4. State Farm

4. State Farm

CEO: Edward B. Rust Jr.
2007 compensation $11.7 million
HQ: Bloomington, IL
Profits: $5.5 billion (2007)
Assets: $181.4 billion

As the biggest property casualty insurance company in America, State Farm has become notorious for its deny and delay tactics. In many cases, the company has gone to extreme lengths to avoid paying claims, including forging signatures on earthquake waivers after the deadly Northridge earthquake, and altering engineering reports regarding damage after Hurricane Katrina.
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Hurricane Katrina showed State Farm at its worst. One of the deadliest natural disasters in U.S. history, Hurricane Katrina made landfall on August 29, 2005, near Buras, Louisiana. The storm killed nearly 1,600 people and caused $135 billion in damages.

One of the legacies of the storm was the widespread dissatisfaction with the response of State Farm and other insurance companies. State Farm would later claim it had settled 99 percent of its cases, but regulators criticized the company for using misleading statistics. The company claimed that any house that had what they considered water damage did not constitute a claim in the first place. In fact, the Louisiana Department of Insurance reported that it was contacted by 9,000 consumers seeking help resolving disputes with their insurance companies.

State Farm denied the claims of the Nguyen family of Mississippi, who lost their home in Hurricane Katrina. State Farm’s own engineers concluded that the damage was caused by wind and even cited eyewitnesses who saw another house picked up by the wind and thrown into the Nguyens’s home. State Farm, however, hired another engineering firm to come to a different conclusion and then denied the claim, saying the damage was caused by flooding. State Farm also denied the claims of Dean Barras in Louisiana. Barras’s home was exposed to the elements for two week’s but State Farm’s response was “the chimney was not built properly.”

Bob Kochran, CEO of an engineering firm assessing Katrina damage for State Farm, said that he was asked to alter reports with which the company did not agree. In order to keep the State Farm contract, Kochran agreed to tell his engineer to “re-evaluate each of out assignments” One of the engineers, Randy Down, responded in an email, “I have a serious concern about the ethics of this whole matter. I really question the ethics of someone who wants to fire us simply because our conclusions don’t match theirs. “State Farm’s attempt to unduly influence the engineers was exposed during litigation to Jackson, Mississippi.

One such angry policyholder was United States Senator Trent Lott, was had long counted on insurance companies for support, become an industry critic after his beachfront house was destroyed by Hurricane Katrina and his subsequent claim was denied by State Farm. Lott eventually settled with State Farm, but went on to sponsor legislation requiring insurers to provide “plan English” summaries of what their policies did and did not cover. Hurricane Katrina had highlighted insurance company use of such things as anti-concurrent clauses, which led policyholders into believing they were covered from the risks of hurricanes, when in fact subsequent flooding might wipe out any chance of a claim being paid. “They don’t want you to know what you really have covered,” said Lott.

In April 2007, State Farm agreed to re-evaluate more than 3,000 Hurricane claims, and within a fee months had paid nearly $30 million in additional settlements. When a grand jury later issued subpoenas probing new claims against State Farm, the company sued Mississippi Attorney General Jim Hood. Hood decried the lawsuit, saying the company’s agreement to reopen claims had never been intended is “blanket immunity” from future probes.

Like Allstate, State Farm used consulting giant McKinsey & Co. The McKinsey concepts involves cutting spending on claims payments to boost profits. Agents steeped in the McKinsey way speak of the “three D’s”—deny the claim, delay the payment, and then do anything to defend against a lawsuit.

In 1994, the Northridge earthquake in California killed 57 people, injured 9,000 and caused an estimated $33.8 billion in damage. It was the costliest earthquake in U.S. history, and insurance companies such as State Farm did everything they could to avoid having to pay for it. After it hit, a State Farm employee testified that company officials forged signatures on earthquake waivers to avoid paying quake-related claims and then withheld evidence when the company was sued. State Farm and Other insurers accused of mishandling Northridge claims were fined over $3billion in penalties; however, State Farm never actually paid the fines. Instead, an insurance department whistleblower would eventually reveal that the insurers donated $12 million to two non-profit foundations created by insurance commissioner Chuck Quackenbush in what amounted to little more to little more than a bribe.

In 1999, a series of powerful tornadoes killed 44 people in Oklahoma and caused $1.8 billion in damages. Homeowners brought a class-action suit against State Farm, alleging the company had tried to undervalue damage to homes or claim damage was caused by other factors such as faulty construction. A jury eventually ruled that State farm acted “recklessly” and “with malice” and disregarded its duty to policyholders. The firm that State Farm used to allegedly undervalue damage was Haag Engineering – the same firm that would be accused of mishandling Katrina claims six years later.

In 1999, despite Oklahoma tornado claims, State Farm earned $1.03 billion in profits after taxes. (83) In 2005, despite Hurricane Katrina, State Farm turned a $3.24 billion profit. The following year, without a major catastrophe, profits increased to $5.32 billion, for which CEO Ed Rust received an 82 percent pay raise. In fact, since State Farm hired McKinsey, the company has seen profits more than double from its 1990s level to the $5.4 billion it made in 2007.

Following the same tactic as Allstate, State Farm has embarked upon a campaign of market withdrawals and non-renewals in the aftermath of Katrina. State Farm has stopped writing new homeowners policies in Mississippi and Florida, and in the latter state non-renewed a further 75,000 policyholders. Just as they did in the aftermath of Katrina, State Farm stopped writing new homeowner policies.

While State Farm will do anything to fight a claim once it has been taken to court, the company has never been shy about using the courts to its own advantage, even when it has to first stack the deck. In the 2004 Illinois Supreme Court election, one justice – Lloyd Karmeier—received huge amounts from State Farm employees, lawyers, and groups to which the insurer belonged. Karmeier won the election and soon after cast a crucial vote reversing a $9 billion judgment against State Farm.