How To Inspect Your Home
Inspecting your home is something that most people assume isn’t necessary because they think that they know everything about their home. So many times I have inspected someone’s home as a public adjuster and found damage, that they never knew about, and that if not taken care of, would have
lowered the value and integrity of their home. It ended up putting five to ten thousand dollars into their pockets. Before we go outside to find damage of any kind in your home, always keep with you the list of perils that cover your type of policy. This will help you know if any damage you find is covered by your policy. As stated at the end of the last chapter, an HO 03 policy is the best type to have.
To start, we need the right tools. The first tool is a good camera with a flash. A digital picture is better than film, in my opinion. You’ll need a flash light to see in spots where there is little or no light. If you have oil or gas heat or a fire place, you need a chemical sponge that you can buy at your local Home Depot in the paint department. Once you have your tools, if you can, have your spouse or friend do the inspection along with you. It can be a help because sometimes someone else has better eyesight than you.
Weather is one of the biggest causes of damage to a home. Since weather comes from the outside, you will need to go outside and walk around your home. Let me tell you a simple thing about what might be covered regarding water damage. If water enters your home above the ground, then it is covered. If it’s considered ground water or a flood, that’s not covered unless you have flood insurance or a sump pump endorsement . Here is one of the reasons it pays to know what kind of homeowner’s insurance you have. If it is an HO 01 or an HO 02 policy, you need to show an opening caused by wind where the water came in; but, if it is an HO 03 you don’t need an opening. Checking on the outside first will give us some possibility where we might find water damage in your home.
If you see cracks in the foundation, this is not covered because the insurance company considers this
settling. This would normally be called a collapse, but in most states, the insurance companies have
rewritten the policy to mean “bring to rubble.” Bring to rubble means that a part of the foundation has broken into pieces, not simply a crack. This could also apply to any other part of the structure if it has
broken into pieces, such as a piece of your ceiling falling out.
Next, we want to check the roof for any shingles, slate, or tiles that may have come off from wind or weather. Always look for where water could come into the home. If you see a dip in the roof, it could mean that one or more of the rafters are cracked or that you have water damage to the sheathing. Sheathing is the plywood surface underneath your shingles. This could be from heavy snow loads on the roof.
Always understand that the damage has to be sudden and accidental. But understand that rot is not
covered and normal water damage is not rot. Rot is a repeating event, when water damage occurs over and over again without being repaired.
Now you should look under any soffit. That’s the part were your roof hangs over the outside walls of your home. In the winter you might have what is called ice damming. When you don’t have ventilated soffits or roof rafters keeping the under side of the roof cold the build up of heat will melt the snow in the day and refreeze it at night, making what we call an ice damming affect. This moves the shingle upwards and causes ice to form up under the shingle. When we have warmer weather, it melts the ice and water just streams right into your home. You might not see damage on the roof when ice damming happens, but you will see water inside your house. Ice damming is only covered under an HO 03 policy. The next time you have a new roof put on, have your roofer put a ice shield under the lower shingles to avoid having this as a claim.
Now, look at windows and siding for any damage. Siding can be damaged differently depending on what it’s made of. Aluminum dents and vinyl breaks. Mold or mulch spoors which look like little black dots that you find on your siding are usually not covered anymore.
On the back of the house we could find two different kinds of claims. As Americans we tend to think that if we put our grills next to the house that it is safer. So, we put our grills next to the siding, not thinking that the grill heats up to about 800 to 900 degrees and will melt the siding. If that happens, this is a claim with an HO 3 policy. The other type of claim comes from basic maintenance of our decks. We tend to overspray or brush the deck with oil based stain or sealant. To determine if the stain on aluminum or vinyl siding will come off, use a little cooking oil on a clean rag. Wipe the siding. If it smears, this will show you that the stain is made with an oil base. It will just continue to smear and you will probably need to have a good part of the siding replaced. If when you wipe it with the rag and it comes off on the rag, it probably is a water based stain. Power washing usually will clean off the stain and you have no claim.
If you see vandalism like dried egg on your siding this is not going to come off and will need to be
replaced. This is a claim. While we are still outside, check for any places that might allow air to leak into your home, such as windows and doors that have cracks in their caulking. You should re-caulk them to prevent water entering your home. Wherever air comes in, water can also comes in. Simple maintenance can prevent further damage to your home.
What happens if you see damage to your property that came from your neighbor’s property such as a tree falling or fire or such? Why would you want to take your neighbor to court or take money out of his/her pocket? You should go to your insurance company and have them pay for your repairs and let the insurance company go after your neighbor’s insurance company. It will help keep a friendly
relationship with your neighbor and will not add any cost or concern to your neighbor and his/her
insurance will not go up. As well, if you had a contractor make a mistake, you don’t pay money to an attorney to have it fixed. Use your policy and your insurance company to get their money from the contractor. This is called subrogation. You are giving the insurance company your right to recover any money for a loss that someone else caused.
Let’s go inside and upstairs. But first if you need a ladder to get into your attic, this would be the time to go get it. Be careful! This is one area that can be dangerous if all you have is open ceiling joists and
rafters. You could fall through and hurt yourself and do damage to your ceiling. It would be covered. We are looking for cracked rafters or damage done to any sheathing on the roof. With the rafters, you will find that they crack in the middle because of the weight of snow or ice on your roof. We are also looking at the sheathing and insulation to seeing if we can find water stains on the sheathing.
If you are looking during warm weather thinking that it’s too late to claim the damage, not so! You can claim it at any time, but you can only sue the insurance company up to a year after the damage has been reported to the insurance company. What this means is that you have one year from the day you discovered the damage to sue the insurance company if they do not pay for the damage. Because the
insurance company has created a state of ignorance by not explaining with the policy holders what is covered, and how and when to file a claim, the day that you notice damage becomes the date of discovery. A lot of people will say, “I don’t know when it happened!” That’s all right! The day you find the damage is known as the date of discovery.
Another concern with having a claim is, will it be big enough to submit? I have laid out a few ways that will guide you through the process. You will find it in the scope and estimating chapter.
After coming down out of the attic, find the first bedroom to your left to start in. As you go into the room go from the left to the right. If you always do it the same way with each room, you will find that you will not miss anything. Always check under the window sills and on the ceiling looking for water stains. A stain can be light so use your flash light. Remember that just because you don’t see a lot of damage on the walls or ceiling doesn't mean that it’s not a good claim. Your insulation may be shot because of the water and you may find other challenges. In many rooms you will see cracks over the door frames. This is from settling which is not covered under collapse in your policy.
Kid’s rooms seem to always have stains on the carpet or marks on the walls with crayons- that’s
covered. If your children damage your home or their friends it’s covered.
If you have blown in hot air heat from oil or gas, check your vents for dark or gray stains or look on the walls and ceiling to see if you can see outlines of joists or studs or black spider webs. Remember that chemical sponges I told you about, well, this is when you use it. Take the sponge and make a
single swipe of the sponge. Look where you swiped the sponge. If you see a gray outline on the wall or vent then you have a puff back. A puff back is when an oil or gas furnace has a backfire and shoots soot into the air. Puff backs are always large claims on all policies.
Some homes have air conditioners in the windows. You can find that the condensation from the air
conditioner will damage the wall and window sill. An accidental discharge of water from this is a claim. Some homes have the air conditioner condenser unit installed up in the attic. If the condensation drains are clogged, then the pans fill up and overflow and water destroys the ceiling below and
insulation in the attic. This is a claim on HO 02 and 03 policies and are called accidental discharge of water when making a claim.
Now let’s check out an up stairs bathroom. Bathrooms are the beginning of many claims with a simple
understanding that pipes break. First you need to also know that the plumbing or fixing of the pipe is not covered, but that the damage and the access to the plumbing is covered. Usually, most of the time the access is more expensive than the fixing of the pipe. You will sometimes find that there is an access panel to access the part of the plumbing that needs repair. Many times the access point will be a tile wall, floor or removing the tub or fixture and replacing them. Toilets, tubs and sinks seem to be overflowing all the time. When inspecting the bathroom open up the vanity doors and take a sniff, if you smell mustiness then you have a leak and you should inspect further. Many times in showers you will find that the shower pan under the tile is leaking. Toilets overflow and the water will seep under the toilet and hit the ceiling below.
Check out every room in your home on the upper floors. As you go down a floor, remember to look under any room that has a bathroom above it for damage. Now, let’s go downstairs to the first floor and check every room like you did upstairs. Don’t forget to inspect the kitchen and bathroom. If you have a cracked tile on the floor or wall, as long as it is not cracked because of settling, it is covered on HO 03 policies only. Burns on your counters are covered on HO 03 policies as well as any burns on your cabinets near your stove. Dishwashers seem to have spills all the time. If the door leaks and water damages the floor below, it is an accidental discharge of water and it is covered on HO 02 and 03
policies and can be submitted for a claim.
Now lets go to the laundry room. So many times if you still have those rubber hoses on your washer
without stainless steel mesh, the hose leaks and if you’re not home, can flood everything in its path.
Sometimes the washer tank leaks which could be as much as 50 gallons. This again, is an accidental
discharge of water and is covered by HO 02 and HO 03 policies.
Many homes have fireplaces. If smoke has filled the home because the flue wasn’t opened, this is also a puff back and is covered on all policies. This can cost a lot of money to clean all the walls, ceilings, as well as floors, lights and furniture.
If you live in a home that is built on a slab of concrete, all your pipes go under the slab somewhere. If they break or are leaking, then your floor will need to be opened up. You may suspect this has
happened when you notice a backup in your sewage system or gray water or moisture coming up from your floor. Check for this if you see changes in your flooring in anyway. The fixing of the pipe is not covered, but the damage ensued from access to the pipe and damage from the leakage is covered. This coverage is called access. You could have the same kind of damage out in your yard, due to a breakage of a sewer pipe, but it may or may not be covered, as many insurance companies are limiting the breakage to no more than 3 feet from the outside wall of your home.
Now let’s go into the basement where you may have ground water that always comes into your
basement, But since you don’t have flood insurance, you think you’re stuck with the mess. Not so! All you need to do is call your agent and tell him/her that you would like to have a sump pump
endorsement put on your policy. The endorsement should cover for 10% of the Section A Building amount listed on the Declaration page . For example, if the amount was $400,000 for the Section A Building amount, you could receive 10 % of that or $40,000 to fix your basement with the sump pump endorsement. It will cover any damage to a finished basement or stored stuff and heaters. It only costs about $40 to $50 a year. If you already have damage you can not claim it now. Fix any damage that has occurred, then get the sump pump endorsement to safeguard you in the future.
I recommend that you inspect your home every six months. If you have found a claim in your home, go to the next chapter. Pass this information along or buy a book for one of your family members or friends. You’ll be helping them to find claims, just like you did!
Wednesday, September 30, 2009
Saturday, May 30, 2009
The Top 10 Stupid Reasons Realtors Do Not Like FHA Loans
1. The FHA loan has became popular once again over the past 6 months mainly due to it being one of the only 100% financing loans able to use to buy a home. With all of the major mortgage companies going bankrupt around the country they all lost their ability to use their own loans. What I mean by using their own loans is that many companies, let’s say Quicken Loan for example worked with larger banks and investment firms and they wrote their own guidelines. This means that they made their own rules and as long as a bunch of underwriting guidelines were met than the loan could be written and sold on the secondary market for a profit.
FHA have always been a group of masters in knowing what makes human changes that show reality in commitment. Three little words “Utmost Good Faith” show the meaning of a persons understanding of long term commitment. Having people put out the effort to complete a one year of handling bad debt. In a positive manor for one year, brilliant making people complete their pledge in tangible way.
2. Realtors loved this during the days of the reify/purchase boom. Since the mortgage companies had their own guidelines a person looking to buy a home could buy just about anything they wanted as long as it had four walls and a roof. It was up to the person buying the home to make sure that the house was up to par with a home inspection.
FHA new that first time home buyers are experienced in home safety and preparedness. It’s that passionate conservative that gives helpful information and guidance for protecting that first time home buyer. Isn’t that what realtors are suppose to do?
3. The mortgage companies did have some standards (have to give them some credit). They would not allow you to buy a home that did not have any type of flooring covering the sub floor. This means that the whole house had to be carpeted, tiled, or wood floors down to cover the sub floor. The kitchen had to be complete. You could be missing a dishwasher or a fridge but the sink had to be in. The mortgage companies would find out when the appraisal got back because in the report it would state what is missing and there would be pictures on it too.
Too many companies knew they were only getting a drive by appraisal and didn’t say anything. Even I can take a picture of any kitchen, but is it the kitchen. Appraisers are not kept to the same standards as an FHA inspection.
4. Now when the FHA is the only option out there for people to get approved on a loan some new standards have been imposed. The FHA’s main guideline is that a home inspection must be done on top of an appraisal. An appraisal and a home inspection are two different things. An appraisal looks at the features of the homes compared to the other homes like it in the neighborhood and determines a value (even if it is missing flooring). A home inspection looks for things like leaky pipes, bad foundation, broken windows, bad roof, mold, and others.
It’s my belief that every home should have an inspection for insurance claims that maybe charged to the insurance company for damage not reported, because of the noncompliance of the insurance company’s responsibilities to the homeowner in explaining their policy’s value to the homeowner. This is a violation of law in every state in the union.
5. If the home that the buyers put an offer on fails the home inspection than the loan cannot be closed until all of those things that made it fail the inspection are cleared up. At that time the loan can close. In reality though, how many people are going to go and dig into whatever space they might have on their home equity line of credit just to fix up the house to be able to sell it to you in a couple months after all of the repairs are fixed. What they are going to do is wait until somebody else comes around that is approved on a conventional 30 year fixed rate mortgage that does not need to pass a home inspection to sell the home. More than likely the people trying to sell the home are probably upside down on their home anyways and can’t afford to put any money into it because then they will need to bring money to closing. If somebody does not come to them with a normal conventional loan they will probably have to foreclose on the house.
The lack of understanding homeowners insurance is ramped in America today. It affects hundreds of thousands of homeowners in protecting the integrity of their home. The mortgage company made you purchase insurance to protect their investment. Since the Insurance commissioner is not going to do their job in protecting the homeowner. Maybe the mortgage company could explain the policy and how to use it to protect the integrity of the investment to the homeowner.
6. With the home not passing the inspection you already know what the look on your realtors face is going to look like. It’s going to be one of disbelief and anger at the same time. Since realtors get paid on commission they just wasted a bunch of time on a deal that has a 95% chance of not closing now. The realtor can either keep looking with you for new homes or just bail on you completely. In this real estate market you might get lucky and find somebody who will stick with you because the realtor is not closing a lot of deals right now because not that many people are getting approved on mortgages at all.
Or find a public adjuster that will do a home inspection for insurance so the monies needed to bring the home to pre-loss condition are made available to the homeowner to complete the work. If a public adjuster is not in your area having a realty firm sending one of their realtors or a employee to the only public adjusting school in America would do two things. First it would solve the immediate problem and show good faith with their client’s, second it would bring in large sums of cash flow into the realtor firm maybe even doubling the firms income.
7. The FHA requires all borrowers to escrow their property taxes and homeowners insurance with their mortgage payment. This means that they now have to bring more money to the closing table to suffice what they need. In total they need money for escrow, down payment, and closing costs. More than likely the person looking to buy a home does not have this kind of money in a bank account any where so this becomes a lost cause.
More realtors should think like farmers. A farmer prepares the ground the year before so his crops will yield a plentiful crop the next year. I use to help client’s to prepare for their purchase of a home the year before for credit and down payment in helping them put together a plan. Now since I controlled the paper work I also made sure the client purchased their loan from us. This also had a great byproduct of referrals, I believe the life blood of a good realtor.
8. FHA loans require twice as much paperwork to complete a loan than a normal loan. With all of this paperwork mandated by the FHA there always seems to be something that pops up and deters the loan from closing. This alone can drive a realtor crazy because all they want to do is show you a house that you like and close the deal so they can move on to the next client.
The richest people in the world have found a niche in business and they then did it over and over again to the point that they controlled and refined a consistent market place. I believe realtors have the ability to use continuing education in our high schools as the ferial fields to find their clients without any cost to them. The realtor starts prepping their crop of new home buyers using FHA to control the client, sounds like a plan to me. Email me for additional information mhouser@thecompletementor.com .
9. If you are in the market to buy a home and are using a pre-approval from a mortgage company using a FHA loan you better get a move on. FHA is implementing new guidelines that gets rid of all down payment assistance programs and requires borrowers to come to the table with 3.5% down payment now. If you want to get into a house and can only get approved on FHA you better start hustling because it takes most mortgage companies 3 weeks to close a loan and about 4 weeks to close an FHA loan due to its lengthy paperwork.
People don’t care about their credit rating until they want to buy a home. If it wasn’t for FHA many people would not have the chance to own a home and start their futures with a helping hand not a hand out.
10. If you want to see your realtor make a funny face just say the words “FHA” to them. You will probably be asked if this was your only loan that you could get approved on. Do not be insulted because of it, the realtor is just trying to cover their butt and not waste a lot of time showing you houses that you will never be able to close on. With so many quirky guidelines you can see why the FHA does this. To really see why they are so stringent you need to step into their shoes. Why would I want to lend you money on something that is not even up to code? If I lent you the money and you defaulted on the home than all I (the FHA) would own is home that is broken down, beat up, and probably needs thousands of dollars to bring it up to code to hopefully sell it. I guess we can thank the U.S Government for doing at least one thing right and making sure we are not buying run down houses. Be sure your realtor is a strong FHA realtor if not find another realtor trust me they are out their. Ask your FHA loan officer for the realtors that are.
FHA have always been a group of masters in knowing what makes human changes that show reality in commitment. Three little words “Utmost Good Faith” show the meaning of a persons understanding of long term commitment. Having people put out the effort to complete a one year of handling bad debt. In a positive manor for one year, brilliant making people complete their pledge in tangible way.
2. Realtors loved this during the days of the reify/purchase boom. Since the mortgage companies had their own guidelines a person looking to buy a home could buy just about anything they wanted as long as it had four walls and a roof. It was up to the person buying the home to make sure that the house was up to par with a home inspection.
FHA new that first time home buyers are experienced in home safety and preparedness. It’s that passionate conservative that gives helpful information and guidance for protecting that first time home buyer. Isn’t that what realtors are suppose to do?
3. The mortgage companies did have some standards (have to give them some credit). They would not allow you to buy a home that did not have any type of flooring covering the sub floor. This means that the whole house had to be carpeted, tiled, or wood floors down to cover the sub floor. The kitchen had to be complete. You could be missing a dishwasher or a fridge but the sink had to be in. The mortgage companies would find out when the appraisal got back because in the report it would state what is missing and there would be pictures on it too.
Too many companies knew they were only getting a drive by appraisal and didn’t say anything. Even I can take a picture of any kitchen, but is it the kitchen. Appraisers are not kept to the same standards as an FHA inspection.
4. Now when the FHA is the only option out there for people to get approved on a loan some new standards have been imposed. The FHA’s main guideline is that a home inspection must be done on top of an appraisal. An appraisal and a home inspection are two different things. An appraisal looks at the features of the homes compared to the other homes like it in the neighborhood and determines a value (even if it is missing flooring). A home inspection looks for things like leaky pipes, bad foundation, broken windows, bad roof, mold, and others.
It’s my belief that every home should have an inspection for insurance claims that maybe charged to the insurance company for damage not reported, because of the noncompliance of the insurance company’s responsibilities to the homeowner in explaining their policy’s value to the homeowner. This is a violation of law in every state in the union.
5. If the home that the buyers put an offer on fails the home inspection than the loan cannot be closed until all of those things that made it fail the inspection are cleared up. At that time the loan can close. In reality though, how many people are going to go and dig into whatever space they might have on their home equity line of credit just to fix up the house to be able to sell it to you in a couple months after all of the repairs are fixed. What they are going to do is wait until somebody else comes around that is approved on a conventional 30 year fixed rate mortgage that does not need to pass a home inspection to sell the home. More than likely the people trying to sell the home are probably upside down on their home anyways and can’t afford to put any money into it because then they will need to bring money to closing. If somebody does not come to them with a normal conventional loan they will probably have to foreclose on the house.
The lack of understanding homeowners insurance is ramped in America today. It affects hundreds of thousands of homeowners in protecting the integrity of their home. The mortgage company made you purchase insurance to protect their investment. Since the Insurance commissioner is not going to do their job in protecting the homeowner. Maybe the mortgage company could explain the policy and how to use it to protect the integrity of the investment to the homeowner.
6. With the home not passing the inspection you already know what the look on your realtors face is going to look like. It’s going to be one of disbelief and anger at the same time. Since realtors get paid on commission they just wasted a bunch of time on a deal that has a 95% chance of not closing now. The realtor can either keep looking with you for new homes or just bail on you completely. In this real estate market you might get lucky and find somebody who will stick with you because the realtor is not closing a lot of deals right now because not that many people are getting approved on mortgages at all.
Or find a public adjuster that will do a home inspection for insurance so the monies needed to bring the home to pre-loss condition are made available to the homeowner to complete the work. If a public adjuster is not in your area having a realty firm sending one of their realtors or a employee to the only public adjusting school in America would do two things. First it would solve the immediate problem and show good faith with their client’s, second it would bring in large sums of cash flow into the realtor firm maybe even doubling the firms income.
7. The FHA requires all borrowers to escrow their property taxes and homeowners insurance with their mortgage payment. This means that they now have to bring more money to the closing table to suffice what they need. In total they need money for escrow, down payment, and closing costs. More than likely the person looking to buy a home does not have this kind of money in a bank account any where so this becomes a lost cause.
More realtors should think like farmers. A farmer prepares the ground the year before so his crops will yield a plentiful crop the next year. I use to help client’s to prepare for their purchase of a home the year before for credit and down payment in helping them put together a plan. Now since I controlled the paper work I also made sure the client purchased their loan from us. This also had a great byproduct of referrals, I believe the life blood of a good realtor.
8. FHA loans require twice as much paperwork to complete a loan than a normal loan. With all of this paperwork mandated by the FHA there always seems to be something that pops up and deters the loan from closing. This alone can drive a realtor crazy because all they want to do is show you a house that you like and close the deal so they can move on to the next client.
The richest people in the world have found a niche in business and they then did it over and over again to the point that they controlled and refined a consistent market place. I believe realtors have the ability to use continuing education in our high schools as the ferial fields to find their clients without any cost to them. The realtor starts prepping their crop of new home buyers using FHA to control the client, sounds like a plan to me. Email me for additional information mhouser@thecompletementor.com .
9. If you are in the market to buy a home and are using a pre-approval from a mortgage company using a FHA loan you better get a move on. FHA is implementing new guidelines that gets rid of all down payment assistance programs and requires borrowers to come to the table with 3.5% down payment now. If you want to get into a house and can only get approved on FHA you better start hustling because it takes most mortgage companies 3 weeks to close a loan and about 4 weeks to close an FHA loan due to its lengthy paperwork.
People don’t care about their credit rating until they want to buy a home. If it wasn’t for FHA many people would not have the chance to own a home and start their futures with a helping hand not a hand out.
10. If you want to see your realtor make a funny face just say the words “FHA” to them. You will probably be asked if this was your only loan that you could get approved on. Do not be insulted because of it, the realtor is just trying to cover their butt and not waste a lot of time showing you houses that you will never be able to close on. With so many quirky guidelines you can see why the FHA does this. To really see why they are so stringent you need to step into their shoes. Why would I want to lend you money on something that is not even up to code? If I lent you the money and you defaulted on the home than all I (the FHA) would own is home that is broken down, beat up, and probably needs thousands of dollars to bring it up to code to hopefully sell it. I guess we can thank the U.S Government for doing at least one thing right and making sure we are not buying run down houses. Be sure your realtor is a strong FHA realtor if not find another realtor trust me they are out their. Ask your FHA loan officer for the realtors that are.
Monday, September 01, 2008
BAD FAITH LIABILITY
BAD FAITH LIABILITY
1. Introduction
No area of civil has generated as much recent interest or controversy as the cause of action for bad faith. For over 300 years the cause of action for breach of contract provided the primary remedy against those who broke their promises. Now the cause of action for bad faith promises threatens to displace the whole body of law amassed through the centuries to give force and meaning to agreements.
The cause of action for bad faith emerged as a remedy in third party insurance cases to control insurance claim settlement abuses. It merged with the implied covenant of good faith and fair dealing and spread to first party insurance cases. Although the policy dose not say this in so many words, the claim representative should not forget that besides the existence of the obligation to defend, the courts have held that the insurer, under certain circumstances, also has the duty to settle if the settlement is reasonable and commensurate with the liability, injuries and damages involved.
The penalty for arbitrary Refusal to do so may be the payment of a judgment even beyond the amount of the policy limit.
2. Development of the cause of action
Third Party Cases - During the early decades of this century the courts responded to some cases in which insured's holding various types of liability insurance policies sought redress for a then common insurance claim settlement practice. In the typical case a third party would sue the insured for an amount exceeding the limits of the insured's liability coverage and offer to settle his claim against the insured for an amount equal to or less than those policy limits.
The insurer, having assumed the insured's defense according to the policy, would exercise its exclusive right under the policy to control the insured's defense by refusing to accept the policy limits settlement offer of $10,000 and yet have to contribute a substantial sum to induce the insurer to consent to he $10,000 settlement.
The victims of these insurance practices first attacked the insurers for breach of contract. Early courts, however, rejected this argument
stating that where the policy clearly and unambiguously set the policy limits, the court would not allow recovery above those limits just because the insurer had rejected a policy limits settlement.
Later plaintiffs abandoned the tactic of suing for breach of contract alone and set forth their claims against insurers as tort causes of action, recovering compensation under the theory that the insurer had engaged in fraud, or that the insurer had breached its fiduciary duty to the insured, or that the insurer had acted negligently.
Most courts that have considered the matter have concluded that the insurer, in deciding how to respond to a policy limits settlement offer, owes the insurer a duty to consider his interests in making the decision. Most courts have regarded the phenomenon of insurers favoring their own interests as raising issues of disloyalty not of carelessness, and they have, accordingly, described insurer misconduct in terms of bad faith rather than negligence. Thus, the insurer may not recover damages from the insurer failed to predict the outcome of the third party's action or made a mistake of judgment.
The courts have concluded that in controlling the insured's, "We further hold that, independent of the tort of intentional infliction of emotional distress, such conduct on the part of a disability insurer constitutes a tortuous
interference with a protected property interest of its insured for which damages may be recovered to compensate for all detriment proximately resulting there from, including economic loss as well as emotional distress resulting from the conduct or from the economic losses caused by the conduct, and in a proper case, punitive damages."
The court explained its holding extending the cause of action for bad faith to first party cases in part on the basis that one may not ordinarily recover damages for emotional distress under a breach of contract cause of action or recover damages for economic losses under a cause of Action for intentional infliction of emotional distress. The court thus perceived a need for a new cause of action to avoid distortions that might result from forcing the insured to recover compensation for the separate categories of damages through separate cause of action.
Through the cause of action for bad faith in third party cases has received almost unanimous acceptance throughout the United States, the cause of action for bad faith in first party cases has generated much sharper debate, with a resulting split of authority on whether an insured may sue for bad faith in a first party case. Most jurisdictions currently appear to recognize a cause of action for bad faith in first party cases, with the other either rejecting, leaving the issue the open, or remaining split in varying degrees.
3. Bad Faith at Large in the Law
We have seen that the cause of action for bad faith emerged as a means to protect insured's in third party cases from insurance claims settlement abuses not specifically regulated in liability insurance policies. That cause of action, originally based squarely on traditional tort concepts, because linked to an implied covenant of good faith and fair dealing that neither party to a
contract shall injure the right of the other party to receive the benefits of the contract and on that basis was extended to first party insurance cases, though the reasons which justified the original recognition of the cause of action in third party cases are absent from the first party insurance context.
The covenant of good faith and fair dealing is said to be implied in every contract. This raises the question whether the cause of action for bad faith which has already spread from third party cases to first party cases, should be extended to non insurance contracts cases generally. If so the cause of action, with the expanded damages recoverable under it. Would threaten to replace the traditional breach of contract cause of action as the principal weapon against those who break their promises.
4. Unfair Claim Settlement Practices Statutes
On March 1, 1973, the Model Unfair Claim Settlement Practices published by the National Association of Insurance Commissioners was adopted as law by the state of California, and shortly after that, by many other states. The Model Act was revised in 1975, and generally, this model has been the basis for all of the Unfair Claim Settlement Practices statutes, each must be scrutinized according to the facts and with the jurisdiction of the suit involved. Nevertheless, Litigation with the third party the insurer acts as a fiduciary of the insured, as an agent or trustee, and therefore owes the insured a duty to act in good faith.
We said this before, but if you are informed you are forearmed. Here are your forearming concerns:
A. Properly document the file (including all dates years of entries). Make certain file information is contained in claim file to support actions taken.
B. Be selective on entries into the file - assume that the file will be read.
C. Be responsive to inquiries.
D. Fully and honestly advise insured of his rights.
E. File should readily show that it has been properly worked.
F. Be flexible on evaluations of liability and damage exposure.
G. Before denial of coverage, get coverage opinion.
H. Always use separate counsel on coverage questions.
I. Send proper reservation of rights.
J. Show a willingness to consider all facts.
K. Be consistent in treatment of claims.
L. Exercise great caution in use of in house counsel (especially for coverage opinion)
M. File must not show unreasonable restrictions on defense attorneys.
N. Watch carefully for conflict of interest situations.
O. Obtain non waiver agreement in appropriate circumstances.
P. Promptly forward excess exposure correspondence to insured including language to insured regarding insured's obtaining separate representation.
The following are some factors which may suggest negligence in the handling of claims of this type:
1. The failure of the insurance company for to settle during either the investigation or the trail when the proper opportunity is presented.
2. The failure for to carry on negotiations.
3. The failure for to investigate all of the facts necessary for to protect the insured.
4. The extent for to which the evidence is in conflict. If the liability is clear, a great duty for to settle exists.
5. If there are conflicts in the evidence which increase the uncertainty of the insured's defenses, the possibility that the insurer was negligent increase.
The following are some factors that may no negligence:
1. A proper investigation of the facts concerning the insured's possible liability for to the plaintiffs, and the likely verdict range.
2. Where applicable, reliance on the advice of competent counsel.
3. Where the company has notified the insured of his rights for to employ private counsel.
4. The reasonableness of the company's refusal for to settle.
The Court states that the tort of intentional infliction of emotional distress requires four essential elements:
1. Introduction
No area of civil has generated as much recent interest or controversy as the cause of action for bad faith. For over 300 years the cause of action for breach of contract provided the primary remedy against those who broke their promises. Now the cause of action for bad faith promises threatens to displace the whole body of law amassed through the centuries to give force and meaning to agreements.
The cause of action for bad faith emerged as a remedy in third party insurance cases to control insurance claim settlement abuses. It merged with the implied covenant of good faith and fair dealing and spread to first party insurance cases. Although the policy dose not say this in so many words, the claim representative should not forget that besides the existence of the obligation to defend, the courts have held that the insurer, under certain circumstances, also has the duty to settle if the settlement is reasonable and commensurate with the liability, injuries and damages involved.
The penalty for arbitrary Refusal to do so may be the payment of a judgment even beyond the amount of the policy limit.
2. Development of the cause of action
Third Party Cases - During the early decades of this century the courts responded to some cases in which insured's holding various types of liability insurance policies sought redress for a then common insurance claim settlement practice. In the typical case a third party would sue the insured for an amount exceeding the limits of the insured's liability coverage and offer to settle his claim against the insured for an amount equal to or less than those policy limits.
The insurer, having assumed the insured's defense according to the policy, would exercise its exclusive right under the policy to control the insured's defense by refusing to accept the policy limits settlement offer of $10,000 and yet have to contribute a substantial sum to induce the insurer to consent to he $10,000 settlement.
The victims of these insurance practices first attacked the insurers for breach of contract. Early courts, however, rejected this argument
stating that where the policy clearly and unambiguously set the policy limits, the court would not allow recovery above those limits just because the insurer had rejected a policy limits settlement.
Later plaintiffs abandoned the tactic of suing for breach of contract alone and set forth their claims against insurers as tort causes of action, recovering compensation under the theory that the insurer had engaged in fraud, or that the insurer had breached its fiduciary duty to the insured, or that the insurer had acted negligently.
Most courts that have considered the matter have concluded that the insurer, in deciding how to respond to a policy limits settlement offer, owes the insurer a duty to consider his interests in making the decision. Most courts have regarded the phenomenon of insurers favoring their own interests as raising issues of disloyalty not of carelessness, and they have, accordingly, described insurer misconduct in terms of bad faith rather than negligence. Thus, the insurer may not recover damages from the insurer failed to predict the outcome of the third party's action or made a mistake of judgment.
The courts have concluded that in controlling the insured's, "We further hold that, independent of the tort of intentional infliction of emotional distress, such conduct on the part of a disability insurer constitutes a tortuous
interference with a protected property interest of its insured for which damages may be recovered to compensate for all detriment proximately resulting there from, including economic loss as well as emotional distress resulting from the conduct or from the economic losses caused by the conduct, and in a proper case, punitive damages."
The court explained its holding extending the cause of action for bad faith to first party cases in part on the basis that one may not ordinarily recover damages for emotional distress under a breach of contract cause of action or recover damages for economic losses under a cause of Action for intentional infliction of emotional distress. The court thus perceived a need for a new cause of action to avoid distortions that might result from forcing the insured to recover compensation for the separate categories of damages through separate cause of action.
Through the cause of action for bad faith in third party cases has received almost unanimous acceptance throughout the United States, the cause of action for bad faith in first party cases has generated much sharper debate, with a resulting split of authority on whether an insured may sue for bad faith in a first party case. Most jurisdictions currently appear to recognize a cause of action for bad faith in first party cases, with the other either rejecting, leaving the issue the open, or remaining split in varying degrees.
3. Bad Faith at Large in the Law
We have seen that the cause of action for bad faith emerged as a means to protect insured's in third party cases from insurance claims settlement abuses not specifically regulated in liability insurance policies. That cause of action, originally based squarely on traditional tort concepts, because linked to an implied covenant of good faith and fair dealing that neither party to a
contract shall injure the right of the other party to receive the benefits of the contract and on that basis was extended to first party insurance cases, though the reasons which justified the original recognition of the cause of action in third party cases are absent from the first party insurance context.
The covenant of good faith and fair dealing is said to be implied in every contract. This raises the question whether the cause of action for bad faith which has already spread from third party cases to first party cases, should be extended to non insurance contracts cases generally. If so the cause of action, with the expanded damages recoverable under it. Would threaten to replace the traditional breach of contract cause of action as the principal weapon against those who break their promises.
4. Unfair Claim Settlement Practices Statutes
On March 1, 1973, the Model Unfair Claim Settlement Practices published by the National Association of Insurance Commissioners was adopted as law by the state of California, and shortly after that, by many other states. The Model Act was revised in 1975, and generally, this model has been the basis for all of the Unfair Claim Settlement Practices statutes, each must be scrutinized according to the facts and with the jurisdiction of the suit involved. Nevertheless, Litigation with the third party the insurer acts as a fiduciary of the insured, as an agent or trustee, and therefore owes the insured a duty to act in good faith.
We said this before, but if you are informed you are forearmed. Here are your forearming concerns:
A. Properly document the file (including all dates years of entries). Make certain file information is contained in claim file to support actions taken.
B. Be selective on entries into the file - assume that the file will be read.
C. Be responsive to inquiries.
D. Fully and honestly advise insured of his rights.
E. File should readily show that it has been properly worked.
F. Be flexible on evaluations of liability and damage exposure.
G. Before denial of coverage, get coverage opinion.
H. Always use separate counsel on coverage questions.
I. Send proper reservation of rights.
J. Show a willingness to consider all facts.
K. Be consistent in treatment of claims.
L. Exercise great caution in use of in house counsel (especially for coverage opinion)
M. File must not show unreasonable restrictions on defense attorneys.
N. Watch carefully for conflict of interest situations.
O. Obtain non waiver agreement in appropriate circumstances.
P. Promptly forward excess exposure correspondence to insured including language to insured regarding insured's obtaining separate representation.
The following are some factors which may suggest negligence in the handling of claims of this type:
1. The failure of the insurance company for to settle during either the investigation or the trail when the proper opportunity is presented.
2. The failure for to carry on negotiations.
3. The failure for to investigate all of the facts necessary for to protect the insured.
4. The extent for to which the evidence is in conflict. If the liability is clear, a great duty for to settle exists.
5. If there are conflicts in the evidence which increase the uncertainty of the insured's defenses, the possibility that the insurer was negligent increase.
The following are some factors that may no negligence:
1. A proper investigation of the facts concerning the insured's possible liability for to the plaintiffs, and the likely verdict range.
2. Where applicable, reliance on the advice of competent counsel.
3. Where the company has notified the insured of his rights for to employ private counsel.
4. The reasonableness of the company's refusal for to settle.
The Court states that the tort of intentional infliction of emotional distress requires four essential elements:
Wednesday, August 27, 2008
THE TEN WORST INSURANCE COMPANIES IN AMERICA CONCLUSION
THE TEN WORST INSURANCE COMPANIES IN AMERICA
Conclusion
The insurance industry is in dire need of reform. For too many insurance companies, profit have clearly trumped fair dealing with policyholders. The industry has done all it can to maximize its profits and rid itself of claims. Allstate CEO Thomas Wilson outlined the strategy when he said the company had “begun to think and act more like a consumer products company.” Allstate has enjoyed a return double that of the S&P 500, but its policyholders have suffered cancellations, nonrenewals, and punishing loss-prevention techniques. Wilson has been unrepentant: “Our obligation is to earn a return for our share holders.”
Wilson is one of many insurance leaders who have lost sight of their legal and ethical responsibility to policyholders. Now they answer only to Wall Street. The time is due for insurance reform that will level the playing field for consumers.
Three Pro-Consumer Insurance Reforms
1. Require Insurers to Work in Good Faith with Consumers
Many states have introduced, and some have passed, “Insurer Fair Conduct” bills which establish a private right of action by a first and/or third party against insurers for failure to act in good faith. Insurers must be held to fair conduct standards when evaluating and settling claims.
2. Require Prior Approval of Rate Increases
Require insurers to obtain commissioner’s approval of proposed rate increased of 10 percent or greater, and authorize interested parties to intervene in rate proceedings. In most states, insurers can raise without the approval of Insurance Commissioner. Rates are either automatically approved absent action on the part of the Commissioner, or the Commissioner has no authority to disapprove increases. The goal is to explicitly authorize—or even require—the Commissioner to hold a hearing prior to approval.
3. Establish an Insurance Consumer Advocate
States should ensure there is a consumer advocate either on the state’s Insurance Commission or within the office of the Insurance Commissioner. Some states have already done so. For example, in 1991, the West Virginia legislature created the Office of Consumer Advocacy, charged with representing consumers’ interest in health care issues. The Consumer Advocate is also authorized to represent the public interest in matters coming before the Insurance Commission.
Conclusion
The insurance industry is in dire need of reform. For too many insurance companies, profit have clearly trumped fair dealing with policyholders. The industry has done all it can to maximize its profits and rid itself of claims. Allstate CEO Thomas Wilson outlined the strategy when he said the company had “begun to think and act more like a consumer products company.” Allstate has enjoyed a return double that of the S&P 500, but its policyholders have suffered cancellations, nonrenewals, and punishing loss-prevention techniques. Wilson has been unrepentant: “Our obligation is to earn a return for our share holders.”
Wilson is one of many insurance leaders who have lost sight of their legal and ethical responsibility to policyholders. Now they answer only to Wall Street. The time is due for insurance reform that will level the playing field for consumers.
Three Pro-Consumer Insurance Reforms
1. Require Insurers to Work in Good Faith with Consumers
Many states have introduced, and some have passed, “Insurer Fair Conduct” bills which establish a private right of action by a first and/or third party against insurers for failure to act in good faith. Insurers must be held to fair conduct standards when evaluating and settling claims.
2. Require Prior Approval of Rate Increases
Require insurers to obtain commissioner’s approval of proposed rate increased of 10 percent or greater, and authorize interested parties to intervene in rate proceedings. In most states, insurers can raise without the approval of Insurance Commissioner. Rates are either automatically approved absent action on the part of the Commissioner, or the Commissioner has no authority to disapprove increases. The goal is to explicitly authorize—or even require—the Commissioner to hold a hearing prior to approval.
3. Establish an Insurance Consumer Advocate
States should ensure there is a consumer advocate either on the state’s Insurance Commission or within the office of the Insurance Commissioner. Some states have already done so. For example, in 1991, the West Virginia legislature created the Office of Consumer Advocacy, charged with representing consumers’ interest in health care issues. The Consumer Advocate is also authorized to represent the public interest in matters coming before the Insurance Commission.
Saturday, August 23, 2008
10. Liberty Mutual
10. Liberty Mutual
CEO: Edmund F. (Ted) Kelly
2005 compensation $27 million
HQ: Boston, MA
Profits: $1.5 billion (2007)
Assets: $94.7 billion
Like Allstate and State Farm, Liberty Mutual hired consulting giant McKinsey & Co. and adopted deny, delay, and defend tactics. The company has also gone one further than simple claims-handling abuses by indulging in what regulators allege is systematic bid-rigging.
_______________________________________
Like Allstate and State Farm before it, Mutual hired consulting giant McKinsey & Co. to boost its bottom line. The McKinsey strategy relies on lowering the amounts paid in claims, no matter whether the claims were valid or not. By all accounts, Liberty Mutual has not become as notorious as its rivals for the deny, delay and defend tactics that McKinsey encouraged. However, that has not stopped the company from leading the way in complaint rankings and stories of short-changed victims. In fact, Liberty Mutual is facing a glut of litigation from its own vendors who say the company’s cost-cutting has resulted in poor claims processing and a spike in lawsuits.
Like several other big property casualty insurers, Liberty Mutual has also begun abandoning policyholders across the country. The company has pulled out of many states—not only hurricane susceptible states such as Florida and Louisiana, but also northern states such as Connecticut, Rhode Island, Maryland, Massachusetts, and much of New York. A 2007 New York Times article highlighted Liberty Mutual policyholders James and Ann Gray of Long Island. The Grays were “nonrenewed” by Liberty Mutual despite the fact that they lived 12 miles from the coast and had “been touched by rampaging waters only once, when the upstairs bathroom overflowed.” In fact, Liberty Mutual and its big name competitors have left more than 3 million homeowners stranded over the last few years. New York regulators chastised Liberty Mutual for tying nonrenewals to whether a policyholder had an auto policy or other coverage, against state law.
Liberty Mutual has also gone where even its big property casualty rivals Allstate and State Farm have feared to tread by trying its hand at massive corporate fraud. While the likes of AIG, Zurich, and ACE settled charges that they colluded with broker Marsh & McLennan in a huge bidrigging fraud, Liberty Mutual remains the only insurance company that refuses to concede guilt. The fraud centered around fake bids that companies submitted to Marsh in order to garner artificially inflated rates. Liberty Mutual claims its business practices were lawful and that regulators’ settlement demands are “excessive.”
CEO: Edmund F. (Ted) Kelly
2005 compensation $27 million
HQ: Boston, MA
Profits: $1.5 billion (2007)
Assets: $94.7 billion
Like Allstate and State Farm, Liberty Mutual hired consulting giant McKinsey & Co. and adopted deny, delay, and defend tactics. The company has also gone one further than simple claims-handling abuses by indulging in what regulators allege is systematic bid-rigging.
_______________________________________
Like Allstate and State Farm before it, Mutual hired consulting giant McKinsey & Co. to boost its bottom line. The McKinsey strategy relies on lowering the amounts paid in claims, no matter whether the claims were valid or not. By all accounts, Liberty Mutual has not become as notorious as its rivals for the deny, delay and defend tactics that McKinsey encouraged. However, that has not stopped the company from leading the way in complaint rankings and stories of short-changed victims. In fact, Liberty Mutual is facing a glut of litigation from its own vendors who say the company’s cost-cutting has resulted in poor claims processing and a spike in lawsuits.
Like several other big property casualty insurers, Liberty Mutual has also begun abandoning policyholders across the country. The company has pulled out of many states—not only hurricane susceptible states such as Florida and Louisiana, but also northern states such as Connecticut, Rhode Island, Maryland, Massachusetts, and much of New York. A 2007 New York Times article highlighted Liberty Mutual policyholders James and Ann Gray of Long Island. The Grays were “nonrenewed” by Liberty Mutual despite the fact that they lived 12 miles from the coast and had “been touched by rampaging waters only once, when the upstairs bathroom overflowed.” In fact, Liberty Mutual and its big name competitors have left more than 3 million homeowners stranded over the last few years. New York regulators chastised Liberty Mutual for tying nonrenewals to whether a policyholder had an auto policy or other coverage, against state law.
Liberty Mutual has also gone where even its big property casualty rivals Allstate and State Farm have feared to tread by trying its hand at massive corporate fraud. While the likes of AIG, Zurich, and ACE settled charges that they colluded with broker Marsh & McLennan in a huge bidrigging fraud, Liberty Mutual remains the only insurance company that refuses to concede guilt. The fraud centered around fake bids that companies submitted to Marsh in order to garner artificially inflated rates. Liberty Mutual claims its business practices were lawful and that regulators’ settlement demands are “excessive.”
Friday, August 22, 2008
9. Torchmark
9. Torchmark
CEO: Mark S. McAndrew
2007 compensation $4.7 million
HQ: McKinney, Texas
Profits: $527.5 million (2007)
Assets: $15.2 billion
Founded, by its own admission, as little more than a scam, Torchmark has preyed upon low-income Southerners for over 100 years. Torchmark is the holding company for a variety of subsidiaries offering low cost burial insurance, cancer insurance, life insurance, and similar policies. The company has come under fire for a variety of transgressions, including charging minority policyholders more than whites.
_______________________________________
According to its former CEO, Torchmark’s very origins are as a scam. Founded in 1990, the group’s purpose was to funnel money to its founders, according to former CEO Frank Samford. Then known as the Heralds of Liberty, it initially registered itself as a fraternal organization to circumvent Alabama’s insurance laws. It was reorganized as a stock company in 1929 and absorbed several other insurance companies over the course of the century before adopting the name Torchmark for the holding company in 1982
Since then, Torchmark and its various subsidiaries have preyed upon low-income Americans all over the South. The various schemes and tactics it has engaged in, including race-based underwriting, refusing insurance to non-English speakers, and deliberate overcharging of premiums, have prompted frequent lawsuits from regulators and policyholders alike. Now Torchmark plans to expand into more states.
In the 1990s, Torchmark subsidiary Liberty National Insurance was forced to pay several millions of dollars in litigation alleging fraud in selling cancer insurance policies. The company had marketed the policies in the 1980s promising lifetime benefits, yet changed the policies without telling their customers.
Torchmark subsidiaries Globe Life Accident Insurance and United American Insurance also came under fire for their marketing of individual health insurance policies. Some of the tactics that were highlighted included selling replacement policies that did not actually replace all of a person’s coverage. Company agents would convince policyholders that their current coverage would be discontinued at age 65, even when it was guaranteed for life, and then would offer new policies that were not worth as much. Another tactic involved offering “low cost” policies at rates that quickly shot up. In one such case in 1989, a Greenville, Mississippi, man bought a policy with an $86 a month “teaser rate.” Torchmark did not disclose that the rate would immediately go up. Within two years, the rate had more than doubled.
For years Torchmark and its affiliates have been involved in litigation concerning race-based pricing, particularly over “burial policies.” In the mid-1980s, half of all Alabamans who died had a burial policy from Torchmark. These burial policies were sold at a higher price to black policyholders. In 2000, a Florida court ordered the company to stop collecting premiums on the old burial policies because black policyholders has been charged more than white policyholders. Alabama regulator followed with an investigation. In 2006, Torchmark subsidiary Liberty National Life Insurance paid $6 million to resolve a 2,000 member class action lawsuit. According to the allegations, Liberty National agents would market these policies with premiums of less than $1 to attract low-income policyholders. However, black policyholders ended up paying 36 percent more than white policyholders.
In 2003, Torchmark affiliate United American Insurance settled charges that it had defrauded senior citizens in the sale of Medicare policies. A two-year investigation in Minnesota concluded the company had misled hundreds of people into purchasing supplemental Medicare insurance policies. According to the report, United American aggressively pressured hundreds of seniors into buying insurance that was more expensive and less comprehensive than the insurance they already had, which was a violation of state law. Internal documents showed that company agents were encouraged to act as if they were representing federal agencies or senior service centers. United American used a subsidiary, Consumer Support Services, which sent mass mailing to elderly citizens signed from the “Medicare Supplement Division.” Agents would then set up meetings to offer information packets, which in reality were home-sales opportunities. The fraud was reported by United American’s own employees. The company also deliberately delayed premium refunds and lied to authorities about its reserves. The Minnesota Commerce Department Commissioner said of the case, “This is not a case of rogue agents. These are not technical violations. This is irresponsible corporate culture at work.” A subsequent report from the state Office of the Legislative Auditor criticized the settlement because it had allowed United American several improper concessions. Among these were a confidentiality provision that kept the deal secret, an agreement not to report the company to the National Association of Insurance Commissioners (NAIC), and an agreement to characterize the company’s payment as a “fee reimbursement,” not a penalty or fine. It was as least the third time United American had been found to have broken Minnesota insurance laws. At the time, ten states had issued at least 26 enforcement actions against the company.
Even Torchmark’s own employees are not immune from the company’s desire to put profits over people. In 1998, Liberty National incurred a multimillion dollar verdict for age discrimination claims put forward by its employees. Evidence presented at the trial highlighted one particularly aggressive manager, Andy King. Ironically, in 2006, Torchmark CEO Mark McAndrew brought in Andy King to shake up Liberty National’s employees. Newly installed as President and Chief Marketing Officer of Liberty National, King would oversee what McAndrew described as a move from “socialistic” compensation to a “capitalistic” approach. McAndrew went on, “There is no doubt moving Andy out there we will see an improvement in the recruiting and new agent hiring. As far as these people that are at extremely low production level, this has been a long term problem. It is something that has gone on for year, so it’s not anything new. Some of those are veteran agents. Most of those would be more veteran agents. It has been accepted for a number of years, and it is something we’re changing. So it’s really not a new problem.”
Torchmark got a taste of its own medicine in 2003 when Waddell and Reed, a unit that Torchmark itself had spun off in 1998, conspired to switch policyholders from United Investors Life, another Torchmark subsidiary, to rival Nationwide. When United Investors sued, Waddell and Reed filed a civil racketeering claim against Torchmark accusing its former parent of scheming to continue its hold over Waddell after it was spun off. Torchmark eventually prevailed.
CEO: Mark S. McAndrew
2007 compensation $4.7 million
HQ: McKinney, Texas
Profits: $527.5 million (2007)
Assets: $15.2 billion
Founded, by its own admission, as little more than a scam, Torchmark has preyed upon low-income Southerners for over 100 years. Torchmark is the holding company for a variety of subsidiaries offering low cost burial insurance, cancer insurance, life insurance, and similar policies. The company has come under fire for a variety of transgressions, including charging minority policyholders more than whites.
_______________________________________
According to its former CEO, Torchmark’s very origins are as a scam. Founded in 1990, the group’s purpose was to funnel money to its founders, according to former CEO Frank Samford. Then known as the Heralds of Liberty, it initially registered itself as a fraternal organization to circumvent Alabama’s insurance laws. It was reorganized as a stock company in 1929 and absorbed several other insurance companies over the course of the century before adopting the name Torchmark for the holding company in 1982
Since then, Torchmark and its various subsidiaries have preyed upon low-income Americans all over the South. The various schemes and tactics it has engaged in, including race-based underwriting, refusing insurance to non-English speakers, and deliberate overcharging of premiums, have prompted frequent lawsuits from regulators and policyholders alike. Now Torchmark plans to expand into more states.
In the 1990s, Torchmark subsidiary Liberty National Insurance was forced to pay several millions of dollars in litigation alleging fraud in selling cancer insurance policies. The company had marketed the policies in the 1980s promising lifetime benefits, yet changed the policies without telling their customers.
Torchmark subsidiaries Globe Life Accident Insurance and United American Insurance also came under fire for their marketing of individual health insurance policies. Some of the tactics that were highlighted included selling replacement policies that did not actually replace all of a person’s coverage. Company agents would convince policyholders that their current coverage would be discontinued at age 65, even when it was guaranteed for life, and then would offer new policies that were not worth as much. Another tactic involved offering “low cost” policies at rates that quickly shot up. In one such case in 1989, a Greenville, Mississippi, man bought a policy with an $86 a month “teaser rate.” Torchmark did not disclose that the rate would immediately go up. Within two years, the rate had more than doubled.
For years Torchmark and its affiliates have been involved in litigation concerning race-based pricing, particularly over “burial policies.” In the mid-1980s, half of all Alabamans who died had a burial policy from Torchmark. These burial policies were sold at a higher price to black policyholders. In 2000, a Florida court ordered the company to stop collecting premiums on the old burial policies because black policyholders has been charged more than white policyholders. Alabama regulator followed with an investigation. In 2006, Torchmark subsidiary Liberty National Life Insurance paid $6 million to resolve a 2,000 member class action lawsuit. According to the allegations, Liberty National agents would market these policies with premiums of less than $1 to attract low-income policyholders. However, black policyholders ended up paying 36 percent more than white policyholders.
In 2003, Torchmark affiliate United American Insurance settled charges that it had defrauded senior citizens in the sale of Medicare policies. A two-year investigation in Minnesota concluded the company had misled hundreds of people into purchasing supplemental Medicare insurance policies. According to the report, United American aggressively pressured hundreds of seniors into buying insurance that was more expensive and less comprehensive than the insurance they already had, which was a violation of state law. Internal documents showed that company agents were encouraged to act as if they were representing federal agencies or senior service centers. United American used a subsidiary, Consumer Support Services, which sent mass mailing to elderly citizens signed from the “Medicare Supplement Division.” Agents would then set up meetings to offer information packets, which in reality were home-sales opportunities. The fraud was reported by United American’s own employees. The company also deliberately delayed premium refunds and lied to authorities about its reserves. The Minnesota Commerce Department Commissioner said of the case, “This is not a case of rogue agents. These are not technical violations. This is irresponsible corporate culture at work.” A subsequent report from the state Office of the Legislative Auditor criticized the settlement because it had allowed United American several improper concessions. Among these were a confidentiality provision that kept the deal secret, an agreement not to report the company to the National Association of Insurance Commissioners (NAIC), and an agreement to characterize the company’s payment as a “fee reimbursement,” not a penalty or fine. It was as least the third time United American had been found to have broken Minnesota insurance laws. At the time, ten states had issued at least 26 enforcement actions against the company.
Even Torchmark’s own employees are not immune from the company’s desire to put profits over people. In 1998, Liberty National incurred a multimillion dollar verdict for age discrimination claims put forward by its employees. Evidence presented at the trial highlighted one particularly aggressive manager, Andy King. Ironically, in 2006, Torchmark CEO Mark McAndrew brought in Andy King to shake up Liberty National’s employees. Newly installed as President and Chief Marketing Officer of Liberty National, King would oversee what McAndrew described as a move from “socialistic” compensation to a “capitalistic” approach. McAndrew went on, “There is no doubt moving Andy out there we will see an improvement in the recruiting and new agent hiring. As far as these people that are at extremely low production level, this has been a long term problem. It is something that has gone on for year, so it’s not anything new. Some of those are veteran agents. Most of those would be more veteran agents. It has been accepted for a number of years, and it is something we’re changing. So it’s really not a new problem.”
Torchmark got a taste of its own medicine in 2003 when Waddell and Reed, a unit that Torchmark itself had spun off in 1998, conspired to switch policyholders from United Investors Life, another Torchmark subsidiary, to rival Nationwide. When United Investors sued, Waddell and Reed filed a civil racketeering claim against Torchmark accusing its former parent of scheming to continue its hold over Waddell after it was spun off. Torchmark eventually prevailed.
Wednesday, August 20, 2008
8. United Health
8. United Health
CEO: Stephen J Hemsley
2007 compensation $13.2 million
HQ: Minnetonka, MN
Profits: $4.7 billion (2007)
Assets: $53.5 billion
United Health is plagued by accusations that its greed has endangered patients. Physicians report that reimbursement rates are so low and delayed by the company that patient health is compromised. Money that should have been spent on medical treatment for policyholders has instead gone to the company’s former CEO, who faced criminal and civil charges for backdating stock options. United Health has also used its association with AARP to jack up premiums on products aimed at seniors, even through they are no better than their cheaper counterparts.
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William McGuire orchestrated United Health Group’s rapid growth to become the largest health insurance company by premiums written in America. (138) Along the way, he ensured that he would be well compensated for his efforts. When McGuire became CEO in 1990, he immediately began to streamline the company by cutting back on coverage for treatment he deemed unnecessary and by bargaining with doctors to reduce payments.
United Health also became dominant in the burgeoning HMO market by investing in information technology and acquiring smaller companies. The company’s success under his leadership made it easy for McGuire to convince the board of directors to reward him for his performance. McGuire was allowed to choose when his stock options would be awarded, essentially allowing him to backdate his options to make it appear they were issued on days when stock prices were at their lowest.
The Wall Street Journal conducted an analysis of McGuire’s stock option grants between 1994 and 2002 and concluded that the probability the options were randomly awarded on dates when stock prices were at their lowest would be about 1 in 200 million. An internal memo made public during litigation confirmed that on at least one occasion options were granted “with an advantageous price.” By backdating his options, McGuire was able amass $1.6 billion in options as United Health’s stock price rose from 30 cents per share in 1990 to $62.14 in December 2005. Given the incredible performance of the stock, the board saw no reason to restrain McGuire.
Shareholders and the SEC did not share the board’s view of McGuire’s worth. The SEC opened an investigation into United Health’s options granting process, which ultimately led to McGuire’s ouster as CEO in 2006. Additionally, McGuire agreed to give back $620 million in stock gains and retirement compensation in order to settle federal and shareholder claims. The settlement left McGuire with just $800 million in options and $530 million in compensation.
During his tenure as CEO, McGuire was meticulous about expanding the company’s reach. One very profitable move was the decision to partner with AARP to sell insurance products. United Health Group understood the value of AARP’s image as a trusted advocate for senior citizen’s rights when it partnered with the non-profit organization in 1998 to market its insurance products. That year, the insurer won a 10-year contract to brand its supplemental Medicare insurance policies with the AARP name. The deal was lucrative for both sides. United Health received $4.5 billion in premiums from AARP-branded products in 2004, while the seniors’ organization pulled in $197 million in royalties and $23 million in investment income that same year.
Beginning in 2006, AARP licensed its name to three United Health Medicare prescription drug plans, covering 4.1 million people. United Health also sells two other prescription drug plan not branded by AARP, and the enrollment numbers show just how effective the AARP name is. United Health’s stand-alone plans cover only 600,000 people.
While this partnership is advantageous for United Health, it laid AARP vulnerable to the charge of allowing financial gain to trump its members’ best interest. The premiums charged by United Health’s AARP plans are often far higher than those charged by other companies. The AARP reputation gives seniors the false sense of value and quality, even though there is little difference in services and the premiums are far higher. In June 2007, United Health was forced to suspend marketing of its Medicare Advantage program after the federal government determined that the company was misrepresenting its products. Medicare audit reports found that United Health lacked an effective program to supervise its marketing representatives. (150) The reports also found that the company failed to notify policyholders about changes in costs and benefits.
United Health has repeatedly been accused of focusing on profits at the expense of its policyholders and their health care providers. The Nebraska Insurance Department reported a spike in complaints against the insurance giant for wrongful denials of claims and for failing to reimburse claims in a timely manner. Other state regulators have said United Health has acted improperly in denying claims. In one case, the company denied a doctor’s request for an enclosed bed to protect a four-year-old with an abnormally small head. In another case,the company rejected a request from a patient who lost 200 pounds after bariatric surgery and wanted to have flaps of excess skin removed to prevent infection. (151)
Physicians report that United Health’s reimbursement rates are so low and delayed that patient health is being compromised. Many physicians in South Carolina have stopped accepting United Health coverage and others are forcing patients to pay up front. South Carolina is the only state that does not have a “prompt pay law,” which requires insurers to pay claims within 90 days. Texas, which has a prompt pay law, has levied $4 million in fines against United Health for late payment. (152) Regulators in Arizona fined the insurer $364,750 for illegally denying over 63,000 claims by doctors.
New York regulators and health care providers have taken an aggressive stance against United Health practices they believe to be unfair. The state Department of Health prohibited United Healthcare of New York from enrolling new members until it improved practices, such as adding more customer relations staff, responding to claims faster, and updating financial reports. The American Medical Association (AMA) and the Medical Society of the State of New York sued the insurer over its reimbursement rates.
Perhaps the biggest hit to United Health will come from a lawsuit New York Attorney General Andrew Cuomo intends to file over how the company determines what portion of a doctor or hospital bill to pay. Cuomo alleges that United Health has systematically been forcing patients to pay more than they should for visits to out-of-network doctors and hospitals by intentionally low-balling reimbursement rates. A company called Ingenix calculates rates; however, this company is owned by United Health which creates the potential for a conflict of interest.
CEO: Stephen J Hemsley
2007 compensation $13.2 million
HQ: Minnetonka, MN
Profits: $4.7 billion (2007)
Assets: $53.5 billion
United Health is plagued by accusations that its greed has endangered patients. Physicians report that reimbursement rates are so low and delayed by the company that patient health is compromised. Money that should have been spent on medical treatment for policyholders has instead gone to the company’s former CEO, who faced criminal and civil charges for backdating stock options. United Health has also used its association with AARP to jack up premiums on products aimed at seniors, even through they are no better than their cheaper counterparts.
_______________________________________
William McGuire orchestrated United Health Group’s rapid growth to become the largest health insurance company by premiums written in America. (138) Along the way, he ensured that he would be well compensated for his efforts. When McGuire became CEO in 1990, he immediately began to streamline the company by cutting back on coverage for treatment he deemed unnecessary and by bargaining with doctors to reduce payments.
United Health also became dominant in the burgeoning HMO market by investing in information technology and acquiring smaller companies. The company’s success under his leadership made it easy for McGuire to convince the board of directors to reward him for his performance. McGuire was allowed to choose when his stock options would be awarded, essentially allowing him to backdate his options to make it appear they were issued on days when stock prices were at their lowest.
The Wall Street Journal conducted an analysis of McGuire’s stock option grants between 1994 and 2002 and concluded that the probability the options were randomly awarded on dates when stock prices were at their lowest would be about 1 in 200 million. An internal memo made public during litigation confirmed that on at least one occasion options were granted “with an advantageous price.” By backdating his options, McGuire was able amass $1.6 billion in options as United Health’s stock price rose from 30 cents per share in 1990 to $62.14 in December 2005. Given the incredible performance of the stock, the board saw no reason to restrain McGuire.
Shareholders and the SEC did not share the board’s view of McGuire’s worth. The SEC opened an investigation into United Health’s options granting process, which ultimately led to McGuire’s ouster as CEO in 2006. Additionally, McGuire agreed to give back $620 million in stock gains and retirement compensation in order to settle federal and shareholder claims. The settlement left McGuire with just $800 million in options and $530 million in compensation.
During his tenure as CEO, McGuire was meticulous about expanding the company’s reach. One very profitable move was the decision to partner with AARP to sell insurance products. United Health Group understood the value of AARP’s image as a trusted advocate for senior citizen’s rights when it partnered with the non-profit organization in 1998 to market its insurance products. That year, the insurer won a 10-year contract to brand its supplemental Medicare insurance policies with the AARP name. The deal was lucrative for both sides. United Health received $4.5 billion in premiums from AARP-branded products in 2004, while the seniors’ organization pulled in $197 million in royalties and $23 million in investment income that same year.
Beginning in 2006, AARP licensed its name to three United Health Medicare prescription drug plans, covering 4.1 million people. United Health also sells two other prescription drug plan not branded by AARP, and the enrollment numbers show just how effective the AARP name is. United Health’s stand-alone plans cover only 600,000 people.
While this partnership is advantageous for United Health, it laid AARP vulnerable to the charge of allowing financial gain to trump its members’ best interest. The premiums charged by United Health’s AARP plans are often far higher than those charged by other companies. The AARP reputation gives seniors the false sense of value and quality, even though there is little difference in services and the premiums are far higher. In June 2007, United Health was forced to suspend marketing of its Medicare Advantage program after the federal government determined that the company was misrepresenting its products. Medicare audit reports found that United Health lacked an effective program to supervise its marketing representatives. (150) The reports also found that the company failed to notify policyholders about changes in costs and benefits.
United Health has repeatedly been accused of focusing on profits at the expense of its policyholders and their health care providers. The Nebraska Insurance Department reported a spike in complaints against the insurance giant for wrongful denials of claims and for failing to reimburse claims in a timely manner. Other state regulators have said United Health has acted improperly in denying claims. In one case, the company denied a doctor’s request for an enclosed bed to protect a four-year-old with an abnormally small head. In another case,the company rejected a request from a patient who lost 200 pounds after bariatric surgery and wanted to have flaps of excess skin removed to prevent infection. (151)
Physicians report that United Health’s reimbursement rates are so low and delayed that patient health is being compromised. Many physicians in South Carolina have stopped accepting United Health coverage and others are forcing patients to pay up front. South Carolina is the only state that does not have a “prompt pay law,” which requires insurers to pay claims within 90 days. Texas, which has a prompt pay law, has levied $4 million in fines against United Health for late payment. (152) Regulators in Arizona fined the insurer $364,750 for illegally denying over 63,000 claims by doctors.
New York regulators and health care providers have taken an aggressive stance against United Health practices they believe to be unfair. The state Department of Health prohibited United Healthcare of New York from enrolling new members until it improved practices, such as adding more customer relations staff, responding to claims faster, and updating financial reports. The American Medical Association (AMA) and the Medical Society of the State of New York sued the insurer over its reimbursement rates.
Perhaps the biggest hit to United Health will come from a lawsuit New York Attorney General Andrew Cuomo intends to file over how the company determines what portion of a doctor or hospital bill to pay. Cuomo alleges that United Health has systematically been forcing patients to pay more than they should for visits to out-of-network doctors and hospitals by intentionally low-balling reimbursement rates. A company called Ingenix calculates rates; however, this company is owned by United Health which creates the potential for a conflict of interest.
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