Bloomberg story on insurance company bad faith

I like journalistic rants as much as the next guy: when I was a reporter I lived by the motto "comfort the afflicted and afflict the comfortable." So I really wanted to like this Bloomberg News story, I really did.  But I don’t.   If I didn’t know anything about the matters written about in the story, or if I was willing to overlook certain gaps in logic, or if I was the kind of person who believes insurance companies sacrifice daily to Satan, I guess this story would really do it for me.  But since none of those things are true, it doesn’t.

I’m not saying that insurance companies don’t make dumb decisions. Nor am I defending any of the companies named in the story — I am not an insurance company spokesman.  But there’s a whole lot of stuff mixed together in this story that doesn’t belong together.  The anecdote that leads off the story I think is terribly weak.  If you read to the end, you find out it concerns the lack of replacement cost coverage for the home.  But what does the issue of replacement cost homeowners coverage have to do with other more serious allegations later in the story, such as systematic claims fraud? Although many insurers have dropped guaranteed replacement cost coverage, it is still generally available in most markets from certain insurers, and there is nothing per se wrong with not offering the coverage — you can still purchase enough insurance to pay replacement cost, it’s just that you have to determine what that level is yourself. 

Let me show you the last three paragraphs of the story, and these are the ones that made me vote two thumbs down.  First, some brief background — Julie Tunnell lived in San Diego and her house was destroyed by a wildfire.  She thought she had replacement cost coverage for the structure, but didn’t — State Farm had dropped this coverage from homeowners policies five years earlier, and five years after Tunnell first bought her insurance.  The amount the insurer offered — I’m guessing it was the policy limit although the story leaves that important detail out — was some $86,000 short of the replacement cost.  So here now are those three paragraphs:  

Tunnell says she doesn’t recall being notified [of the change in the coverage]. She says her family debated hiring a lawyer and suing, and eventually decided the battle would be too stressful. The Tunnells took the $220,000 and borrowed money to build a new house.

“Why is this happening to people over and over again?” Tunnell asks. “State Farm keeps underinsuring people, and they get away with it. This is unthinkable.”

As long as insurers make the rules and control the game, Tunnell and homeowners across the U.S. won’t know whether their homes are fully insured, no matter what their policies say.

Some sense of understanding that not every gripe about insurance companies is of equal gravity, severity or plausibility would have improved the story. It’s not up to your insurance company to make sure you have enough liability insurance to protect your assets if you hit someone with your car, or to make sure you buy enough property coverage to replace your jewelry, or to sit down at your table and make sure you understand you are not covered for earthquakes or floods.  First, the law presumes that you the consumer know how much insurance you need, and if you don’t get it, that responsibility is yours.  Second, this is the theory of a standard-form contract — the market eliminates the transaction costs of having to negotiate with every person in the world.  In return for these savings, it is legally presumed you have read and understood the contract, whether you did or not.  For contracts like homeowners policies that are renewed each year, these can be amended through endorsements each year: sometimes coverage is broadened, sometimes it is narrowed.  No one is guaranteed that the policy you bought 11 years ago will be exactly the same today.  

Do you remember what the last line of that story said? Won’t know if they are fully insured "no matter what their policies say."  But hang on a minute, if you read Jule Tunnell’s policy, it will almost certainly say there is no replacement cost coverage and the policy limits are $220,000.  So what’s the problem?  The contract said what they would get, they just didn’t read it.  The failure to realize that the lead anecdote is a poor example to prove the point of insurer fraud really hurts the credibility of the remaining allegations.

10 Comments

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10 Responses to Bloomberg story on insurance company bad faith

  1. Anthony Willard

    The article pushes a subtext that making money off float is wicked. I would be surprised if this is in accord with Bloomberg’s editorial position.
    Another subtext: companies that use computers are up to no good, ipso facto.
    The article accuses the insurance industry as a whole of pervasive and systemic fraud. Not only that, but the fraud is not well concealed but is right out there for everyone to see. The authors must think consumers are nitwits to buy insurance at all. In addition to not buying insurance, we should all sue McKinsey for suborning extortion.
    I notice they throw in some advice for insurers: never insure houses built on a sage and eucalyptus mesa, and never insure a lawyer.

  2. Matt

    How about some balanced stories about the amount of customer fraud (padding) that occurs? If you’re a consumer and you want to lower rates, tell your neighbor that just had his house broken into that his invisible plasma TV that he just added to his claim is going to kill your rates. I’m really getting frustrated by our victim mentality. It’s not just insurance… it’s now home mortgage lenders that are being thrown under the bus for their “predatory lending.”

  3. Matt, maybe the next buzz-phrase will be “predatory insuring.” This can be used to describe circumstances where you underinsured your own property or liabilities, but it is more convenient to blame the insurer for not making sure you had the right amount of coverage. It’s been said that the easiest way to clear a room is to shout “who wants to talk about buying some insurance?” In light of that aversion to purchasing insurance, can people really argue with a straight face that it is up to their insurer to arrange the optimum insurance for them?

  4. Matt

    “Predatory Insuring” … be careful it might just catch on! What is ironic about the story is most insurers rely on increasing property coverage values for inorganic growth. Most property insurers will implement an inflation figure so each renewal the coverage will increase by x percent. Isn’t it in the insurers’ best interest to apply as much coverage as the home/building warrants? Perhaps somebody should tell Bloomberg that ‘coverage amount’ is one of the main premium factors for property insurance.

  5. Erin

    One thing to keep in mind, of course, is that by and large, people do not want to deal with their insurance or learn about it. Generally, people just want to pay their premiums (or rather, they don’t want to but they do because they’re required to) and be done with it. As staff for State Farm and therefore on the “front lines” advising policyholders on their coverage, I am continually attempting to contact policyholders to review coverage to be sure they have enough coverage so they don’t fall into situations like the Tunnells. By and large, policyholders do not bother to take the time to ensure they have adequate insurance. When they do take the time and discover that they are underinsured, they often deliberately choose to remain at lower coverage because they want to save a few dollars on their premium. The clients who actively choose to stay on top of their insurance, become educated about their policies, and proper cover themselves are few and far between and deeply appreciated by agents.
    Proper insurance coverage is not just money lining the pockets of insurance companies; it’s also good sense for the insured, and so everyone wins. I don’t doubt that there are companies engaging in shoddy business practices and unscrupulous agents out there, but I do believe that by and large insurance companies and agents are trying to do right by their policyholders, who just don’t seem to have the impetus to properly protect themselves.
    Robert Hartwig, president of the Insurance Information Institute, has written a rebuff to the article, which can be found at http://www.statefarm.com/about/media/bloomberg_response.asp.

  6. A new documentary titled “Bad Faith” focusing on the Bad Faith aspects of disability and Workers’ compensation claims will be screening at the Laemmle #1 Theater in Pasadena, California on August 24, 2007. Several attempts by insurance companies to shut down the screening of this documentary have not been successful. Insurance insiders were interviewed about how legitimate claims were denied, delayed or minimized. The emmy award winning producer produced this in High Definition. The website http://www.badfaithdoc.com contains information, news and clips from the movie.
    Contact every one you know who wants to preserve our First amendment rights to Freedom of Speech. Insurance companies should not have the right to prevent us from dicsussing vitally important issues.
    Please request that your local theater provide this movie.

  7. Dora Jones

    I saw the moview and LOVED it. I thought I was the only one going through insurance HELL. I will ask my lawyer to go see it, it might give him some ideas about how to fight back. I liked the testimony of the insurance investigator who quit because of the crooked things they made him do. I will see it again.

  8. Around the web, September 6

    Class-actioneer Michael Hausfeld steers $5.1 million antitrust cy pres payout to fund new Center for Competition Law at George Washington U.’s law school; from the description, sounds like the center will furnish policy ammo for antitrust plaintiffs’ b…

  9. GRACE DORSEY

    we have been faithful to state farm for years, unfortunately we had a fire, they provided the replacement cost to rebuild, but they are giving us hell about the contents. The adjuster made a list and provided replacement cost (we have no problem with that) but they are giving us a hard time and the run around giving us the money that is due to us.