Public Broadcasting’s Now with David Brancaccio ran a fascinating program last Friday about the insurance industry and their performance in the wake of certain disasters such as the San Diego wildfire in California four years ago.

PBS, relying heavily on an article in the September issue of Bloomberg Market Magazine entitled The Insurance Hoax by David Dietz and Darrell Preston, devoted a half hour to its thesis that some major insurance companies, notably State Farm and Allstate, have gone to great lengths to shortchange customers in order to build their stock values and reward stockholders.

The Bloomberg article leads off with a story about a State Farm customer who was visited by a company rep who informed her, after the largest wildfire in California history, that she would receive only $184,000 of the estimated $306,000 cost of replacing her home.

Thus, the authors conclude, this customer learned 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,” sometimes only 30 to 60 percent of the cost of rebuilding, “even when carriers assure homeowners they’re fully covered, thousands of complaints with state insurance departments and civil court cases show.”

PBS interviewed homeowners who said that their coverage had been switched by their company from “full replacement” to “extended replacement” coverage before the fire. When they questioned their agents they were told that extended replacement was much better than full replacement “yet, once claims were submitted, they were offered settlements that came nowhere near covering their rebuilding costs.”

Bloomberg says that, by reducing what it pays out on losses, companies have achieved huge profits over the last 12 years. Casualty insurers reported record profits last year - $73 billion, 49 percent higher than in 2005, and this in the wake of Hurricane Katrina.

Property owners, who pay more than $50 billion a year in insurance premiums, find that their carriers systematically deny and reduce payment on claims and change policy coverage with no clear explanation.

They ignore or alter engineering reports and sometimes ask their adjusters to lie to customers Bloomberg said, citing as sources court records and interviews with former employees and state regulators.

California’s Lieutenant Governor John Garamendi served for eight years as the state’s insurance commission where he imposed $18.4 million in fines against carriers for mistreating consumers. He is quoted as saying that “the first commandment of insurance is ‘Thou shalt pay as little and as late as possible.’”

It was in the 1990’s, following Hurricane Hugo which cost the industry $4.2 billion in claims that the industry began looking for ways to increase profits by “streamlining” claims handling. Key to this streamlining was a New York State consulting firm, McKinsey & Co. McKinsey worked for Allstate Insurance, developing methods for the company to pay out less in claims.

Allstate has fought for years to keep the 13,000 pages of documents produced for it by McKinsey from becoming public, and while under orders from two different courts to produce the information, continues to fight disclosure. An attorney representing claimants got his hands on some of the documents among which were PowerPoint slides which advised Allstate, in a take off on the company’s decades old self-description as “the Good Hands People” to use “Good Hands or Boxing Gloves,” by first making a low offer on a claim and if that offer is accepted, the customer is treated well; if the customer protests or hires an attorney, Allstate should fight back.”

Another slide displays an alligator with the caption “Sit and Wait.” The slide says Allstate can discourage claimants by delaying settlements and stalling legal proceedings. One claimant told Brancaccio that his insurance company demanded not only invoices for such routine claims as for debris disposal but then insisted on testimony from the contractor who hauled the debris - testimony that was scheduled and postponed, scheduled and postponed in an attempt to wear down not only the claimant but his witnesses.

McKinsey was apparently good for Allstate’s bottom line. The company’s profits rose 140 percent to 4.99 billion between 1996 and 2006 while the company dropped the percentage of premium income spent on claim payouts from 79 percent in 1996 to 58 percent last year. This loss ratio changes each year based on events such as natural disasters but the general trend since Allstate hired McKinsey has been down.

And Allstate’s stock has jumped 400 percent between June 3, 1993, the day Allstate went public and July 11 this year while the Standard & Poor’s 500 Index tripled. State Farm’s profits doubled in the 10 year period ended in 2006.

Several months ago we detailed how many insurance companies were reducing their exposure to risk (and improving their bottom lines) by raising premiums - some times astronomically - and thereby forcing homeowners to drop coverage in disaster prone areas or by withdrawing from the insurance market altogether in riskier areas. Premiums have also skyrocketed or policies cancelled for homeowners in less risky areas who have submitted even one substantial claim.

Companies have invested in computer programs that estimate the cost of rebuilding a home or of treating people injured in automobile accidents, including factoring in pain and suffering or permanent impairment.

Lawsuits have asserted that insurers have manipulated these programs to pay out as little as possible and there have been allegations that some companies have pressured or rewarded adjusters who have keep claim payouts down by lying about coverage or denying claims.

Companies have even been accused of changing policies retroactively. One case in New Hampshire was found in favor of the plaintiff against Hartford Financial Services Group which, it is alleged, deleted the replacement cost portion of a homeowner’s policy on a mansion which was destroyed by fire.

Of course much of the country is familiar with the on-going battle in the Gulf States over whether the homes destroyed by Hurricane Katrina were the result of wind or flood water. If wind, the insurance company loses; if flood waters then the losses are laid off on the federally sponsored flood insurance program for those homeowners who have such coverage or on the homeowners themselves if they do not.

Are Allstate and State Farm alone in using McKinsey-like tactics? And where are state and federal governments in all of this? Maybe, just maybe insurers have overplayed their hand because of a Katrina victim named Trent Lott. Also the companies have had plenty to say about the story and the television program in the last few days. To be continued…
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Without much warning, thousands of Central Floridians have received the same notice from their homeowners insurance companies: You’ve been dropped.

The messages have come to people who have never filed a homeowners claim and to some who have. And many have had the maddening experience of being told that their policies would be shifted from one insurance company to another — sometimes more than once.

They don’t care about the terminology their insurers use; to them, “nonrenewed” isn’t any kinder than “canceled.”

“I understand that they’ve canceled a lot of them, but I never talked to anybody about it,” said Jay Hance, a senior citizen who lost the Allstate policy on his Summerfield home after 10 years. He says the company even canceled his policy a few months before it was scheduled to come up for renewal — sending him a check for the balance of the money.

” … Now, I have to find someone to replace it. That’s what hurts,” Hance said.

In the past two years, as state regulators largely have focused on insurers’ rate-increase requests, insurance companies have said they planned to drop thousands of Florida policyholders. State Farm and Nationwide, among the five largest companies providing homeowners insurance in the state, said in the fall that they would drop 50,000 and 40,000 policies respectively.

Most of those “nonrenewals” were to begin in 2008, so homeowners have really started to feel the pain in the past few weeks. The canceled policies weren’t just for high-priced coastal properties; many Central Floridians have received the same unpleasant news.

Although state-backed Citizens Property Insurance and some newer, smaller companies have stepped in to fill the gap in certain places, other insurers have said they won’t write new Florida policies.

Homeowners who are dropped have some options — but sitting still isn’t one of them.

Here are two people whose insurers dropped their policies — and how they dealt with it.

David Poland, 73, has lived in an east Orlando mobile home for the past 19 years. And during the majority of that time, Allstate insured his 1982 model home.

“I never had one claim,” he said.

He thought everything was fine until this past September, when he received a notice that his policy would not be renewed.

And now that he has had the experience of having his policy canceled, Poland says he is a bit annoyed by insurers’ claims to serve families when families need them most.

“I see these commercials and I read these full-page ads and it just irks me something awful,” he said. “They’re out beating the bushes to get some fresh money.”

Poland, who once worked in auto repair, said he had seen customers having difficult experiences with auto insurance companies, so he wasn’t entirely surprised to encounter problems with his homeowners insurance company.

“They wanted you to put aftermarket parts on … they beat everything right down to the bottom,” he said of auto insurers.

He used AARP to find a new homeowners policy, and now has property-insurance coverage from The Hartford. He’s hopeful that this policy will last.

“It’s an awful thing to go through,” he said.

Marvin and Marlene Kaplan weren’t expecting the nonrenewal letter they received recently from MetLife — one of the smaller home insurers in the state.

It told them that MetLife would no longer cover their Casselberry home after June, because covering homes in Florida was just too risky.

Marvin Kaplan, 60, said he was dismayed to be dropped after having been a loyal customer for years. He wasn’t sure where to turn to find a new policy.

To his surprise, he was saved by a company that also has declared its desire to limit its exposure to Florida: State Farm.

A New Smyrna Beach-based State Farm agent who had seen Kaplan on television news called him to offer coverage before March 1, when the company had said it would stop writing new policies in the state.

“This is a major nightmare… I’m lucky State Farm rescued me,” Kaplan said.