The Real Insurance Frauds

Submitted by: Mike Spindell, guest blogger

It’s Christmastime again and since my childhood, long ago, the Frank Capra film “It’s A Wonderful Life” has been shown time and again in this season, providing a message of redemption, hope and joy that we associate with this time of year. You all know the plot about selfless George Bailey (James Stewart) a man who has sacrificed his dreams for others and because of his selflessness winds up running the Bailey Building and Loan Association, of Bedford Falls, NY. Because of George this institution has provided home loans for the poor of this rural community and serves as its bank. With the Company on the verge of bankruptcy, through duplicity, George is on the verge of suicide distraught over the losses to those he loves and worried by needs of the average people of his town. You all know this plot and if you don’t its summary is here. . I must warn you, perhaps it’s the time of year but I choked up reading the plot, yet again, as I do every time I see this beloved movie.

This introduction has not been made because I’m about to write about banks, or the depredations of the banking industry. Others here and our host have already written extensively on the predatory nature of the banking industry and the harm it has caused to our country. My point of this opening is that we have all grown up with certain mythologies about businesses that provide financial services to the public. This film has had a place in defining that American mythology, in this instance about a bank of sorts, whose leader believes in aiding the community first and profits second. Myths shape our thinking and from my youth I still remember the ad slogan “You have a friend at Chase Manhattan”.

We’ve discovered that banks are anything but our friends. Their bottom line has surpassed service to the point that each customer is looked at as a “cash cow”, to be plundered incessantly with usurious interest and fees for what should be free services. But what about “You’re in Good Hands with Allstate”, “Nationwide Is On Your Side”, or “Like A Good Neighbor State Farm is There”?  Surely the Insurance industry supplies the safety net we want for our homes and cars. Do they? Last week I was sent an article by the Independent Claims Adjuster handling my interminable case for mold damage to my home. He’s helping greatly so this isn’t about me, but the article he sent certainly puts into context all the delays in the process and how property insurance companies are maximizing their profits at the expense of their customers.

The article my claims adjuster sent was “Insurance Claim Delays Deliver Massive Profits To Industry By Shorting Customers” written by Mollie Reilly and Max Rosenthal. It appeared in the December 13th Huffington Post Business section. It describes a change in claims payment system procedures sold to Allstate and other Insurance Companies by the large consulting firm McKinsey and Company, which boosted their profits at claimants expense.

“Unlike many other businesses, the insurance industry is bound by law to act in good faith with its customers. Because of their protective role in the lives of ordinary citizens, insurers have long operated as semi-public trusts. But since the mid-1990s, a new profit-hungry model, combined with weak regulation, has upended that ancient social contract. “Claims have been converted into a money-making process,” said Russ Roberts, a New Mexico-based management consultant and former business professor at Northwestern University who has studied the insurance industry’s evolution from a service business to a profit-driven machine. The change started when consulting giant McKinsey & Company sold Allstate and other leading insurance companies on a new system to boost the bottom line: Rather than adjusting claims the traditional way, which gave claims managers wide latitude to serve customers, insurers embraced a computer-driven method that produced purposefully low offers to claimants.

We have all been led to believe that a property insurer has our interest at heart and wants to make us whole after disaster strikes. While some problems have arisen in disputes where there has been massive damage done by natural disaster, the myths and the ads tell us that these companies are more than our friends, they are our protectors. It seems, as with many myths, this is no longer the case, if it ever has been.

“McKinsey’s strategy put profits above all. One slide in the McKinsey presentation illustrated this philosophy by painting the insurance business as a zero-sum game: “Improving Allstate’s casualty economics will have a negative economic impact on some medical providers, plaintiff attorneys, and claimants. … Allstate gains — others must lose. Allstate has certainly gained: It made $4.6 billion in profits in 2007, double its earnings in the 1990s. The stunning increase, said Russ Roberts, came through “driving down loss values to an average of 30 percent below the actual market cost” — that is, paying dramatically less on claims”.

We see that through delaying payment of claims, paying minimal claim amounts and forcing people already strapped by hardship to take it or sue, “Good Hands” companies like Allstate are making record profits, while some people’s lives are collapsing around them, even though they prudently bought property insurance. While I am not surprised by this, I am outraged. Is every purchase of ours whether product, or service to be based on “caveat emptor”? Is this what those who push so hard to have regulations on businesses stripped working for? Is the complete burden of having to painstakingly investigate every entity we deal with to be laid on our shoulders? Is this the type of society we all want?

“An insurance company can make a lot of money on the small claims,” said Jay Feinman, a professor at Rutgers University School of Law, “because if you save a few dollars on a huge number of claims, it’s worth more than saving a lot of dollars on a very small number of claims.”

“Allstate is the best-known user of the McKinsey model, topping the list of the “Ten Worst Insurance Companies in America” published by the American Association for Justice. But Allstate’s rise in profits has led most of the industry to adopt the same approach. McKinsey has worked with State Farm, another insurance giant, and other companies in redesigning their claims systems. Feinman cautioned in his book “Delay, Deny, Defend” that the two major names “are just the largest players in the industry … [the ones] whose involvement with McKinsey & Company in the transformation of claims is the best documented.”

By using the tactic of “Delay, Deny, Defend” these companies are purposely avoiding paying claims, or paying much less than they should, because they in the end have the upper hand. Imagine, as a case presented in this article describes, losing your home and belongings in a claimable disaster. Most Americans would be totally at a loss about what to do next. Most of us don’t have the wherewithal to sustain a financial disaster like that. That is what this strategy counts on. People are being toyed with at a time of crisis and through that the Insurance Company reaps profits far beyond what their business should entitle them to make.

“Roberts, the management consultant, said that companies like Allstate attempt to pass off claims delays as fluke occurrences. But, he said, they are actually routine and intentional products of the McKinsey system: “The Allstate/McKinsey system for ‘lowballing’ claims payments … is driven by the claims performance management and pay systems from the top to the bottom of the organization.”

Feinman, the Rutgers law professor, also suggested the deck is stacked against individuals who make claims. “You have an accident or a fire in your house. You call up the insurance company. You describe the circumstances. Maybe they send an adjuster out, and they say it’s not covered, or it’s covered but here’s the dollar amount that we’re obligated to pay you,” he said. Most people, Feinman said, do not have the expertise “to know whether or not that’s right.”

What happens to those people with scant resources, with great damages to their home ad belongings? How have the lives of those with these companies coverage been adversely changed by this policy of greed? I think greed is the correct terminology, though to me it also verges on fraud. As a business major in college I was taught that when you supplied a service to someone, the best business practice was to make good on the service you offered. Now of course I graduated in the mid 60’s and as I understand it since Reagan and the 80’s, Business Schools are teaching a revised curriculum that makes the bottom line the only consideration of a business executive.

We have all seen insurance industry sponsored commercials telling us that “insurance fraud” is causing our rates to rise and asking us to pressure our legislators to draft even more severe legislation to combat this evil. Some I’ve seen have even suggested turning in our family and neighbors that we believe are committing insurance fraud “because insurance fraud hurts everyone”. I would submit that the real threat of insurance fraud is coming from the insurance industry itself as it searches for ways not to deliver services they have contracted to provide. Sadly, although both the Federal and the various State governments have agencies to regulate this industry, the regulators seem to have been seduced by the regulated.

“…experts like Feinman argue that insurance regulation has become little more than a fig leaf. State insurance departments are usually understaffed and overwhelmed. And even if they had the legal firepower to contend with giant insurance companies, Feinman said, “the regulators are closer to the industry than they are consumers.” Eleven of the past 15 presidents of the National Association of Insurance Commissioners (NAIC) went on to work for the insurance industry after leaving office, while a 17-year study from two Georgia State University professors found that around half of state-level insurance commissioners did so as well. When combined with penalties that Feinman described as “laughably low” in many states, this close relationship means that regulation does not provide an effective check on insurance companies. And state governments themselves have incentive to place consumers on the backburner. Because insurance taxes are a major source of revenue for the states, said Roberts, insurance oversight commissions are usually more concerned with keeping companies solvent than resolving the problems of policyholders”.

So we see also that government regulation of the Insurance Industry has been ineffective. Some of the reasons give above are a “revolving door” between regulator and industry. Also mentioned is that on State level insurance taxes provide the State with a good deal of revenue. I would also suggest though that the Insurance Industry is the source of a good deal of political campaign funds and their payback is lax oversight. This inevitably leads us to the great debate in America between the “Too Much Government” side and those like me who see a dire need for effective government regulation. I know there are more than a few who read this blog who rail against how government regulation has hurt the “free market”. I would ask them to use the link to the article I’ve posted and mull over if they think this method of doing business by the insurance industry is a fair one. If they agree with me that this is a bad, possibly fraudulent business practice, what then can we as a society do about it, or do they think that it is a matter in which government should not intervene?


31 thoughts on “The Real Insurance Frauds”

  1. Great piece Mike…if you think….until an award is made….the Insurance company is free of having to pay interest….or wrongful denial of a claim….

    On a side note years ago in Gudiepost was a story about “Its a Wonderful Life”….apparently it first ran in the Summer and was a total box office disaster…as it was called the “Greatest Gift”….a little touch up here and there…and wallah…… American Classic……

  2. pete,

    You really owe it to yourself to catch “It’s a Wonderful Life”. That, “Mr. Smith Goes to Washington”, “Winchester ’73”, “Harvey” and “Rear Window” (along with the two you mention) are critical pieces of Stewart’s body of work. My dad met him once while traveling for business during the early 70’s. He was snowed in at a hotel in Denver and he went down to the restaurant for dinner. It was between Thanksgiving and Christmas. The only patrons were him and Mr. & Mrs. Stewart. They very kindly invited him to join them. My dad said that he was every bit the good natured, regular, plain spoken guy you saw on the screen and that he and his wife Gloria were a lovely couple.

    1. AMS,
      A perceptive comment and I share all your sentiments.

      Gene gives good advice with those movies, but I would add Vertigo, Bell Book And Candle, and my favorite of all, North By Northwest. I saw that in The Radio City Music Hall, first run, in what turned out to be the best day of my youth.

  3. as much as i like jimmy stewart movies i’ve never watched “it’s a wonderful life”. i’ve seen “flight of the phoenix” and “the spirit of saint louis” so many times i think i have the dialog memorized.

    as far as insurance here in florida you have to have it in case of hurricanes. watch out though, it doesn’t cover winds or flooding.

  4. Great post Mike,

    I guess i don’t have to tell you what I think……but I will of course.

    It seems like evry other day someone is revealing how yet another industy is taking advantage of it’s customers to their great detriment and the company’s profit.

    No wonder so many people express a strong inclination to just give up.

    The sense of hopelessness and frustration felt by people today is in some ways worse than the condition of forced poverty they have put us in.

    Having little money; having little else can be bourne. Physical depravation is a visable enemy. it can be fought.

    Hopelessness and the feeling that no one cares; that the entire economy is reaching out to crush you and that the government and many of the people would just as soon let you starve to relieve the burden you now are; well, that is alot harder to deal with. And alot harder to fix.

    How can you put empathy,sympathy,compassion and charity into a person’s heart?

    I find it very disconcerting that Republicans (to generalize) and other right-wing supporters are forever saying that we should do away with government programs to help the poor and allow private charity to take care of those who need help. They even pride themselves on their charitable giving.

    Then those same people or groups speak in support of letting the poor starve or die of disease if they can’t afford heath care etc.

    We often hear of how humans are a species doomed by our own actions and inactions but I am here to say that we may as well just wait for the end of humans because the value of being a living human is so much deminished when the humans have lost their humanity

    Humans with no humanity. 1984. Fahrenheit 451. Logan’s run. The future is closer than we think.

  5. As someone with a close friend who has been arguing with his insurance company for a year now about a fire at his hangar, I’ll have to say I find none of this either surprising or amusing. Great article, Mike.

  6. “I have come to the conclusion, or at least believe it is safer to assume, that all commercial businesses are the enemy.”


    I fervently agree with you.


    Loved the clip, as I loved the movie. It says it all for bureaucracies everywhere private or governmental.

  7. Sigh. It’s at 11:04 where Mr. Incredible exemplifies Mike’s post.

    The “resolution” is here:

  8. Can’t say I’m surprised. From the day I insured my first car, I’d always had the impression the insurance industry was legalized crime.

  9. O come, all ye Grinches,
    Greedy and duplicitous.
    O come ye, oh come ye to ole Wall Street,
    Profits, we behold them,
    King over the people.

    O, maximize our profits;
    O, maximize our profits;
    O, maximize our profits,
    Grinches Rule!

    ‘Tis the season, folks —

    For the love of money is the root of all evil. 1 Tim 6:10

  10. Great story Mike. It seems everyone has had a bad experience with insurance companies and the claims process. Having to deal with insurance companies on personall injury matters, I can attest to their “see you in court” tactic in too many cases.

  11. Mike,

    I had an episode with Nationwide which boiled down to $160 after a week of negotiating. My local agent said the claim would be covered but the claims office had “meetings” to discuss a 320 buck claim. At the end of the week it was down to half. At this point I told them they would lose my buisness, $1200/yr. They did not care, when I called my agent he did not care. (He was into “financial advising.”) I went with an independent agent and saved 50%.

    I have come to the conclusion, or at least believe it is safer to assume, that all commercial businesses are the enemy. It is a shame it takes only 10,000 crooks to ruin the reputation of one Ben and Jerry’s. It is a hoot to read “mission statements.” They are only in business to help the customer. Good grief. they are in business to make money. Nothing wrong with that. A little honesty, however, would be unique but it is not in fashion.

  12. “The Bank Around the Corner” — a throwback to another era.


    ‘This has not exactly been a time of great love for bankers. Amid the continuing foreclosure crisis and Occupy Wall Street’s campaign against “the 1 percent,” it is easy to forget that not all banks are complicated giants, trading in derivatives and re-hypothecating valueless collateral. The Bank of Cattaraugus, for example, is by asset size the state’s smallest bank (one branch, eight employees, no credit default swaps) and yet it plays an outsize role in this hilly village an hour south of Buffalo: housing its deposits, lending to its neediest inhabitants and recently granting forbearance on a mortgage when the borrower, a bus mechanic, temporarily lost his job after shooting off his finger while holstering his gun.

    If it sounds old-fashioned, it is. It’s not the kind of bank you’ll find anymore in New York City, where multiple branches and capitalizations counted in 10 figures are the norm. With $12 million in total assets, the Bank of Cattaraugus is a microbank, well below the $10 billion ceiling that defines small banks. It exists in a seemingly different universe from the mammoth banks-turned-financial-services-conglomerates, like Citigroup ($1.9 trillion in assets) or JPMorgan Chase ($2.25 trillion).

    With obvious exceptions, business at the Bank of Cattaraugus hasn’t changed much since 1882, when 20 prominent residents — among them a Civil War surgeon and a cousin of Davy Crockett — established the bank to safeguard townsfolk’s money and to finance local commerce.

    In its 130-year history, the bank has rarely booked a profit for itself in excess of $50,000. Last year, Mr. Cullen said, it made $5,000. He and his officers are industry anomalies: bankers who avoid high-risk and high-growth tactics in order to reinvest in their community’s economy.

    “My examiners always ask me, ‘When are you going to grow?’ ” said Mr. Cullen, a Cattaraugus native who is 64 and has the prosperous stoutness of a storybook banker. “But where is it written I have to grow? We take care of our customers. The truth is we probably couldn’t grow too much in a town like this.”

    While it faces many of the same regulations that govern larger banks, it operates according to an antiquated theory of the business: that a bank should be a utility, like the power company, and serve as a broker between savers and borrowers in its community.” (end of excerpt)

  13. Sue the insurance company in Small Claims Court. They will have to have a lawyer come to small claims court because a corporation can not represent itself in a court case, it must have a lawyer. That costs them money. When the case is called and the company lawyer opens his mouth to say this or that is not right with the suit, request a continuance to obtain your own lawyer. In the interum bone up on the defense the lawyer uttered. Go back to small claims court without the lawyer but with your star witness, your mother in law. Thats right. Put her on the stand to produce evidence of the value of the claim. Then for futher evidence put on a photo of the insurance companies lawyers home. Dont tell the court whose home it is but show how a home that has not been damaged by wind and hail should look. Now, you may be asking for $4,000.xx which is near the max for a small claim. The company was out to save money by delay and all that but now they have spent about $4,000 defending the claim. The judge may throw you out because you have an arbitration clause or a Sinter Clause in your insurance policy. If they force you to arbitrate then take your mother in law.

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