Article

Saving a few dollars in premiums can backfire if your insurance company stonewalls you on claims.

When the firetrucks arrived, Howard Green of Valparaiso, Ind., was standing atop his house with a garden hose, trying to keep the roof from igniting. He had accidentally set the chimney on fire while trying to remove a beehive, and the flames had already spread into a bedroom and throughout the second floor.

The next day, Green says, his State Farm agent delivered a $5,000 check. Green and his wife, Rosemary, bought respirator masks and began to inventory the debris, which amounted to 40 bags of "smelly, smoke-laden stuff that’s ruined" and burnt mattresses.

Seven months after the September 1997 fire, the 40 bags were still in the couple’s garage and Green was still sleeping in his dining room. Green says that State Farm had paid $75,000 for structural damage but still hadn’t paid their $70,000 claim to replace the destroyed possessions.

For the first six of those months, Green says State Farm didn’t even make them an offer. Then a company adjuster, who disagreed with the way Green’s adjuster had prepared the inventory, grilled them for more than two hours on the value of their damaged clothing and possessions. Next, in a very unusual development, a State Farm attorney required the Greens to defend (under oath) their claims on the value of nearly every shirt, suit and pair of shoes during a six-hour deposition. "They even asked me for a receipt for a $40 Buck knife and a $5 jock strap," Green recalls. Fortunately, in many cases the Greens still had the receipts (although not for the jock strap).

State Farm is entitled to request documentation to protect itself from fraud. But Green says he found it strange that the company waited half a year to examine the bags in his garage. "In my opinion, there’s an attempt to beat down the insured," he says.

A few weeks after the deposition, State Farm still hadn’t paid the bulk of the claim. The Greens’ attorney, Tim Kelly, wrote a letter to the company: "If this claim is not completely resolved by August 31, you will leave me with no option but to file suit." About a week before the deadline--11 months after the fire--State Farm sent a $48,000 check. Another check arrived a few weeks later, bringing the total reimbursement close to their $70,000 claim.

State Farm would not comment on the specifics of the Greens’ case. "State Farm prides itself on personal service in accordance with policy contracts," says spokesman Edward Domansky. "We only regret that the contents portion of the claim took longer than either State Farm or our policyholder would have liked."

How do you avoid a prolonged battle with a foot-dragging insurer? By all means, try to sidestep such companies in the first place. But that strategy is not foolproof. State Farm, in fact, has one of the better records.

To measure how claims-friendly or claims-hostile policyholders find the leading auto and homeowners insurers, we gathered consumer-complaint statistics from 20 state insurance regulators and data from the insurance-rating firm A.M. Best. We also grilled lawyers, independent adjusters, agents, regulators and policyholders for tips on ensuring that you get the coverage you’ve paid for.

THE SQUEEZE ON CLAIMS

"They owed me $70,000 on my contents for 11 months," says Green, who had been a State Farm policyholder for 30 years. "Did they earn interest on the money? How about the millions of other people they stall? They make a fortune."

There’s no denying that insurance companies make a lot of money. In 1997 the State Farm Group of companies collected $30 billion in auto- and homeowners-insurance premiums and earned net income of more than $3.8 billion. Allstate Insurance Group collected $17 billion and netted more than $3 billion.

The industry as a whole is rewarding shareholders with higher returns, but in many cases it’s because they’re paying out less on claims. "It’s been my experience that when a company’s profits zoom up, usually the claims payments zoom down," says Clinton Miller, who has testified in about 400 bad-faith cases and is the author of How Insurance Companies Settle Cases, a textbook for plaintiffs’ lawyers. "If you’re a stockholder of an insurance company that’s making phenomenal profits, you may want to buy your insurance from another company."

A 1998 Legg Mason report on Allstate, for example, shows how profitable it can be to put the squeeze on claims, which typically account for three-fourths of an insurance company’s expenses. If Allstate could cut its loss ratio (the amount paid out in auto and homeowners claims as a percentage of premiums) by just one percentage point, the report says, it would save $186 million and add 28 cents to its after-tax earnings per share. Between 1995 and 1997, Allstate did in fact manage to cut its loss ratio from 78% to 72%. (Legg Mason’s ratios differ from the ones in the table on page 74 because the company includes amounts paid to adjusters and lawyers.)

The story is the same for most large insurers (see the table). Within the same two years, according to A.M. Best figures, many of the companies cut their homeowners loss ratios by ten percentage points or more, partly because 1997 saw few catastrophes. But even When you discount catastrophic costs, loss ratios still declined. The only exception is American Family Mutual, which saw its loss ratio rise from 68% in 1995 to 74% in 1997.

The differences are smaller for auto insurers, but the trend is still down. State Farm made the most progress, cutting its loss ratio by more than eight percentage points over two years. Among large companies, only Nationwide and USAA have seen their auto loss ratios rise modestly.

ARE CUSTOMERS HAPPY?

A low loss ratio doesn’t necessarily mean that a company is shortchanging its policyholders--sometimes it’s low because a company’s premiums are high or because it attracts policyholders who rarely submit claims. Mild weather, safer cars and stricter drunk-driving laws have lowered the numbers industrywide. So it’s also useful to look for more tangible evidence of customer dissatisfaction.

To get a more complete picture of how satisfied policyholders are when they have claims, we collected complaint statistics from 20 state insurance departments. Because we included the most populous states, our sample represents about 60% of the total premiums paid to the nine largest auto and homeowners insurers in 1997. (Few states had 1998 figures available when we conducted the survey.)

Though figures vary widely because states have different methods of categorizing complaints, some 50% to 75% of the states’ auto- and homeowners-insurance complaints were related to claims. The companies with the highest number of complaints in proportion to the total dollar amount of premiums collected tended to be small or regional companies.

Among the nation’s largest insurers, Prudential Property and Casualty had the worst homeowners-insurance complaint ratio: Its rate of 115 complaints per $100 million in premiums was more than double the average complaint ratio. Farmers Insurance Group had the second-worst complaint ratio, with 73 complaints per $100 million in premiums.

USAA was clearly the least-complained-about insurer on the homeowners side, with only 16 complaints per $100 million--reinforcing USAA’s long-standing reputation for high-quality service. But with few exceptions, USAA sells policies only to people in the military and their dependents.

Among auto insurers, American Family had the highest complaint ratio (54 per $100 million) and Liberty Mutual fared best, with 20 complaints per $100 million.

BEYOND COMPLAINTS

Complaints lodged with state insurance regulators are the best measure available of customer satisfaction, but they capture only a segment of those who are unhappy. Some customers complain only to their agent or insurer, or quietly change insurers if they’re dissatisfied. Others go straight to a lawyer with disputes, without first contacting their state’s insurance department.

Some of the highest-profile lawsuits have been brought against State Farm and Allstate--not surprising, given that together they own a third of the homeowners and auto markets. Both, in fact, have better-than-average homeowners complaint ratios with state insurance regulators. (State Farm’s auto complaint ratios are also better than average.) But a good record is little consolation if you’re the one who must do battle with an industry giant.

In one class-action case, Allstate settled with victims of the January 1994 Northridge, Cal., earthquake, who had charged that their claims were low-balled by engineers the company hired to assess the damage. Allstate agreed to reopen the claims of about 10,000 policyholders, reinspect many homes and pay 100% of any additional repair costs.

Although he did not participate in that suit, Bilgai Diaz was one of many Northridge earthquake victims who says he had difficulty getting Allstate to settle claims. In the six months after the quake, Diaz says, Allstate assigned four different adjusters to his case. The next-to-last adjuster said the house needed to be razed and rebuilt.

The company "had been offering me no more than $530,000" to rebuild the house, says Diaz, yet his contractor said it would cost $870,000 (on top of $200,000 Allstate had already paid to cover salvaging the foundation and emergency repairs). Diaz took his case to a neutral appraisal board, which recommended an award of $805,000. Diaz thought he’d be paid in 60 days so he could start rebuilding.

Allstate spokesman Peter Debreceny says the company hasn’t paid Diaz because "the Diazes haven’t started to construct anything." Debreceny also says the company has offered Diaz an additional $750,000 to rebuild; Diaz says he’s never heard that figure.

Diaz sued Allstate for breach of contract and bad faith in 1996. Five years after the earthquake, the suit still has not gone to trial and Diaz’s house remains uninhabitable. "My whole neighborhood is brand-new except for my eyesore," he says. To add salt to the wound, the city of Los Angeles recently notified Diaz that he must board up the house because the city considers it abandoned.

AVOIDING PROBLEM COMPANIES

"Companies can look at claims as either an area in which to save money or an opportunity to provide superior service to gain loyalty in the future," says Charles Brown, an independent agent in Kennett, Mo. "It might be worth an extra $5 or $50 in premiums each year to go with a company that makes it its business to pay the claim and make it as easy as possible."

That’s good advice, but how do you find such companies? Our table below is a good place to start. It shows the companies that fared best and worst in our 20-state complaint survey as well as the latest available loss ratios. But sometimes problems are local or regional, so it can pay to do a little scouting on your own.

As you shop, ask independent agents--who can represent several insurers--which companies are known for hassle-free claims. If they’re unhappy with a company, independents can send their clients elsewhere. "We’ve pulled whole books of business from companies because we didn’t like the way they handled claims," says Ann Martin-Grimm, an independent agent in Lewiston, Idaho.

To find out which companies generate the most customer complaints in your state, ask your state insurance department for a list of complaint ratios for all the insurers licensed in the state. (To find the insurance regulator in your state, check www.naic.org.) The ratio itself isn’t as meaningful as how it compares with others, so look at the entire list to determine where your current or prospective insurer ranks. You can also ask whether the department has taken any enforcement actions against an insurer. And you can read up on recent lawsuits in the Insurance News Network’s lawsuit library (www.insure.com).

Once you purchase a policy, you can take further steps to protect yourself if you have a claim. First, read your policy to be sure you know what’s covered. If anything is unclear, ask your agent for an answer in writing.

Second, inventory your possessions and keep receipts. "The easiest way to do that is to go through the house with a video camera," recommends Charles Brown. "Open closets, open cabinets, open drawers and describe the items, where you bought them and how much they cost." Then store the video outside your house (your office might be a good spot). In case you need to document an auto claim, keep a disposable camera in your car, recommends Mike Smerkanich, an insurance agent with Cima companies in Alexandria, Va.

WHEN YOU HAVE A CLAIM

Ivan Culbertson’s Jeep Cherokee was totaled when he was hit head-on in late October 1998 not long after the start of his final year at Willamette University College of Law. Rescuers pried him out of his car and rushed him to the hospital, where he had surgery on his face and shattered knee. The medical bills exceeded $16,000.

The police found the other car’s driver at fault, but that person’s insurer, a small, high-risk company, denied Culbertson’s claim. "Their excuse was that their insured said I was at fault," says Culbertson. He tracked down a copy of the police report and sent a copy to the company. It still denied the claim.

Having gathered his own evidence and kept track of every conversation and letter related to the case, Culbertson enlisted the help of the Oregon Insurance Division. An investigator agreed Culbertson wasn’t at fault and sent a letter asking the insurance company to pay his claim. That worked. In March he received a check for the full amount of his claim, although the company still didn’t admit its customer was at fault.

Even if you choose an insurer with a good record, you can’t guarantee trouble-free claims. And as Culbertson’s case illustrates, you may even have to deal with an insurer you’ve never heard of or would not have chosen yourself. So whenever you have a significant claim, be prepared for the possibility that you may have to battle for a fair settlement. Here are some tips:

* Report a claim quickly and try not to alter the scene until you contact your company--each one has different rules for presenting evidence. Save receipts for major items and living expenses, police reports, and anything else that supports your claim.

* Ask about deadlines--yours and the company’s. And keep an eye on the statute of limitations. In many states, you can’t sue an insurance company more than one year after a claim is filed. Time can get away from you if you think the company--or even the insurance department--is working with you.

* Document all phone calls and letters (certified receipts always help). "Get in writing from the company why they’re denying a claim," says Robert Hunter of the Consumer Federation of America. "Once they’ve told you the reason, they can’t come up with a new reason."

* Do some research to build your case. If you and the company disagree on your car’s value, for example, check a used-car pricing guide (visit Kelley Blue Book on the Web, www.kbb.com), or call a couple of dealers and report your findings to the adjuster.

* Pester the insurance company if the claims process stalls. Start with the claims adjuster and work your way up the ladder to the president, if necessary. "It seems like a lot of insurance companies intentionally drag their feet hoping that the insured will say `give me anything and I’ll walk away,’" says Gregory Geelan, a lawyer in San Diego.

* Hire your own contractor or adjuster if you think the company’s estimate is too low (see the box below).

* Hire a lawyer to assist you if you’re asked to give a deposition. People go it alone because "they know they’re not guilty and want to cooperate," says the Greens’ lawyer Tim Kelly. But many unwittingly say something that ends up hurting their case, he says.

* Try to avoid signing anything that releases the insurance company from further obligation to pay you. For example, it might take months before you realize that an earthquake has damaged your house’s foundation.

WHEN YOU HAVE A SERIOUS DISPUTE

Because you’re up against very deep pockets, suing an insurer should be your last resort. When a company takes in $20 billion a year in auto and homeowners premiums, even multimillion-dollar verdicts have little impact on the bottom line, says Hugo Warns, an insurance analyst at Legg Mason.

Unless you have a bad-faith case against the insurer--in which you could get your legal expenses paid and possibly receive punitive damages in addition to the amount of your claim--your costs will probably leave you in the red even if you win. "If the company pays you $100,000 but you have to pay your attorney one-third, you have $67,000 left to rebuild your home," says Miller.

So before you open this Pandora’s box, contact your state’s insurance department (or try small-claims court, if your dispute involves just a few thousand dollars).

Some regulators are more effective than others in pressing consumer complaints, and none can force a company to pay a claim. But regulators can generally levy civil fines if the company isn’t complying with state claims-handling laws. Often that’s a big enough stick to get results. The Oregon Insurance Division, for example, helped residents recover $4 million in disputed insurance claims on 2,187 auto- and 353 homeowners-insurance policies in 1997.

THE NUMBERS below show the claims-paying records of the largest homeowners and auto insurers in the U.S., which as a group represent more than 50% of the U.S. market. We gathered each company’s complaint ratio--the average number of complaints per $100 million in premiums--from 20 state insurance departments. The lower the ratio, the better.

(Because of variations in state insurance department records, the statistics are not fully consistent from state to state. Where possible, we included only complaints that regulators have investigated and deemed "justified." In states that do not report justified complaints separately, we used total complaint figures. We also adjusted the complaint ratios so that a company’s absence in a "lenient" state or presence in a "strict" state would not skew the numbers unfairly.)

The insurance-rating firm A.M. Best provided the loss ratios, which measure how much companies paid out in claims as a percentage of the premiums they collect. Low figures indicate that a company may be stingy with claims--or careful to select policyholders that make few claims. A large drop in the loss ratio from 1995 to 1997 indicates the company has cut back on its claims expenses.

Pay close attention to the two left-hand columns. Companies that show both a high complaint ratio and a low loss ratio are the companies least likely to be keeping policyholders happy when they have claims.

HOMEOWNERS

                   COMPLAINTS PER                   CHANGE 1995-97
                    $100 MILLION                     (PERCENTAGE
                     IN PREMIUMS    LOSS RATIO(*)      POINTS)

USAA                     16              51%            -5
STATE FARM               22              55            -14
LIBERTY MUTUAL           29              57             -7
NATIONWIDE               32              59             -6
ALLSTATE                 33              52            -15
AMERICAN FAMILY          44              74             +5
SAFECO                   59              60            -11
FARMERS                  73              60            -37
PRUDENTIAL               115             50            -13

AUTO
                   COMPLAINTS PER                   CHANGE 1995-97
                    $100 MILLION                     (PERCENTAGE
                    IN PREMIUMS     LOSS RATIO(*)      POINTS)

LIBERTY MUTUAL           20              68%            -2
USAA                     27              75             +4
STATE FARM               29              62             -8
GEICO                    31              68             -5
ALLSTATE                 40              60             -6
FARMERS                  41              64             -6
PROGRESSIVE              47              59             -6
NATIONWIDE               49              64             +4
AMERICAN FAMILY          54              66             -2

RELATED ARTICLE: GETTING A SECOND OPINION

TREMORS LEFT cracks in the walls and foundation and leaks in the roof of Leon Robbins’s home in south central Los Angeles, even though it was miles from the epicenter of the Northridge earthquake in January 1994. The estimated cost to repair the damage? Only $7,200 (just $400 short of the deductible), according to Robbins’s insurer, Western Home Insurance Co. At least $22,300, according to a contractor that Robbins consulted. Or $40,000, according to another contractor, hired by Robbins’s attorney after Western Home rejected the previous estimate.

After hearing from 11 more Western Home policyholders with similar stories, a jury in Los Angeles County Superior Court in 1997 found the insurance company guilty of bad faith and awarded Robbins $7.7 million, including punitive damages. "We disagreed with the findings," says Western Home president Don Preusser. On appeal, the case was settled confidentially.

Western Home also settled with the other 11 policyholders for an undisclosed amount. "Almost everyone had been told that the damage was just under the deductible," says Brian Kabateck, a partner with Quisenberry & Barbanel, the law firm that handled the case.

What should you do if you think your insurer is low-bailing your homeowners’ claim? The first line of defense is to call one or more contractors to estimate the cost of repairs. The estimate may be free, or you may pay a fee if the estimate is clearly for insurance purposes.

If you want more firepower on your side, consider hiring an independent adjuster to estimate damages and to go to bat for you with your insurer. While a contractor’s estimate can help when your dispute is over the cost of repairs, an adjuster can be your advocate when you disagree with your insurer over what your policy actually covers or about reimbursements for possessions. An adjuster can also help you submit and document claims and can represent you in negotiations.

Expect to pay an adjuster 10% of the amount recovered, or 25% to 45% of the difference between what your insurer offers and the amount you eventually receive. Adjusters are usually licensed with your state’s insurance department; referrals are available through the National Association of Public Insurance Adjusters (www.napia.com). Certified or senior professional public adjusters have met the group’s experience, continuing-education and ethics requirements.