U.S. insurance companies are making record profits while systematically denying claims or reducing what they pay policyholders, a Bloomberg News analysis shows.
Insurers often pay 30 percent to 60 percent of the cost of rebuilding a damaged home — even when carriers assure homeowners they're fully covered, according to thousands of complaints with state insurance departments and civil court cases.
Paying out less to victims of catastrophes has helped produce record profits. In the past 12 years, insurance company net income has soared — even in the wake of Hurricane Katrina, the worst natural disaster in U.S. history.
Property-casualty insurers, which cover damage to homes and cars, reported their highest-ever profit of $73 billion last year, up 49 percent from $49 billion in 2005, according to Highline Data LLC, a Cambridge, Mass.-based firm that compiles insurance industry data.
People are also reading…
Some of that profit came on the backs of people like Julie Tunnell.
Tunnell remembers standing in her debris-strewn driveway when a tall man in blue jeans approached. Her tudor-style home in northern San Diego had been incinerated a week earlier in the largest wildfire in California history. The blaze in October and November 2003 swept across an area 19 times the size of Manhattan, destroying 2,232 homes and killing 15 people.
Now came another blow. A representative of State Farm Mutual Automobile Insurance Co., the largest home insurer in the U.S., came to the charred remnants of Tunnell's home to tell her the company would pay just $184,000 of the estimated $306,000 cost of rebuilding the house.
"It was devastating; I stood there and cried," says Tunnell, 42, who teaches accounting at San Diego City College. "I felt absolutely abandoned."
With that, Tunnell joined thousands of people in the U.S. who already knew a secret about the insurance industry: When there's a disaster, the companies that homeowners count on to protect them from financial ruin routinely pay less than what policies promise.
Systematically deny claims
The 60 million U.S. homeowners who pay more than $50 billion a year in insurance premiums are often disappointed when they discover insurers won't pay the full cost of rebuilding their damaged or destroyed homes.
Property insurers systematically deny and reduce their policyholders' claims, according to court records in California, Florida, Illinois, Mississippi, New Hampshire and Tennessee.
The insurance companies routinely refuse to pay market prices for homes and replacement contents; they use computer programs to cut payouts; they change policy coverage with no clear explanation; they ignore or alter engineering reports; and they sometimes ask their adjusters to lie to customers, court records and interviews with former employees and state regulators show.
As Mississippi Republican U.S. Sen. Trent Lott and thousands of other homeowners have found, insurers make low offers — or refuse to pay at all — and then dare people to fight back.
"It's despicable not to make good-faith offers to everybody," says Robert Hunter, who was Texas insurance commissioner from 1993 to 1995 and is now insurance director at the Washington-based Consumer Federation of America.
"Money managers have taken over this whole industry," Hunter says. "Their eyes are not on people who are hurt but on the bottom line for the next quarter."
The industry's drive for profit has overwhelmed its obligation to policyholders, says California Lt. Gov. John Garamendi, a Democrat. As California's insurance commissioner from 2002 to 2006, Garamendi imposed $18.4 million in fines against carriers for mistreating customers.
"There's a fundamental economic conflict between the customer and the company," he says. "That is, the company doesn't want to pay. The first commandment of insurance is, 'Thou shalt pay as little and as late as possible."
"Good hands or boxing gloves"
In September 1992, Allstate Corp., the second-largest U.S. home insurer, sought advice on improved efficiency from McKinsey & Co., a New York-based consulting firm that has advised many of the world's biggest corporations, according to records in at least six civil court cases.
State Farm, and Farmers Group Inc., the third-largest home insurer in the U.S., also hired McKinsey as a consultant, court records show.
McKinsey produced about 13,000 pages of documents, including PowerPoint slides, in the 1990s, for Northbrook, Ill.-based Allstate. The consulting firm developed methods for the company to become more profitable by paying out less in claims, according to videotaped evidence presented in Fayette Circuit Court in Lexington, Ky., in a civil case involving a 1997 car accident.
For 57 years, Allstate has advertised its employees as the "Good Hands People," telling customers they will be well cared for in times of need.
The McKinsey slides had a new twist on that slogan. One slide McKinsey prepared for Allstate was entitled "Good Hands or Boxing Gloves."
When a policyholder files a claim, first make a low offer, McKinsey advised Allstate. If a client accepts the low amount, Allstate should treat the person with good hands, McKinsey said. If the customer protests or hires a lawyer, Allstate should fight back.
McKinsey doesn't discuss any of its work for clients, spokesman Mark Garrett says.
Less payout to policyholders
One McKinsey slide displayed at the Kentucky hearing featured an alligator with the caption "Sit and Wait." The slide says Allstate can discourage claimants by delaying settlements and stalling court proceedings.
By postponing payments, insurance companies can hold money longer and make more on their investments — and often wear down clients to the point of dropping a challenge.
McKinsey's advice helped spark a turnaround in Allstate's finances. The company's profit rose 140 percent to $4.99 billion in 2006, up from $2.08 billion in 1996.