Louisiana Sues Insurers For Price Fixing

Emily Martinez inspect here devastated house 14 September 2005, for the first time since she left it 17 days ago before Hurricane Katrina hit the city of New Orleans, Louisiana.
MENAHEM KAHANA/AFP/Getty Images
Louisiana Attorney General Charles Foti is suing the state's largest property insurance companies, accusing insurers of conspiring to limit payments to policyholders after hurricanes Katrina and Rita and engaging in an elaborate price-fixing scheme.

Foti's wide-ranging lawsuit, filed Wednesday in a state court in New Orleans, alleges that Allstate Insurance Co., State Farm Fire and Casualty Co. and other insurers worked together to manipulate damage estimates and low-ball claims payments after the 2005 hurricanes.

The lawsuit claims the companies coerced policyholders into settling damage claims for less than their actual value by editing engineering reports, delaying payments and forcing policyholders to go to court to challenge the estimates.

"The acts of this combination have seriously impeded the economic growth and disaster recovery of (Louisiana) and its citizens and effectuated an ongoing fraud on commerce in this state," says the 29-page lawsuit from Foti, who recently lost a re-election bid.

Named in the lawsuit are Northbrook, Ill.-based Allstate, Bloomington, Ill.-based State Farm, Lafayette Insurance Co., USAA Casualty Insurance Co., Farmers Insurance Exchange, Standard Fire Insurance Co., and several companies that worked with the insurers on handling claims after Katrina and Rita.

Foti, whose lawsuit accuses the companies of violating the Louisiana Monopolies Act, seeks unspecified monetary damages, plus attorneys' fees and costs.

"This alleged scheme," Foti said in a written statement, "gave insurers an unjust advantage over policyholders ... by reaping huge profits from the misfortunes of persons whom they pledged to protect from the risk of loss."

The suit comes amid complaints from thousands of property owners that they were underpaid on their Katrina-related claims, but CBS Radio correspondent Mike Conti said it also comes as a surprise to many in state government, including state insurance commissioner James Donelon.

"I can only assume that there is some evidentiary basis for his allegations," Donelon told CBS Radio.

State Farm spokesman Phil Supple said he hadn't seen the lawsuit and couldn't comment on Foti's allegations, but he defended the Bloomington, Ill.-based company's handling of Katrina claims.

"At State Farm, each claim is handled individually, and we pay what we owe based on our contract with our policyholders," Supple said.

Allstate spokesman Michael Siemienas also said he hadn't seen the lawsuit and wouldn't immediately comment.

Robert Hartwig, president of the industry-funded Insurance Information Institute in New York, called it "ludicrous" to accuse companies of engaging in any kind of conspiracy.

"Insurers operate independently from one another," he said. "They do not act in concert with each other under any circumstances."

Hartwig said insurers paid about $28 billion for about 1.2 million policyholder claims in Louisiana after Katrina and Rita. "The industry made fair offers and settlements to people who filed claims in the wake of these two storms," he added.

Foti, a New Orleans Democrat, ran for re-election this year but will leave office in January after finishing third in an Oct. 20 primary.

Also targeted in the suit in McKinsey & Company, a New York consulting group that the suit alleges taught the insurance companies how to reduce their payouts and increase profits.

Called the "architect" of sweeping changes in the insurance industry beginning in the 1980s, McKinsey advised insurers to "stop 'premium leakage' by undervaluing claims using the tactics of deny, delay, and defend," the lawsuit alleges.

The suit further alleges that by using McKinsey, the insurance companies conspired together in a price-fixing scheme.

"Usually it's very difficult to prove a price-fixing case or a horizontal combination type of anti-trust case, but in this case there is one common thread, and that is McKinsey & Company," Loyola law professor Dane Ciolino told CBS affiliate WWL.

"All of these companies had at some point consulted with McKinsey, and Mr. Foti hopes to use that to bind all these various insurers into one common conspiracy."

In response to a request for comment, McKinsey spokesman Mark Garrett said they "don't discuss matters related to client work."

Rather than filing in federal court, Foti's civil suit was brought in state court under state monopoly law, asking for a jury trial. Ciolino says the attorney general is "obviously hoping that he can get a sympathetic factfinder among Louisiana policyholders."

Investigation Into Allstate's Practices And Profits

The news comes as a WWL investigation into insurance company policies reveals that, despite the costs associated with the hurricanes that ravaged Florida and the Gulf Coast two years ago, some insurance companies recorded even greater profits following Katrina and Rita.

WWL correspondent Dennis Woltering reports that, according to the Consumer Federation of America, Allstate made more net income after taxes than it had before dealing with the losses from the 2005 hurricanes. In fact, in 2006 when it was still paying claims for Katrina and Rita, its profits jumped to $5 billion.

From 1986 to 1995, Allstate's profits averaged $82 million a year. From 1996 to 2005, profits rose to an average of $2.2 billion a year, an increase of more than 2,700%.

"Now there's only one place where that money can come from, and that's from the pockets of policyholders," David Bernardinelli, a New Mexico attorney who has represented clients suing insurance companies, told WWL.

The consumer group found that, between 1996 and 2006, the amount of each premium dollar Allstate paid back to policyholders fell from 73 centers per dollar to 59 cents.

Such business practices were uncovered in internal Allstate presentation slides in which McKinsey showed how the insurer could boost its profits.

"People are desperate, and willing to accept pennies on the dollar just to get something, and there is frankly a regulatory system that's been gamed by the industry," Bernardinelli said.

Allstate spokesman Rich Halberg said its increase in profits came from the company adding millions of new policyholders; 3.5 million new auto insurance customers and 1.6 new homeowner policyholders between 1996 and 2006.

Allstate said it paid more than $3 billion in claims after Katrina and Rita, settling 98 precent of those claims within 12 months.

"When you have independent third parties who are not trial lawyers look at the processes, you'll see that we came out with a clean bill of health," Halberg said. "That happened when the Louisiana Department of Insurance looked at our claims following Katrina and Rita."

When the state government conducted a market review of Allstate's response to Katrina and Rita, it concluded that the company was compliant with the state's statute, rules and regulations. But Insurance Commissioner Donelan also ordered the company to scrap its "flawed" property inspection process, and to reinstate policyholders after Allstate cancelled the policies of more than 4,700 homeowners.