When applying for a grant last year from George Soros’s Open Society Institute to report on the insurance industry’s response to Hurricane Katrina, I anticipated two things: insurers would play a make-or-break role in the Gulf region’s ability to recover and the story would be poorly covered by the national business press.
Alas, on the first point, I was right beyond my expectations. The disgraceful state of the Gulf’s recovery can be traced in large measure to insurers’ wholesale—and I mean, by the tens of thousands—violations of their legal obligations to policyholders. While many blame the government, and I’m sure with good reason, it is worth noting that the recovery of Mississippi, which has an efficient state government under a Republican governor with close ties to Washington and two smart, active and influential Republican senators, has been only marginally more successful than Louisiana’s, where basically none of that is true, except Louisiana has one prominent Republican official, Sen. Very Serious Sin.
The common thread in these two states is insurance.
I was largely correct about the business press, too, I’m afraid. Somehow, national outlets devoted to business news, The Wall Street Journal, Forbes, Fortune, Business Week, and the Financial Times barely notice that 2005—year of the worst-ever insured loss in the history of the world—was also the most profitable insurance year ever, by a long shot. No one asked how that could be so.
No one asked, moreoever, how it could be that, according to State Farm Insurance, Allstate Insurance Co. and Nationwide Financial Services Inc., Hurricane Katrina caused no wind damage—none at all—in thousands of cases. Commonsense alone calls that assertion into question.
Worse, though, Forbes and The Wall Street Journal’s editorial page both mischaracterized the nature of the dispute between insurers and Katrina policyholders. Both frame the problem as one in which policyholders are seeking to force insurers to pay for flood damage, which private insurance does not cover. The dispute, according to these outlets, is a natural consequence of insurers’ unavoidable (albeit regrettable) decision to protect their solvency by denying illegitimate claims and to prudently (again regrettably) leave unprofitable coastal markets.
As Forbes writes:
After Katrina, Allstate and other insurers refused to pay for flood damages. Why should they? The policies excluded floods. Many homeowners didn’t buy coverage available from the federal government.
Unsurprisingly, the exit from unprofitable markets prompted a lot of anger. People must now scramble for coverage from smaller carriers at much higher rates, if they can get coverage at all. The Mississippi attorney general and irate flood victims have sued Allstate and its peers in a bid to force payments for the water damage.(1)
Audit Readers, this representation of reality, while hewing closely to a talking point of the Insurance Information Institute, is flatly false. That this mischaracterization has gained saliency among the public is worth billions to insurers. Among its other faults, it falsely portrays policyholders as either too stupid to know what their policies say or too desperate to care.
As even a half-hearted attempt at reporting would have discovered, plaintiffs in the Gulf overwhelmingly are suing for noncoverage of wind damage. Wind. Not water. Hurricane winds are explictly covered in homeowners’ policies, and that’s the basis of the complaints in most all of the key early cases, including Broussard, Guice, Shows, and Weiss. Most were filed at the time of the November 2006 Forbes piece and covered extensively—available online, for free—by the New Orleans Times-Picayune and the Biloxi Sun-Herald.
These cases allege, among other things, that State Farm, Allstate and their ilk manipulated and destroyed engineering reports in a systematic and concerted scheme to avoid paying wind damages.
Whatever the merits of the allegations (Don’t worry, Forbes; I’m sure there’s nothing to them), it is inaccurate—sloppy to the point of irresponsibility—to suggest that Katrina plaintiffs are mainly after flood coverage from private insurers.
And of course, not only do policyholders allege that wind did some damage, it did. That’s why State Farm lost Broussard, which involved a total loss in Biloxi. As the federal judge in the case wrote (emphasis added as an aid to Forbes editors and other business experts):
All of State Farm’s evidence was directed to proving that 100% of the damage to the insured property was caused by rising water, yet State Farm’s own expert witness, Dr. Gurley, testified that it was more than probable than not that the Broussard’s dwelling sustained at least some wind damage to its roof.
The key issue is how much damage had occurred as a result of wind before the storm surge arrived.
And yet, here’s what The Wall Street Journal editorial board wrote about that very case, in an editorial headline “Robin Hoods.” First, the editorial sets up a straw man, Mississippi Attorney General Jim Hood:
Mr. Hood has been on a campaign to loot insurers from the first days after Katrina. His complaint is that it is “unconscionable” that insurers have refused to pay for flood damage. Never mind that their contracts specifically contain flood exclusions even as they pay tens of millions for wind damages. This water exclusion been well known among homeowners and state regulators for years, which is why the federal government offers flood insurance. Mr. Hood nonetheless filed a civil suit and began a criminal probe.
The next paragraph then mischaracterizes Broussard:
The insurance industry has won a few of these legal skirmishes. But that changed last month when a judge told State Farm to pay a Mississippi couple a $232,000 claim and a jury awarded $2.5 million in punitive damages (since reduced by a judge to $1 million). State Farm is the nation’s largest home insurer and has already paid $1.1 billion in Katrina claims in Mississippi alone. But the company looked at hundreds of other pending suits, did the math, and threw itself on the mercy of Mr. Hood. State Farm agreed to re-open 35,000 claims it had already settled and to pay at least $50 million more. The insurer also agree to hand over $80 million to some 640 households represented by tort kingpin Dickie Scruggs.
Hood believes, among other things, that a storm surge is covered. It is fine to disagree. But, again, the main insurance disputes, including the case cited by the Journal as well as all criminal probes, are not about getting insurers to cover flood damage. Whatever one’s ideological orientation (and leave it to the Journal editorial board to politicize the weather), employing falsehood in the service of whatever argument you want to make about the agonies suffered by a few corporate actors at the hands of evil tort lawyers and demagoguing politicians is unacceptable. Fix the error.
The New York Times isn’t exempt, as here in a January story, which says State Farm needing to solve a “public relations headache” by settling after Broussard.
While State Farm and the other insurers may have had some strong legal arguments, they have been widely perceived as insensitive. In many cases, residents whose houses were reduced to concrete slab foundations received just a few thousand dollars in payments. Some received nothing.(2)
State Farm’s headache was legal, factual and contractual. Its own witness sunk it. It knew wind damaged the house and denied the claim anyway. It had some of the world’s most expensive Wall Street lawyers, Skadden, Arps, Slate, Meagher & Flom, and still lost. That’s why it settled. Allstate has the same headaches, after a federal jury in New Orleans in April found the company acted in bad faith in denying a wind claim.
I know why insurers cheat. I confess I do not know why business journalists go along with it.
And a word about wind. Wind is a reason there is insurance. It is an event in the anticipation of which prudent homeowners buy homeowners’ policies at all. Wind, with fire, is why State Farm and Allstate by themselves collected $20 billion—that’s with a “b”—in homeowners premiums in 2005 alone (an astonishing 21 percent of which went to pay for commissions for agents and other selling expenses. Don’t take my word for it. That’s the insurance industry talking).
Anyone curious about the Great Windless Hurricane of 2005, even today, need only go to nola.com, and type “Rebecca Mowbray” in the search box. Those curious about what happened in Southern Mississippi—true, WSJ editorialists, those people don’t count, but let’s act like they do for the sake of argument—can go to sunherald.com, and search under “Anita Lee.” I will have more on those two remarkable reporters in another column.
Despite everything, however, The Audit remains confident that excellence in business journalism is possible, even in Manhattan. As proof, The New York Times weighed in with a post-Katrina story that recognizes the simple reality that insurance is Topic A in any discussion of the post-Katrina gulf, or is at least a close second to governmental failure.
Insurance companies may have paid out $11 billion to Louisianians in the two years since Hurricane Katrina, but they have also become a new villain in the tales people tell about the slow recovery here. Every neighborhood is full of horror stories about companies that reneged on their promises, offered only pennies on the dollar in settlements, dribbled out payments, deliberately underestimated the costs of repairs, dropped longtime customers and sharply increased the price of coverage.
And it is not just talk.
The story goes to cite lawsuits (6,600 in New Orleans federal court, thousands more in state courts) and complaints and phone calls to the state insurance department (4,700 in 2006, 20,000, a month after the storm):
I have plenty of quibbles with this generally excellent Times piece. There should be a moratorium, for instance, on the use of this statistic:
Industry spokesmen say that most homeowners are satisfied and that 99 percent of homeowners’ claims have been settled.
Even the insurance industry will admit that “settled” means closed unilaterally by insurers. It does not remotely imply that anyone is happy.
The story misses evidence of widespread insurer misconduct, evidence filed among court documents. What is more, it is evidence that federal courts have already found to be true. If we don’t believe judges and juries, why have them?
But insurance is well-funded, PR-savvy, purposely convoluted, singularly untransparent, and virtually unregulated in terms of market conduct. It is a difficult assignment. And the Times story does reflect, for a national audience, the fact that across the political spectrum in the gulf, insurance is considered a, and even perhaps the, major roadblock to post-Katrina recovery.
One outfit that needs no help from me is, however, is unheralded Bloomberg Markets Magazine, which this month has weighed in with an important contribution to the debate.
Note the unhedged, matter-of -fact, three-word headline:
The Insurance Hoax
How’s that for clear? But just in case you missed the point, here is the subhead. I will add emphasis:
Property insurers use secret tactics to cheat customers out of payments—as profits break records.
This is not Mother Jones here, just a mainstream business news outlet, albeit one that does not seem to believe that we are living in the best of all possible worlds.
The story recounts the revolution in insurance that occured after the early 1990s, when Allstate hired consulting giant McKinsey & Co. to turn claims-handling—fatefully—into a profit center in advance of Allstate’s spinoff from Sears Roebuck & Co. McKinsey produced some 14,000 PowerPoint slides that later emerged in litigation brought by a Santa Fe, N.M., plaintiff’s lawyer, David Berardinelli, which he published in a law book. (Business Week reported on the book here.)
Slide #001426 puts the equation this way:
Zero Sum Economic Game: -Allstate Gains -Others Must Lose.
“Others,” the slide says, includes “claimants,” that is, customers.
The Bloomberg story quotes internal emails, including one from Farmers Group, a unit of Zurich Financial Services AG.
Teach them to say, `Sorry, no more,’ with a toothy grin and mean it.
And it tracks down former executives, like this one from Allstate, who, according to the story, says her former company awarded portable refrigerators and other prizes to adjusters who tried to deny claims by blaming fires on arson without justification.
“We were told to lie by our supervisors.”
It quotes a Mississippi engineer, one of several who have come forward to testify that their Katrina reports for State Farm were tampered with to blame wind damage on water.
“We were working for insurance companies, and they wanted certain results.”
And it finds the North Carolina engineering firm that was fired by State Farm because it found too much wind damage. As one engineer said in internal email to his boss:
“I have a serious concern about the ethics of this whole matter. I really question the ethics of someone who wants to fire us simply because our conclusions don’t match theirs.”
By way of disclosure, I spoke to David Dietz, one of the reporters, along with Darrell Preston, on the Bloomberg story before I came to work at Columbia, so I guess that makes me a source. But anybody can call me. I’m in the book and online.
The fact is, evidence that something is seriously amiss in the insurance industry has been piling up to the point that the business press must take notice.
The New York Times wrote a definitive piece in March on abuses in the long-term care industry. It includes multimedia if you’re into that.
Brian Ross and ABC News have done groundbreaking work on two former insurance executives who turned evidence of fraud over to state and federal authorities and Scruggs, the tort king:
The headline gives a rough idea of what, to me, has always been an obvious and easily gettable story:
Exclusive: Whistleblowers Say State Farm Shredded Documents to Avoid Paying Katrina Victims, Allegations of Massive Fraud
The Los Angeles Times, particularly Peter Gosselin, has done probably the best work in the field over time.
Dateline NBC and 60 Minutes did excellent work earlier in the decade on the precedessor to Unum Corp., the nation’s leading disability carrier, triggering a special 48-state investigation that you never heard of, plus a separate probes by California and Georgia.
I would suggest that “The Insurance Hoax” and the growing body of work like it represent a problem for the rest of the business press, not to mention for the industry itself. But like all good journalism, these stories also point a way forward.
1. Good Hands, Iron Fist; Allstate has jettisoned problem policies, like the ones on the Gulf Coast.
27 November 2006 (Audit Note: Don’t fooled by the tough-sounding headline; the iron fist has nothing to do with Allstate’s claimshandling.)
2. Big Insurer Will Pay 640 Katrina Claims, Jan. 24, 2007