I just received this interesting legal update.

Ed

"Attorney General files lawsuit against six large insurance companies alleging price-fixing"

Attorney General Charles Foti filed a lawsuit in Orleans Parish Civil District Court late Wednesday alleging collusion, price-fixing and anti-trust violations by six major insurance companies - including Allstate and State Farm - as well as the firms that manufacture their claims-processing software, and the companies that offer them advice or collect their data.

The suit, filed in conjunction with several outside law firms deep in Katrina litigation, is based on the work of an ongoing investigation by the Louisiana Attorney General, who lost his re-election bid in the October 20 primary.

Charles FotiIt says that these groups conspired to manipulate commerce for their own enrichment "by rigging the value of policyholder claims and raiding the premiums held in trust by their companies" and that companies "coerced their policyholders into settling their claims of damages for less than their value by editing engineering reports, by delaying payment and by forcing policyholders to litigate claims to receive full value."

Bob Hartwig, an economist who is president of the Insurance Information Institute trade group, said that Foti's accusations are baseless.

"To allege that insurers act collusively in the settlement of claims is an accusation that has no merit whatsoever," Hartwig said. "Insurers operate independently from each other in settling claims. They do not consult with one another, and they adjust those claims according to their individual contracts with their customers."

In Louisiana, insurers paid out $28 billion on 1.2 million claims of all types from Hurricanes Katrina and Rita. "Those are very substantial numbers. Much of the rebuilding that's going on in Louisiana today is being done with insurance money," Hartwig said.

The suit names State Farm Fire and Casualty Co. and Allstate Insurance Co., Louisiana's two largest residential insurers; Farmers Insurance Exchange, the state's fifth largest homeowners insurance company; Standard Fire Insurance Co, better known as Travelers, the state's seventh largest homeowners insurer; military insurer USAA Casualty Insurance Co., the eighth largest homeowners company and tiny Lafayette Insurance Co., a division of United Fire Group.

The suit also names Marshall & Swift/Boeckh LLC and Xactware Inc., companies that manufacture leading claims adjusting software; and Xactware's parent company, insurance data collector Insurance Services Office Inc. It also names McKinsey & Co., an international consulting firm which was the architect of claims handling practices used by many major insurance companies.

Many of the companies named in the suit could not be reached for comment Wednesday. McKinsey officials said the company doesn't comment on anything related to client work. Allstate and Travelers officials said they couldn't comment because they hadn't seen the suit, as did State Farm, which also said it stands by its claims-handling procedures.

"We haven't seen the suit. What I can say is that we handle each claim individually based on the merits of the claims based on our contracts with our policyholders," State Farm spokesman Fraser Engerman said. "We pay what we owe."

USAA spokesman David Snowden said that lawyers are reviewing the suit. "USAA's claims practices are based on a foundation of ethics, fairness and integrity. Since Hurricane Katrina, we've worked with our members to individually resolve more than 20,000 claims in Louisiana," Snowden said. USAA is owned by its members, who are military personnel and their families.

The sweeping suit says that many insurance companies used the same consulting firm, McKinsey, to devise a strategy for reducing claims, and the success of those companies created financial pressure for everyone else in the industry to follow.

By using claims processing software manufactured by Marshall & Swift/Boeckh and Xactware, the industry has been able to standardize its tactics for low-balling claims, and create a "tainted" database of claims settlements figures which the industry uses to further depress estimates for what people need to repair their homes, according to the lawsuit.. Meanwhile, all of this data is centralized by Xactware's parent company, Insurance Services Office, better known as ISO, allowing companies to collude.

By using these outside vendors to unify "power and control," insurers systematically reduced the percentage of premium dollars that companies return to policyholders in the form of claims payments "under a shroud of secrecy." While the industry has historically paid 70 cents on every premium dollar collected back to policyholders in claims payments, in Katrina, they paid 50 cents for every premium dollar, the suit says.”


Foti's suit was filed in conjunction with Baton Rouge sole practitioner Joseph McKernan; New Orleans sole practitioner Mark Glago; and the New Orleans law firms of Herman, Herman, Katz & Cotlar and Capitelli & Wicker. Those firms are working with Jane Johnson, Louisiana's assistant attorney general for anti-trust issues, without any guarantees earning legal fees.

The lawsuit relies heavily on the theories of New Mexico attorney David Berardinelli, who wrote a book about the McKinsey company's work for Allstate called "From Good Hands to Boxing Gloves." The title of the book is taken from a McKinsey slide advising the company to don boxing gloves and pummel anyone who doesn't accept settlements for pennies on the dollar.

Prior to McKinsey's consulting work for the industry, insurance was viewed as a quasi-public trust in which insurance played a vital role in indemnifying the middle class against financial ruin. But McKinsey, in its quest to increase profits for its clients, ignored this unique function of the industry, and created a devastating strategy that rewards shareholders at the expense of policyholders that has spread throughout the industry, Berardinelli says.

Foti's suit says that insurance companies engaged in horizontal price-fixing "with the explicit approval of insurer management," and strategies to delay and deny claims. In the face of such strategies, homeowners are essentially buying insurance that will never adequately compensate them, meaning that they are overpaying on their premiums.

The suit takes note of the record profits achieved by the industry in 2005 and 2006, despite fielding the most expensive hurricane seasons ever in 2004 and 2005.

In alleging the conspiracy, Foti's suit notes the vast influence that the outside firms named in the suit have on insurance companies. McKinsey, for example, advises two-thirds of the nation's Fortune 1000 companies.

ISO brags in press releases that it has a searchable database of more than 500 million insurance claims, and its Xactware is used by 16 of the nation's top 20 property insurers. The company's software allows insurers to monitor what claims adjusters are doing through its XactAnalysis Quality Review and compare their work to the latest prices reported in the software's Industry Trend Reports, and allows insurers to assign reinspections.

Those trend reports allow insurers "to share the current prices being submitted by competitors, and thus, coordinate the horizontal price-fixing suppression, or attempted suppression, of the overall market in repair services at virtually every geographic level and price component," the suit says.

By December 2005, the cost of repairing a home had doubled since before the storm, and the cost of completely rebuilding a home had gone up by 50 percent, the suit says, yet the price lists of the insurers named in the suit had only increased by 15 percent to 20 percent by December 2005.

Once enough companies are onboard using a certain product others are under pressure to follow. Farmers, according to the suit, visited with a bunch of other leading insurance companies in 1998 and 1999, and when it saw the financial benefits of using the standard claims processing software, it started using Xactimate, too.

The suit cites quotes by Frank Coyne, chairman, chief executive and president of ISO, boasting that computerized claims software and aggregated data are changing how companies do business, while companies that don't follow are going out of business.

"In just a decade and a half, approximately a third of the insurers serving the United States vanished as escalating competition ate into top-line revenue growth and bottom-line profitability. But it isn't just the intensity of competition that's changing . . .The nature of the competition is changing, too, as advances in predictive modeling and other analytical techniques enable leading insurers of all sizes to target their marketing, underwriting and pricing as never before."

Claims adjusters, the suit says, are pressured or required to accept the pricing database information from the Xactware or Marshall & Swift/Boeckh software in the estimates they write if the adjuster wants to be able to close the claim and get paid for the work.

While these companies purport to be providing an independent and objective benchmark for pricing, the suit says, "they intentionally devalue the market price in order to underpay their policyholders and/or artificially deflate, or attempt to deflate construction and repair costs in the affected market."

Meanwhile, the suit says that State Farm has testified under oath that it can modify Xactimate's price lists before adjusting claims. A pricing specialist conducts surveys building material suppliers for the latest prices and updated its New Orleans prices several times per quarter between 2005 and 2007. However, the suit says, a State Farm price list containing 10,000 different items was exactly the same as a Travelers price list on Nov. 15, 2005, something that would be "a statistical impossibility without collusion."

"This continuous arrangement gave insurers an unjust advantage over policyholder, which they took advantage of before, during and after the greatest disaster this country has ever suffered, by reaping huge profits from the misfortunes of persons whom they pledged to protect from risk of loss. They raised insurmountable odds against policyholders' ability to recover," the suit says.

The suit asks for all damages, including but not limited to, treble damages, attorneys fees and costs, injunctive relief and all equitable, declaratory and general relief."

Edward,

Next time you highlight some text, you might try using a different color. Real hard to read the highlighted part. This suit is pretty much old news filed by a lame duck AG and is in the same group as the other one he filed in August of 2007. In that one he filed a class action suit against every insurance carrier in the state of Louisiana alleging that they improperly paid wind damages, and paid no flood damages under the coverages, and therefore the Road Home Program had to pay the insureds. Last note I read on both of them is the new AG will look at them shortly after taking office to see if there is any merit to them or if they are worth going forward, so time will tell.

My apologies on the highlighted text.  That was a copy paste from some e-mail souce I just received this afternoon and felt the topic would warrant a good discussion on this forum, especially since I remember a similar thread going back quite a few pages.

I will see if I can edit the text color, otherwise, highlight the text with your mouse cursor to make it stand out.

Ed

edit:

I was unable to change the font color in the original post, but by highlighting the text in question, it stands out now for better readability.

Yeah - I would really have to disagree with the plaintiffs position. I just had a long site meeting with a contractor who was happy to use Xactimate to create a very, very large estimate for water damage repair based on a small amount of mold that was visible. It's all in the scope.

A green adjuster will overlook vital steps that need to be done, and a very sharp contractor using that same software can make your estimate grow like it was on steroids.  I'm using the same Xactimate that the contractor is - and lot's of contractors do use it.  The allegation that it is just an insurance-side software really shows the author's lack of research. 

Like an old violin, some people can really make it sing. It isn't the software's fault. Ed, if I was your adjuster on that other roof claim with all the layers, you would be done and happy - because I know we would see "eye to eye" on the scope. It's all about the correct description of repair steps, and allowing labor when warranted for the odd stuff that isn't in the database.

Bob, I am sure that any resonable adjuster and myself would have been able to come to an acceptable conclusion.  For that to occur, communication and returned e-mail messages and phone calls would have been required.

From what I see of the members on this forum, that would not have been an obstacle, whatsoever.

Now this I find quite interesting:

Meanwhile, the suit says that State Farm has testified under oath that it can modify Xactimate's price lists before adjusting claims. A pricing specialist conducts surveys building material suppliers for the latest prices and updated its New Orleans prices several times per quarter between 2005 and 2007. However, the suit says, a State Farm price list containing 10,000 different items was exactly the same as a Travelersprice list on Nov. 15, 2005, something that would be "a statistical impossibility without collusion."

It had been mentioned to me previously by several adjusters here, that AllState has their own revised in house adjusted version of M & S/B software that they utilize for their convenience.  Now we know that StateFarm too has testified that they do this as well, and seemingly, so does Travellers.  Hmmm?  Does anybody see a pattern here? 

Isn't it extremely peculiar that the supposedly constantly updated items prices are in unison with each other on such a large number of fields?  If one is using a proprietary self adjusted system, then how would the other competitor have the exact same data?  This possibly could mean that when the software updates quarterly, that both entities suscribing to it, each receive the same revisions jointly though.  But it does seem odd in reflection to comments from people in the know, doesn't it?

Another point to be made, is that you can always find another contractor in a "Reverse Auction" to see who will lower their prices to what another party deems an acceptable dollar amount.  Why should any other party be allowed to state how much someone can charge, not knowing their specific overhead and burden figures and their desired profit margin.  Should someone else be able to tell you after you provided an adjusting service, that they found someone else that could or at least said that they could have done it for 2/3 of your charges?

I don't give a hill of beans about what the "Going Rate" is.  As far as I am concerned, the "Going Rate" is actually the "Going Out Of Business" rate.  Lets use the Department Of Labor generalized statistics regarding all small businesses as a whole.  They state that 80 % of all businesses go out of business within the first 5 years of existance.  During the next 5 year period of time, 80 % of the remainder of the original group observed also goes out of business.  That leaves a ridiculously low and absurd figure of only 4 % of all of the original businesses surviving after a full 10 year period of time.

Should I, or any other company who has paid their dues, (as in my case, this will be my 25th year in business), have to submit to being paid the same rate as a contractor who just started out? 

I don't price gouge, otherwise I would not have been in business in the same location under the same name for as long as I have, so therefor, shouldn't the price structure I charge automatically be considered fair and reasonable and legitimate?  How then, can a software and the multitudes of inept or lazy or company line, adjusters, be able to justify what any contractor can charge for their efforts, especially after a home owner, under no duress, made a conscious decision to award that contractor the job?

(P.S.  I am not trying to turn this topic into a format to re-state the previous circumstances which occured on the other job posted originally by me.  Lets leave this discussion independant of that one, unless some point needs to be made, using that as a readily available real world example.)

Now, as a final point to be made, when comparing contractors or rates charged from one to the other, what consideration is given to one who does not hire illegal labor or subcontract out all tasks to a sub who uses illegal labor, who therefor are not charging for the correct and justifiable legitimate amount of overhead including its bountiful burden amount?

If anyone thinks this is not the rule, rather than the exception, they are gravely mistaken.  I know my competitors and I know how much they charge.  For some and most of them to operate and still have profit left over for themselves, their is no way that they can be paying legitimately.  Now, a contractor who does play by the books gets penalized for doing so, because, "Other Contracors Will Do It Cheaper", or "That Is Not The Going Rate" that we have set aside for this task.

I will end on that note, since I probably typed too much for anyone to want to read the entire post anyways.  Sorry, I got caught up in the moment with a passion for doing things the right way and still surviving in spite of the adversarial competing bid scenarios I deal with on a continual basis.

Ed

Ed,

Considering the fact that the pricing data bases come from the estimating software company and doesn't originate from nor is created by the carrier, it doesn't seem unreasonable to me that any carrier/adjuster who utilizes a particular software would have the same pricing data base.  The pricing data bases are localized to particular areas, supposedly utilizing the costs of that local area.  And we all know about supply and demand; if items are in demand in a particular area one can count on the fact that the price will increase due to the demand, which would facilitate the need to update the data bases. This isn't exclusive of the building supply world, check the price of orange juice after a freeze in the area they are grown.  

Also, anyone using the software can amend or change the pricing by simply changing the price per item while creating the estimate. You can change it for that one estimate or change it globally within the program. 

Considering that there are limited companies that offer the service of the data base research for the pricing guides, I don't find it unusual that the pricing within different programs is similar or in fact identical.  The job of finding the costs locally for materials and labor would be exhaustive to say the least.  The ability to have local price guides in the estimating programs eliminates the need for every adjuster to call up each local building supply store and verify the costs of items such as plywood, 2x4's, Sheetrock, mud, etc, etc, etc.   

While I understand your frustration, I personally don't feel that this particular issue is representative of any collusion or price fixing.  When an adjuster creates an estimate they have the ability to change each line item, and there are far too many adjusters out there who created estimates that were not revised to believe that the thousands of estimates generated from those disasters were all changed at the carrier level to match prices. 

~M~

I think we can all agree that all of the major systems allow the adjuster to change pricing based on local conditions and other issues based on the specific claim and contractor involved.  The problem here is adjusters working for these carrier were told not to alter the databasesfor any reason.  These staff adjusters could only alter scopes of damage and add or delete line items as needed to make the numbers work out.

The suit does make for good reading even if it doesn't go anywhere.  Becuase all these carriers use the same software and databases and all the data is feed tp a company which provides data research to the insurance industry it does make one wonder.   If you ran an insurance company and knew what the other major companies were paying for construction items, what would you do?

If the estimating systems did not have prices that could be modified, the system would be useless. On the other side of the argument if each adjuster who worked catastrophe losses was able to modify the data base prices in the estimates and not leave this up to management, the estimate along with the "close on a one shot basis will not work." Nothing wrong with supplementing the original line item price. Done ever day.

All contractors who depend on insurance work seem to do very well. If a contractor does not agree with the  companys prices, just tell the Homeowner you have a hard time with the carrier's system and you would like to get an agreed cost before the work starts.

All contractors should be required to tattoo this on their forehead as part of the licensing process.