At Daly & Black, P.C., we deal with insurance companies on a daily basis and we continuously observe their practices; for example, how they treat their policyholders, how long they take to settle claims, and the dollar figures they attempt to offer their policyholders when settling a claim.
Unlike most businesses, insurance companies are bound by law to act in good faith when paying claims. Since a large part of our society and economy depends on the efficiency and expediency of insurance companies, they are held to a higher standard of conduct, or at least they are supposed to be.
Since the mid-1990s, a new profit-hungry model, only made stronger by weak regulation undermined this traditional contract among insurance companies and policyholders.
"Claims has been converted into a money-making process," said Russ Roberts, a management consultant and former business professor at Northwestern University who has been studying the insurance industry as it transformed from a service business to a profit-driven machine.
Insurance companies started to change their modus operandi when consulting giant McKinsey & Company sold Allstate and other major insurance companies a new system aimed at boosting profits: instead of adjusting claims in a manner that served customers, insureds switched to a computer-driving method, which intentionally produced low-ball settlement offers to claimants.
Under the new backdrop, claimants who accepted low-ball offers would receive prompt service, whereas those who didn't, were subjected to delayed claims, or in some cases their settlement offers were so low, that claimants were driven to filing expensive lawsuits to fight for their fair share.
Former Allstate Agent Shannon Kmatz, told the American Association for Justice that the goals was to make it so claims were "so expensive and so time-consuming that lawyers would start refusing to help clients."
As a play on Allstate's advertising slogan, consultants referred to this strategy as "Good Hands or Boxing Gloves."
Allstate has come out with a bang: Having made $4.6 billion in profits in 2007, it doubled its earnings from the 1990s. This massive increase is a direct result of paying dramatically less on claims.
According to an unpublished Harris Interactive Poll conducted in September of 2011, 59% of adults believe that insurers deny claims intentionally. In today's economy, a claim denied for even a month can spell financial disaster for the average American family. This translates to: Allstate's business model profits off customers when they are the most vulnerable.
To prove this point, a study by the National Bureau of Economic Research found that around 25% of Americans are not able to come up with $2,000 within 30 days.
Unfortunately, insurance companies like Allstate assert that claim delays are fluke occurrences, when in actual fact they are not only routine, but intentional products of the McKinsey system.
When you have an accident, or when your house catches on fire, you contact your insurance company and explain what happened. They may or may not send an adjuster out, and if they do, they may say it's not covered, or if it is covered, they will say that this is the dollar amount that we're obligated to pay you. Since most people have no expertise in the insurance industry, they will have no idea whether it's right or not.
Arguably, insurance regulation is weak at its very best. Since insurance taxes are a major source of revenue for state governments, consumers are put on the backburner. Insurance oversight commissions place more importance on keeping insurance companies solvent than protecting the rights of policyholders.
Intentionally delaying claims is an effort to put the squeeze on policyholders, and according to NAIC data, claim delays have been the most common cause for policyholder complaints.