are discussed below. The financial bottom line was and is the generation of additional billions of dollars of annual revenue per year for these insurance corporations.  Since state insurance departments have not regulated this institutional bad faith misconduct, it is up to the cheated policyholders and their lawyers to right this wrong through the civil justice system.  Solutions to this reprehensible misconduct are provided below.

State Farm’s Dishonest Misconduct

         Despite attempts at secrecy and destroying incriminating evidence, State Farm’s dishonest misconduct eventually was discovered. Through litigation spanning 24 years, the details about State Farm’s wrongdoing came to light, culminating in the United States Supreme Court opinion of State Farm Mutual Automobile Insurance Company v. Campbell,[1] where the court noted that State Farm created “a national scheme to meet corporate fiscal goals by capping payouts on claims company wide,” which was referred to as “Performance, Planning and Review, or PP&R policy.”[2]

         In a close 5 to 4 vote, the court reversed the Utah Supreme Court’s affirmance of a jury verdict against State Farm in the amount of $145 million in punitive damages for bad faith in handling the defense of an auto collision case, and remanded with instructions that the U.S. Supreme Court favored single digit multipliers for compensatory to punitive damages to comport with due process. Justice Ginsberg wrote in her dissent that she would have affirmed the jury verdict for $145 million in punitive damages on the key criterion that the “reprehensibility” of State Farm’s conduct was supported by ample evidence. 

            State Farm implemented PP&R in 1979 with “the explicit objective of using the claims-adjustment process as a profit center,” which “continues to function as an unlawful scheme to deny benefits owed to consumers by paying out less than fair value in order to meet preset, arbitrary payout targets designed to enhance corporate profits.” The scope “applied equally to the handling of both third-party and first-party claims.”[3]

            Common tactics used by State Farm included “falsifying or withholding of evidence in claim files” and “to unjustly attack the character, reputation and credibility of a claimant and make notations to that effect in the claim file to create prejudice in the event the claim ever came before a jury.”[4]

            Former State Farm employees testified they were subjected to “intolerable and recurrent pressure to reduce payouts below fair value” and at times “forced to commit dishonest acts and to knowingly underpay claims.”[5]  Ample evidence was presented that State Farm’s policy was “deliberately crafted to prey on consumers who would be unlikely to defend themselves.”  Several former employees testified “they were trained to target the ‘weakest of the herd’ --  the elderly, the poor, and other consumers who are least knowledgeable about their rights and thus most vulnerable to trickery or deceit, or who have little money and hence have no real alternative but to accept an inadequate offer to settle a claim at much less than fair value.” [6]

            To insulate itself from liability, “State Farm made ‘systematic’ efforts to destroy internal company documents that might reveal its scheme,” despite having a “special historical department that contained a copy of all past manuals on claim-handling practices and the dates on which each section of each manual was changed. Yet in discovery proceedings, State Farm failed to produce any claim-handling practice manuals for the years relevant to the Campbells’ bad-faith case.”  Evidence showed claims management was ordered to destroy a “wide range of material of the sort that had proved damaging in bad-faith litigation in the past.” “In recent years State Farm has gone to extraordinary lengths to stop damaging documents from being created in the first place.”[7]

            “State Farm’s ‘policies and practices,’ the trial evidence thus bore out, were ‘responsible for the injuries suffered by the Campbells,’ and the means used to implement those policies could be found ‘callous, clandestine, fraudulent, and dishonest. …The Utah Supreme Court, relying on the trial court’s record-based recitations, understandably characterized State Farm’s behavior as ‘egregious and malicious.’”[8]

            The underlying Supreme Court of Utah’s opinion provided more details about State Farm’s dishonest and fraudulent wrongdoing. In Campbell v. State Farm Mutual Automobile Insurance Company,[9] rical baseline from 1922 to 1977ned to recuse, andthe initialnion.s s ground to es given to the same interrogatory filed in ththe court reviewed considerable evidence to support the finding that “State Farm repeatedly and deliberately deceived and cheated its customers via the PP&R scheme…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.”[10]

            The court recounted evidence that showed “State Farm engaged in a widespread pattern of fraud…that 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.”[11]

            “A high probability of recidivism justifies a higher than normal punitive damage award…In light of State Farm’s decades-long policy of fraudulent and dishonest practices in its handling of claims, it is difficult to imagine how such ingrained policies of corporate culture can be easily or quickly changed.”[12]  “The harm propagated by State Farm is extreme when compared to the statistical probability that State Farm is likely to be required to pay damages only once in 50,000 cases.”[13]  Other wrongful acts of bad faith included “evidence that State Farm employed predictable experts…engaged in hardball litigation tactics, and discriminated on the basis of sex and race.”[14]  The court noted the $145 million punitive damages verdict was not unreasonable, given the need to sufficiently deter and punish State Farm. 

            The employment of defense lawyers willing to violate the ethical rules of professional conduct was a key component in State Farm’s enforcement of its mandated hardball claims methods of “Delay – Deny – Defend.”  This “fraudulent scheme” increased revenues by billions of dollars per year, so it easily justified State Farm paying millions of dollars per year to defense lawyers hired to defend insured defendants in injury lawsuits. State Farm’s instructions to defense lawyers were outrageous, and were quoted by the Supreme Court of Utah, as follows:

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.[15]

            Following remand by the U.S. Supreme Court, the Utah Supreme Court reduced the punitive damages amount from $145 million to $9 million to comport with the single digit multiplier of compensatory to punitive damages, as required by the U.S. Supreme Court’s opinion.  Campbell v. State Farm Mutual Automobile Insurance Company.[16]

            Unfortunately, it appears the Utah Supreme Court and the dissenting justices of the United States Supreme Court were correct when they noted that future wrongdoing by giant corporations would not be deterred unless large punitive damages awards could be enforced.  After the punitive damages verdict was reduced from $145 million to $9 million, State Farm’s and other insurance companies’ insurance abuse has continued to the detriment of policyholders in first party UIM and UM cases, and to injured plaintiffs and defendants in third party cases. 

         Policyholders and injury claimants are forced to file a lawsuit as the only option to a low valued settlement offer.  A key component of the claim department “redesign” is using the civil justice system as the “Kill Box” for injury claimants unwilling to accept a low settlement offer.  Sadly, the character assassination tactics and other violation of ethical rules by unscrupulous defense lawyers often defeat even the most meritorious of injury claims.

The Fruits of State Farm’s Ill-gotten Gains

         The Utah Supreme Court noted State Farm’s surplus increased from $2.65 billion to $25 billion, and its assets increased from $6.3 billion to $54.75 billion, in the period from just before PP&R was implemented in 1977 to 1995. This shows the great profitability of State Farm’s fraudulent scheme.[17]  State Farm’s web page has a company history stating it was founded in 1922. From inception in 1922 to 1977, in 55 years, State Farm’s assets grew to $6.3 billion per the court’s opinion, which averages $0.12 billion per year as a baseline. The court noted from 1978 to 1995, in 17 years during which PP&R was adopted, State Farm’s assets grew to $54.75 billion, an increase of $48.45 billion, which averages $2.85 billion per year over 17 years.  This is an average increase of 2,400 percent per year over the baseline, once State Farm stopped following insurance industry good faith claim handling rules in 1978. From 1995 to 2013 according to State Farm’s online annual reports, State Farm’s assets increased to $129.34 billion, an increase of $74.59 billion since 1995, which averages $4.14 billion per year over 18 years.  This is an average of 3,400 percent increase per year over the historical baseline, and an increase of 1,200 percent per year over the 2,400 percent per year increase for the initial PP&R period up to 1995 that was mentioned in the court opinion. Dishonesty pays and pays well!

State Farm Caught Lying About Buying a Judicial Election

         State Farm made the news for getting caught buying justice in Illinois. The insurer paid millions to a judge’s campaign in order to get a billion-dollar verdict against it reversed. In 1999, State Farm lost a $1,056,180,000 verdict for repairing insured vehicles with cheaper, aftermarket parts instead of OEM parts. State Farm appealed to the Supreme Court of Illinois. While this appeal was pending, the insurer campaigned for and donated money to a candidate in a race for the Supreme Court of Illinois, the very court that would decide State Farm’s appeal. The candidate backed by State Farm ultimately won the election, which was the most expensive state supreme court race in U.S. history, with $9.3 million raised.

         When the policyholders who won the verdict objected to this judge deciding the appeal, State Farm told the court it had only donated $350,000 to the judge’s campaign. The judge declined to recuse, and cast the deciding vote to overturn the verdict against State Farm, which occurred in 2005.

        Years later, a former FBI agent discovered that State Farm lied when it said it only donated $350,000 to the judge’s campaign. State Farm actually donated between $2.5 and $4 million to the campaign. Based on this evidence, attorney and former Republican senator from Tennessee, Fred Thompson (among others), filed a class action lawsuit to reinstate the $1+ billion verdict against State Farm, which is pending.[18]

Allstate’s Dishonest Misconduct

         In litigation spanning 15 years, the Arkansas Supreme Court found in Allstate Insurance Company v. Dodson,[19] that Allstate adopted dishonest auto claims handling practices, similar to State Farm’s practices quoted above, by adopting a “nationwide practice of deliberately low-balling small insurance claims for bodily injury and taking advantage of financially-vulnerable personal-injury victims.”[20] The court characterized this scheme as Allstate declaring “economic warfare” against injury victims, and noted as follows:

Fye’s testimony included reference to a study of Allstate’s core practices that showed that claimants not represented by attorneys received less in settlements than claimants who were represented by attorneys. Fye also testified that it was Allstate’s goal to control loss payout, especially on bodily injury claims of small to medium size. He added that it was Allstate’s national practice to utilize a computer program (Colossus) to calculate a range of settlement values for claims involving minor impact, soft-tissue injuries and make settlement offers in the lowest ten percent of that range. If the claimants did not want to settle, then they would be forced into a lawsuit. Claim adjusters, he said, are being trained in ‘trial economics,’ which concerns whether it is economically feasible for an attorney to take on the costs of prosecuting a soft-tissue injury case. He testified that Allstate’s claims program sends a message to claimants and lawyers who consider taking claims to court that the majority of claims for small to medium soft-tissue injuries settle for less than ten thousand dollars. Based on his observation of industry standards over the past fifty years, Fye opined that Allstate violated those industry standards by identifying a successful medical practice that was providing assistance to persons with soft-tissue injuries and intervening to curb that practice in order to reduce claims.[21]

         In affirming a jury verdict in the amount of $6 million compensatory damages and $15 million punitive damages for Dr. Jon Dodson, who Allstate targeted to run out of the physical therapy business pursuant to its dishonest claim handling methods, the court stated:

Viewing this evidence in the light most favorable to Dodson, there is sufficient evidence to support a finding by the jury that Allstate, in its continued statements made by its representatives to Dodson’s patients and attorneys that worked with Dodson, acted with malice. There was ample evidence presented that Allstate went beyond merely refusing to pay for physical therapy performed at Dodson’s clinic by unlicensed employees. As recited above, several patients and attorneys testified that Allstate agents not only refused to pay physical therapy claims but also repeatedly told them that Dodson was running an illegal and fraudulent practice.

The enormity of the wrong is great enough to support punitive damages, considering that Allstate continued this conduct over a period of several years resulting in severe damages to Dodson’s reputation and medical practice. Also supportive of the assessment of punitive damages is the fact that this course of conduct was taken by a nationally recognized insurance agency and, apparently, in accordance with their national claims practices and procedures to curb small, soft-tissue claims. The evidence presented in this case was such that a jury could have concluded that the acts committed by Allstate were pursued with a conscious indifference for Dodson and with deliberate intent to injure him. After considering all of the circumstances, we conclude that awarding punitive damages does not shock the conscience of this court. The question is the appropriate amount of those damages, and we will discuss this as a part of the cross appeal.[22]

Insurance Defense Lawyer Ethical Misconduct

         Billions of dollars of increased revenue per year from denying fair compensation to policyholders and consumers easily justifies the payment of many millions of dollars per year to insurance defense counsel, as enforcers of the mandated hardball claims methods, which keeps the extra billions of dollars of annual revenue flowing.

         In addition to the misconduct quoted in the above court opinions, numerous other examples of insurance defense lawyer misconduct are listed in the case of Lioce v. Cohen.[23] The end result is that now auto injury claimants have difficulty finding a doctor to treat their injuries, and difficulty finding an injury lawyer willing to take an injury claim to trial, in part due to losing cases because of defense lawyer misconduct. 

         In third-party cases it is especially troubling that some defense lawyers ignore the ethical duties owed to the insured individual defendants for whom they are hired by the insurance company to defend. Independent defense lawyers’ ethical duties are 100% owed to the individual client. Instead, some defense lawyers follow insurance company marching orders as quoted above, and do the bidding of adjusters to win cases using questionable tactics and engaging in unprofessional misconduct.  They ignore the duties owed to their true clients, whose interest is usually best served by fulfilling the purpose of insurance in the first instance by accepting responsibility for the insured’s fault in causing damages to another, and settling claims out of court on a fair basis using industry standard good faith claim handling rules.  Settling injury claims on a reasonable basis is in the best interest of the insured because it avoids the risk of an excess jury verdict for which the insured is personally liable, and the time, stress and expense otherwise incurred by the insured when the insurance company forces a jury trial by not making a reasonable settlement offer. Some ignore their independent defense lawyer ethical duties to first be a peacemaker and try to settle claims, instead of using litigation as a last resort for dispute resolution. 

         Our law firm is aware of this widespread state and national ethical problem due to our firm’s handling, on a pro bono basis, the case of Brown v. Kelton,[24] where we fought and won the battle to keep insurance company staff attorneys from being assigned to represent insured defendants in Arkansas in third party cases, as it was the right thing to do to help policyholders receive representation by independent defense lawyers rather than insurance company employee lawyers with a built in conflict of interest.

This decision helped injury plaintiffs by establishing that insured defendants have a right to be represented by independent defense lawyers, whohopefully will have the ethical fortitude to tell the insurance company to pay the claim based upon a fair evaluation, and refuse to do the bidding of some adjusters to character assassinate the claimant and otherwise do what it takes to win at all costs in violation of the ethical rules. A third benefit from Brown v. Kelton is that it preserved the way of life and law practice for independent defense lawyers in Arkansas, and avoided the trend in other states where defense lawyers are relegated to working as staff attorney employees controlled by insurance company employers.

Solutions for Stopping the Insurance Abuse

         Just as it is not easy to turn an aircraft carrier, it is not easy for greed- driven insurance companies to turn away from using dishonest claim handling methods against policyholders and consumers, due to the additional billions of dollars per year in revenue generated from cheating. After spending hundreds of millions of dollars to “redesign” insurance claim departments, involving hundreds of thousands of pages of claim handling and procedure manuals, and decades spent training adjusters and managers on how to apply the required hardball methods, the corporate culture has become so ingrained that it is difficult, if not impossible, for these dishonest insurance companies to voluntarily mend their ways. This is especially true after the above State Farm v. Campbell decision eliminated the imposition of full punitive damages, and thereby removed an effective deterrent and punishment factor to stop the insurance abuse by State Farm, as well as removing the deterrence factor to prevent other insurance companies from adopting similar dishonest schemes that continue to cheat policyholders and consumers.

           There are some options to consider for stopping the dishonest insurance abuse. Reputable defense lawyers must follow their professional ethical duties to serve as independent and objective lawyers for the individual clients they are hired to represent, and resist the insurance company’s orders to engage in ethical misconduct.  These duties include handling litigation in a civil manner and in strict compliance with the ethical rules, and a refusal to follow the adjusters’ instructions to engage in scorched-earth tactics focused on character assassination and willful violation of the ethical rules.  The defense lawyer’s ethical duties include telling the adjuster that such hardball methods are unacceptable, providing the adjuster with a reasonable and objective claim evaluation based upon the merits of the case, and telling the adjuster to pay the claim based upon such evaluation.

            Plaintiffs’ lawyers must learn to overcome ethical misconduct by some defense lawyers and do what it takes to make them play by the ethical rules. It is necessary to work to master the subject matter of litigated cases, and to learn trial advocacy skills to achieve good jury verdict results for deserving injury victims, when forced to take a case to trial by the opposing insurance carrier’s refusal to make a reasonable settlement offer.

         Policyholders and consumers can help with grassroots efforts to learn and inform others about the dishonest hardball claims methods that have cheated policyholders and consumers for decades.  This includes viewing the award winning documentary film, Hot Coffee, reading books and literature listed in the appendix below, and news articles that expose how insurance companies and other powerful interests have corrupted the legal system by tort “reform,” which is nothing more than taking away the average citizen’s constitutional right to a fair jury trial.  Hot Coffee shows how the powerful interests used propaganda to attempt to poison the minds of potential jurors, which is jury tampering on a national scale.

         Consumers and policyholders can develop relationships with their local, state and national lawmakers to express their views about insurance reform laws that are needed to stop the insurance abuse, including removal of the exemption from anti-trust laws for insurance companies, and to oppose and repeal tort reform laws that hurt consumers by taking away the constitutional right to a fair jury trial.

         Consumers, including consumers who are shareholders and policyholders of insurance companies, can organize and lobby boards of directors to fire senior managers who follow the “greed is good” management philosophy taught by McKinsey & Company to State Farm and Allstate, which received hundreds of millions of dollars in consulting fees to “redesign” insurance company claim departments to maximize corporate profits using dishonest methods.  Those senior managers who continue to require dishonest claim handling methods should be replaced with those having personal integrity and business ethical conduct training. With the huge surpluses and assets amassed by these dishonest insurance carriers, they can well afford to change their ways and follow the insurance industry’s good faith claim handling rules to fairly pay claims for decades to come.

         The good people who are adjusters and managers of dishonest insurance companies can demand a stop to the dishonest claim handling methods that abuse their own policyholders. If not successful, they can seek employment by an insurance company that follows good faith claim handling rules, which will improve their sleep at night in the knowledge they are fairly treating other human beings in their daily work, instead of being required to cheat policyholders.

Conclusion

         The policyholders and consumers of America, with the help of their lawyers and lawmakers, can force the changes needed to stop the dishonest insurance abuse.  The key is educating the public about this problem, including judges, plaintiff and defense lawyers, and even insurance adjusters and managers, who are largely unaware of these dishonest schemes required by many auto insurance companies.  This dishonest misconduct has been kept secret due to the use of protective orders in court cases. It is within the power of judges to end the practice of using protective orders that have long shielded the dishonest misconduct.

         Education should in turn generate public outrage to demand much needed insurance reform laws. In the meantime, the policyholder victims of insurance abuse have no choice except to keep fighting the good fight, one case at a time, through the civil justice system.  

Revision Date:  September 15, 2015

Copyright 2015 by Don P. Chaney

[1] 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003).

[2] Id. at 408 U.S. at 412. 

[3] Id. 538 U.S. at 431. 

[4] Id. 538 U.S. at 431.

[5] Id. 538 U.S. 431.

[6] Id. 538 U.S. at 433.

[7] Id. 539 U.S. at 436.

[8] Id. 538 U.S. at 436.            

[9] 2001 UT 89, 65 P.3d 1134 (2001).

[10] Id. 2001 UT 89 at page 25.rical baseline from 1922 to 1977ned to recuse, andthe initialnion.s s ground to es given to the same interrogatory filed in th

[11] Id. 2001 UT 89 at page 30.

[12] Id. 2001 UT 89 at page 36

[13] Id. 2001 UT 89 at page 60. 

[14] Id. 2001 UT 89 at page 70.

[15] Id. 2001 UT 89 at page 9.

[16] 2004 UT 34 (2004). 

[17] Id. 2001 UT 89 at page 25. 

[18] http://articles.chicagotribune.com/2011-09-15/news/chi-suit-state-farm-covered-up-donations-to-justice-who-voted-in-its-favor-20110915_1_state-farm-dick-luedke-recuse

[19] 2011 Ark. 19, 376 S.W.3d 414 (2011).

[20] Id. 2011 Ark. 19 at page 12.  

[21] Id. 2011 Ark. 19 at page 13.

[22] Id. 2011 Ark. 19 at page 15.

[23] 174 P.3d 970 (2008).

[24] 2011 Ark. 93 (2011).