Sentry says….

Here is a great article from the Huffington Post!

By Mollie Reilly and Max J. Rosenthal The Huffington Post
December 13, 2011

WASHINGTON — 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 has 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.

Those who took the low-ball offers received prompt service, while those who didn’t had their claims delayed and potentially were reduced to bringing expensive lawsuits to fight for their benefits. As former Allstate agent Shannon Kmatz told the American Association for Justice, the trial lawyers’ lobby, the strategy was to make claims “so expensive and so time-consuming that lawyers would start refusing to help clients.” The strategy was dubbed “Good Hands or Boxing Gloves” by the consultants, riffing on Allstate’s advertising slogan.

McKinsey, which was reportedly hired by Allstate in 1992, prepared about 12,500 PowerPoint slides to present its plan. The slides were introduced in litigation in 2005, when the insurer turned them over under a temporary protective order. David Berardinelli, a New Mexico-based trial lawyer who was working on the case, detailed the slides in his 2008 book, “From Good Hands to Boxing Gloves: The Dark Side of Insurance.”

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.

“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.”

Roberts told HuffPost that, by his estimate, the companies that take in 70 percent of total insurance profits in the United States now abuse their obligations to their policyholders. When Allstate CEO Tom Wilson earned $9.3 million last year, he was not even on the top 10 list of best-paid insurance executives, compiled by New York Law School’s Center for Justice and Democracy. (The top 10 list was led by William R. Berkley of W.R. Berkley, who made $24.6 million in 2010.)

Yolande Daeninck, spokeswoman for McKinsey & Company, said, “In line with our firm’s longstanding policy to not discuss our client work, we decline to comment.”

A HOUSE BURNS DOWN

According to an unpublished Harris Interactive Poll conducted in September, 16 percent of surveyed adults have experienced financial hardship while waiting for an insurance claim to be settled or know someone who has. The same poll found that 59 percent of adults believe that most insurers intentionally delay claims — and those with an income of $35,000 or less were more likely to agree.

With 15.3 percent of Americans — about 46.2 million people — living in poverty, close to 10 percent unemployment, and roughly 2 million people who’ve been looking for work for more than two years, Allstate’s business model is profiting off many consumers at their most vulnerable. A claim delayed by even a month can spell financial disaster for a family. As a National Bureau of Economic Research study found, about 25 percent of Americans could not come up with $2,000 in a 30-day period.

Madeleine Burdette, a retiree, is an Allstate customer who reported her experience on the popular website AllstateInsuranceSucks.com. When her Georgia home burned in November 2010, Burdette was in Ohio, where she lives most of the year. She said the fire marshal in Georgia told her that her house would have to be torn down. “The entire middle of the house was gone,” Burdette said. “It took out everything. Just the outside walls were left untouched.”

The next day, she said, Burdette’s Allstate adjuster told her the house could be repaired. Allstate also said it would have to do a thorough investigation to determine if the fire was caused by arson. If it was arson, the adjuster told Burdette, Allstate would not pay for any damages. According to former employees, such investigations are a common practice at Allstate and are encouraged by supervisors as a way to avoid paying claims quickly.

Burdette, who lives on her Social Security checks, flew from Ohio to survey the damage herself. While in Georgia, she contacted public adjuster Anita Taff. Public adjusters serve as advocates for individuals who feel they need another set of eyes on a claim. Taff met with Burdette at the house, Burdette said, and discussed the damage with the contractor Burdette had hired. Upon returning to Ohio, Burdette spoke with Taff over the phone to find out what her impression was. Burdette said Taff warned her that the contractor might go along with Allstate’s insistence that the house could be repaired.

“I believe [delaying claims] is an effort to put the squeeze on policyholders,” Taff told HuffPost. She explained that while a claim is being held up, the insurance company may stop paying the policyholder’s additional living expenses, forcing the policyholder to cover mortgage and rent entirely out of pocket. “That’s something that many people cannot afford to do, so they’re forced to take a lower settlement,” Taff said.

Burdette said she immediately called the contractor and told him not to go near her house. According to Burdette, she received a phone call within 10 minutes from her Allstate adjuster asking her not to hire Taff or any other public adjuster. “He said, ‘If you hire a public adjuster, I’m going to deny and delay this claim for as long as possible,’” Burdette told HuffPost. Taken aback, she then asked if it wasn’t in his best interest to settle the claim. “Not really,” he replied, according to Burdette.

Although the Allstate adjuster eventually agreed to work with Taff on Burdette’s claim, her troubles did not end. The contractor who had been banned from her property nevertheless worked on the house and billed Allstate for $22,000. Burdette had explicitly told Allstate not to pay the contractor a dime, she said, but the company paid him under her policy anyway. The contractor couldn’t be reached for comment.

More than a year later, Burdette’s home is still being repaired and Allstate refuses to reimburse the $22,000. She consulted four different lawyers to see if she had a legal case. While she said they all agreed that she was entitled to reimbursement, she said they also agreed that she lacked the funds to fight the insurance giant. “They told me, ‘You’ll run out of money,’” she said.

NO FLUKES

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.”

Allstate spokeswoman Laura Strykowski said the company can’t comment on specific cases because of privacy requirements, but considers its claims process both legal and effective. “Our customers and claimants receive prompt and courteous claim service and our goal is to settle each claim fairly and efficiently,” she wrote to HuffPost. “As a regulated company, Allstate’s claim practices are available to and regularly reviewed by state departments of insurance.”

But 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.

With the exception of the federal Affordable Care Act, insurance is regulated on a state-by-state basis. Although most states set a specific timeline for how quickly an insurance company must initially respond to claims, there is much more leeway when it comes to settling those claims. For example, in Missouri, an insurer must acknowledge receipt of a claim within 10 days and either pay or deny it within 15 days of receiving all necessary documentation. However, if the insurer decides it needs more time to investigate, it may keep delaying as long as it updates the policyholder every 45 days. In Georgia, where Burdette’s house burned down, the insurer must notify the policyholder if it will affirm or deny a claim within 60 days. However, the insurer does not have to settle the amount it will pay within that period. Many states have similar provisions that allow insurers to put off paying claims indefinitely.

According to NAIC data, claim delays have long been the most frequent cause of policyholder complaint. As of Nov. 28, 2011, the NAIC had received 11,053 delay-related complaints this year alone, comprising almost a quarter of the year’s total complaints. These data only reflect confirmed complaints — the ones that the state insurance commission has investigated — so the actual number of delayed claims is likely much higher.

Complaining to state regulators about the insurer’s delay is always an option, but its effectiveness is questionable at best. “I have not seen it be successful,” said Taff.

I love my job!  I once heard that if you get a job you like, you will never have to work a day in your life.  For this reason, I don’t “work” for a living, but every now and then something comes up that just takes the joy out of my day, and Monday was one those days.

I got a call from a client (and friend) last week about a septic tank backup at his house.  Yuck!  Water damage in your home is bad enough, but smelly black water from your septic tank really ruins your day!  I recommended a local drying company to him to get the water and contaminants out and get the house dry.  They came out right away and provided good service.  My friend called his State Farm Insurance agent and submitted a claim, and an adjuster called and set up a meeting for this Monday morning at 8:30.  He asked me to meet him and the adjuster there, so Monday morning first thing I was shaking hands with a local State Farm adjuster that I have worked with in the past.  So far so good!

Now, this is not an average house.  While it is not a high end mansion, it is a custom house that they designed, planned, and sweated over to build about seven years ago.  It has a lot of really nice features, and a couple of them are key to this discussion; nice quality solid bamboo flooring throughout the entire downstairs, and an open floor plan.

The kitchen, half bath, and laundry area suffered the most damage, and the drying company removed a lot of the bamboo flooring in this area so they could get everything clean and dry.  The bamboo also runs past the kitchen into a large living room, a dining room, foyer, and hall.  These areas are all part of the bamboo floor, and there is no separation at all between the rooms; the floor flows nicely from one room to the next with no place to break it.

When we met with the adjuster, only the kitchen floor was actually damaged.  The rest of the floors would have to be replaced so that there would once again be a smooth unbroken floor throughout the downstairs.  Then the adjuster said something I have never heard before, and completely ruined my day.  “The other floors will have to be replaced, but we will only pay for them if you actually incur that expense.”

You may not know this, but your insurance policy is a contract between you and your insurer, and that contract spells out a lot of things.  One of the things it spells out is how covered losses will be paid.  The policy clearly states that a covered loss will be paid on an actual cash value basis, with payment of the replacement cost difference “if incurred.”  What that means is that your entire claim should be paid, minus depreciation, as settlement of the claim, whether or not you EVER do the work.  If you actually make replacement of the covered items, then you can go back to the insurer for payment of the depreciation that was held back.  State Farm has taken the position that some items in the loss will be paid for up front, while others will not, because you might not actually replace those items.  This is in direct conflict with the wording in the policy!

Let’s think this through.  In my friends kitchen are a lot of really nice cabinets, all covered with really nice solid surface countertops.  They are still in place, and the bamboo runs underneath them.  We have two options in dealing with those cabinets, one good, the other not so good.  We can take the cabinets out, put the floor back underneath, and then reset the cabinets, countertops and all.  This will cost a bunch of money, but that is what it will take to restore the kitchen to the quality it was.  Or we can leave the cabinets in place, cut the bamboo out as close to the cabinets as possible, and run new flooring around the cabinets, using trim to close any gaps at the base of the cabinets.  State Farm is paying up front to remove the cabinets, even though the cost of handling them has not yet been “incurred.”  Why the cabinets and not the living room floor?  To take the example to an extreme, it is theoretically possible to buy some new bamboo, piece it in where the old has been removed, and leave the kitchen looking like a patchwork quilt.  Why not hold back the cost of any new bamboo until costs are “incurred?”  Finally, what if my friend elects to not repair the kitchen at all?  What if he likes the way it looks now, with plywood showing through patches of torn out bamboo and the baseboards removed and the walls scratched up?  Why not hold back all payment until costs are “incurred?”

The truth is that, under the insurance contract, the loss has value whether or not any repairs are ever made.  “Incurred expense” coverage has been tried before, and is always rejected by the courts.  What you do with your ACV insurance money is your business (and your mortgage holder’s), and it is NONE of State Farms’ business.

There are a bunch of people in Pennsylvania so upset with State Farm over this issue that they have gotten together and filed a class action lawsuit.  Here is a link to information about that suit:  State Farm Class Action

I think you would agree with me that arbitrarily changing the terms of a deal would be downright un-neighborly.  Apparently, State Farm would disagree.

I am presently consulting with a client who has some serious water damage in a very, very nice home.  A pipe burst in one of her walk-in closets in the master suite, flooding that closet, the master bedroom, the other walk-in closet, the master bath, a hall, and a large den off the master suite.  All total, about 2000 square feet of area was affected.  Most of the damage is to a nice parquet hardwood floor that covered all this area except the bath, which is tile.

Her home is insured with Allstate Insurance.  She called Allstate, made a claim, and an adjuster came out to look at it.  He assured her that she had coverage in place and he would get everything worked out.  What she didn’t know was that “worked out” meant that a flooring company of Allstate’s choice would replace her hardwood floors.  It just so happens that Allstate has a contract with CCA Global, a very large company that owns other companies, including Flooring America and Carpet One.   The adjuster sent Carpet One out to look at the floors, and then he made the Carpet One estimate for the hardwood replacement a part of his estimate for the repairs.  He even went so far as to say that while the client was free to hire anyone she wished for the hardwood replacement, he wouldn’t pay any more than the Carpet One estimate. 

Well, you might say, what’s wrong with that?  Carpet One is a national franchise and the local Carpet One franchise happens to be Burgess Carpet, a Macon icon in the flooring business with a good reputation.  So why not reach an agreement with them to do the floors?  The problem here is two-fold; one, she wants a general contractor to do all the work and stand behind it.  She doesn’t want to have to keep up with and pay two different contractors.  Two, when she signed up for Allstate, she didn’t sign up for CCA Global.  No one told her that buying Allstate insurance meant that she would lose the freedom to choose her own contractor if her home became damaged.  To make matters worse, the agreement with CCA Global apparently calls for reduced pricing that they don’t give to the general public, and in exchange they get to do all the flooring work for Allstate.  That means that while she is technically free to choose anyone to install her floors, in reality she can’t get anyone else to do them for the pricing that CCA Global has apparently agreed to with Allstate.

The insurance policy says that the insurance company will pay the “reasonable cost” to “repair or replace” any covered items that become damaged.  A deep discount given in exchange for a volume of work does not establish the reasonable cost for that work in an area.  Look at it this way: Allstate surely does not pay the same price for their company cars that you and I pay at the dealership.  That’s because they are buying a large quantity of cars.  Does that discounted rate establish the reasonable cost for that car if you go to buy just one?  Of course not!

When you choose your insurance company, choose wisely.  My client found out that those “good hands” can wear boxing gloves!

We have a client who calls on us whenever she needs work done at her house. Repeat clients like that are priceless! Besides, she’s a single mom and we work hard to make sure that the work we do on her home gives her the best value.

Recently she called with a problem. She had an exterminator under the home who told her that she had a leak under her hall bathtub, and it had caused significant damage to the floor under her bath. She called her insurance company, and then she called us.

I sent John, one of my best carpenters, under the house and confirmed what the exterminator had said. It was actually the commode flange that leaked under the tile floor, (a very common leak) and had completely damaged the floor of the 5′ x 8′ bath. Everything was going to have to come out, including a 5′ single piece fiberglass tub & shower combination. Now, a tub & shower combination is a BIG bath fixture. In fact, it is physically bigger than the space it is in, because it has a flange all the way around it that the drywall covers. There is NO WAY that tub is coming out of that bath without either cutting it into pieces or taking it through the wall into the next room. Since the tub itself was undamaged, we opted for the latter, something we have done many, many times and is actually pretty easy to do.

Meanwhile, the adjuster had sent his “pet” contractor out to see her, trying to get him the job to fix the bath. Problem for him is, we have worked for her and her father several times, she trusts us, and she wants us to fix the house for her, period. That contractor still wrote an estimate, sent it to the adjuster, and guess what? It never mentioned moving the tub! Beware of “pet” contractors that many insurance companies have! Often times they are called “Preferred” contractors. Why are they preferred? Because many of them will cut corners to save the insurance company money, even if it means reducing the quality of the work you need! Don’t misunderstand me. Damage to a home is not like a soft tissue injury in a car wreck that can’t be seen in an x-ray. Damage to a home is obvious to those who know how to look, and each item can be seen, touched, and verified.

Now this is where the subject of restore vs. repair comes in. I wrote an estimate to RESTORE the bath, which included taking the tub through the wall into the bedroom next to it. That meant detaching and resetting an electric wire and outlet, taking down 3 studs, rolling up the carpet in the bedroom, taking down about 3′ x 6′ of drywall, and painting a small 10′ x 12′ bedroom. The adjuster had a fit! He wanted to know why we were working in the bedroom at all, since it was undamaged from the leak. I told him that the tub had to go somewhere so we could replace the sub-floor under it. He said he had been told the floor under the tub was undamaged. Now I’m wondering if my guy was wrong! So out I go to the house, camera in hand, and crawl under the house myself. Sure enough, the floor was just as John had said. I took photos and emailed them to the adjuster. He still didn’t believe it, and sent his “pet” contractor back out to confirm what I had told him. Unbelievably, the “pet” told him that though the floor was damaged, it was “not enough to worry about, since it was under the tub and couldn’t be seen.” Uh, unless you go under the house! The adjuster then told me that “generally, we don’t worry about the floor underneath tubs.” I thought “well then, generally you rip off your insureds.” I was wise enough not to say that out loud! The client insisted on the proper work, and the adjuster paid for it like he should have from the beginning.

Now, think this through with me. What if my client didn’t have a contractor she could trust, and instead trusted the “pet” contractor supplied by her insurance company? They would have REPAIRED her bath, and from the top it might have looked great. Then, sometime in the future, she would have put her house up for sale and some home inspector would have found that damage under the tub. At that point she would have to either properly fix the floor with her own money or take that amount off the price of the house. It would have cost her THOUSANDS. Not exactly what a single mom needs when she is trying to sell her home! Instead, she had a contractor who was working for HER, had her best interests at heart, and RESTORED her bath properly.

The big idea to take with you here is that VALUE is what you are insuring when you insure anything, be it a home, a car, or a life, and while you can REPAIR something and it may look fine, that doesn’t necessarily RESTORE the value that it previously had.

Replacing the carpet in your home is exciting!  But it is also an expensive and inconvenient event, and it makes good sense to shop, compare, and do your homework to make sure you are getting the best deal you can, right? Well, easier said than done.

In today’s carpet market, more and more retailers are colluding with carpet manufacturers to “private label” the carpet that they carry in their stores. In other words, Shaw Carpet, the world’s largest carpet producer, may make a certain style of carpet, and then label it differently for a dozen different retailers. To make matters worse, some large retailers are buying carpet brands and using them as their own. For example, in 1994 Carpet One bought the Bigelow brand name from Mohawk Industries. Bigelow is an old and trusted carpet name brand, but now Carpet One can use the name on carpet of any quality! To cloud the matter further, both Carpet One and Flooring America are both owned by CCA Global Partners. This makes it very difficult to shop and compare prices at various stores. Lowes, Home Depot, Flooring America, and Carpet One are just a few of the carpet retailers that are in on this scam….er….I mean arrangement. 

Why do you suppose they do this? In most businesses, you price your products based on your cost, reputation, and desired profit, and may the best store win, right? Apparently the carpet industry wants a different arrangement, one where the consumer is unable to compare apples to apples when deciding on products. A good question to ask is “why are they afraid to compete?” and the answer usually is “because they are not priced competitively.” Private labeling also opens the door for abuse of all kinds.  For example, a private labeled carpet store may advertise a “price guarantee”, where they guarantee to match or beat a price for the same carpet found at another retailer.  The problem, because of private labeling, is that the carpet cannot be “found” at another retailer!  Really, this “arrangement” doesn’t pass the smell test, does it?

So how do you shop smart for carpet? Well, when you find a carpet that you like, insist on a list of the particulars of its construction:

1. What kind of fiber is it made from? Polyester, Polypropylene, and Nylon are just a few of the possibilities, and each has advantages and disadvantages. And don’t let them give you a private label yarn name, such as Flooring America’s “Tigressa.” Tigressa is a private label yarn made from type 6-6 BCF nylon, and they want you to believe that it is one of a kind. This yarn has a number of features that makes it a great choice for your carpets, but the truth is that you can get the same yarn in other carpets.
2. Is it a Bulk Continuous Filament (BCF) fiber? BCF yarn is made from a single fiber filament, as opposed to yarns made from many fibers. BCF yarns greatly resist pilling and fuzzing of the carpet over time.
3. What is the face weight of the carpet? (Face weight is the weight, in ounces, of the carpet yarn in one square yard of carpet, as opposed to the total weight of the carpet, which is the weight of the entire carpet, including backings, in one square yard of carpet.)
4. What is the gauge and stitch rate of the carpet? (How close the yarns are to one another, a major determiner of carpet pile density and performance)
5. How much carpet is in the installation? I am amazed at how many flooring quotes I see that do not state how many yards or square feet are included in the price! This is vital information necessary to compare one quote to another. (Many roofers do the same thing in their quotes.)

Once you have this information then you can go from one store to another looking at samples of similar carpet and obtaining quotes. 

We recently obtained a quote for a project from a franchise store in Perry. It was a nice piece of carpet, but the quote was for a whopping $70.00 per square yard! That comes up to $7.78 a square foot, or about what a nice hardwood floor would cost. After some questioning and research we were able to find a very similar piece of carpet for about 2/3 that amount at a locally owned retailer with a great reputation.  A big box or a franchise store may actually offer the best deal, but ask your questions, do your homework, and make sure. It can save dollars, and that makes sense!