Consumer 10.0: Staking your claim, and adjusting

By Jeff Gelles - Inquirer Business Columnist

Hurricane-force winds walloped the Jersey Shore that Saturday in mid-March as a nor'easter blew through. Eighty miles inland, Larry Collins' part of Upper Bucks County didn't fare much better, taking torrential rains and gusts near 55 m.p.h.

Collins worried as windows rattled and shingles blew off the house he shares with his 83-year-old mother, Minnie Smith.

Smith was terrified by the storm's fury. Collins was concerned about the damage. One thing neither worried about was the financial effect, even after Collins ventured outside and found rain gutters dangling, the front deck damaged, and an awning partly collapsed.Collins and Smith were protected by their homeowners' policy from State Farm, the company with the "good neighbor" slogan.

But six weeks later - with the awning, deck, and other damage still unfixed - they weren't quite so sure.

For much of that time, Collins and his mother have been at an impasse with State Farm. Their contractor - suggested by State Farm's agent - estimated repair costs of about $12,500. State Farm's adjuster, who visited two weeks after the damaging storm, put the damages at less than half that amount. He cut a check on the spot for $4,132 "and told me several times to get that right in the bank," Collins recalls.

I'd like to report that this case had a happy ending, and that may be where it's heading.

I contacted State Farm spokesman Dave Phillips last week, and within a day Collins got a call from an adjuster who said he was reassessing the claim. The adjuster even gave a last name and phone number - the first time that's happened in half a dozen calls, Collins says.

Phillips told me he couldn't talk specifics, but said the company was looking into the case.

"Our main intention right now is to get the issue resolved," Phillips said Friday. "Our practice at State Farm is to deliver and to pay the right amount - to get a claim resolved and to make sure our policyholder comes first."

I hope that's the outcome. But Collins contacted me in part because he saw last week's column about a new book on the insurance industry and its author Jay M. Feinman, a law professor at Rutgers University-Camden.

Collins asked a reasonable question: Was his case an example of the claims-practices trend identified by Feinman and other industry critics - a trend Feinman summed up in his book's title, Delay, Deny, Defend?

Those critics say that insurers, just like policyholders, face a "moral hazard" - a term referring to the potentially reckless behavior of those protected from its full consequences by insurance.

The moral hazard facing insurers is even more straightforward, Feinman says, and also a matter of incentives: that a dollar saved in claims is a dollar made in profits.

Insurance has a long, venerable history, punctuated by some disturbing episodes. Feinman believes that one has been under way since the 1990s, when Wall Street's press for higher profits led some insurers to revamp their practices at the urging of consultants such as McKinsey & Co.

Essentially, Feinman says the consultants urged insurers to overlook their own moral hazard and turn their claims units into a profit center. He says the result - also fostered by the use of complex computer models to estimate repair costs - is that some insurers systematically lowball claims.

As you'd expect, the large insurers drawing most such criticism, such as Allstate and State Farm, have strenuously denied the accusations. State Farm says it followed key recommendations from McKinsey & Co. only "for a short period of time in the 1990s as a way to go after insurance fraud."

Feinman says there's too little information to say whether State Farm's seemingly lowball offer to Collins or the delays he's faced since are part of larger trends or isolated incidents.

He says a second estimate would have helped, even if Collins acted reasonably in assuming it was unnecessary because he'd hired a contractor recommended by a State Farm agent.

I should note that Collins' contractor, Alex Shelmet, says he was offended by the State Farm adjuster, but calls the experience unusual.

"I've never been questioned like this by an adjuster," says Shelmet, owner of AJ's Home Remodeling & Repairs, of Chalfont. "My prices are very well in line."

So what does Feinman recommend?

First, he says consumers should be better shoppers. Don't just focus on price. Look for whatever comparative data you can find on claims practices and customer satisfaction - and urge your state to make more information available on policyholders' complaints.

Second, recognize there are variations in policies, such as whether a policy covers damage if a sump pump fails or an oil tank leaks. Get an agent who can explain the gaps, and ask if riders are available to cover risks that worry you.

Finally, if bad luck strikes, recognize that slogans like "good neighbor," "good hands," and "on your side" are just slogans, just like that Geico gecko is just a darned cute animation.

"When you have a claim, the insurance company isn't your enemy, but the insurance company isn't your friend, either," Feinman says. "You don't have to assume that what they tell you is accurate with respect to your coverage or how much your claim is worth."

Feinman advises consumers to document damages, familiarize themselves with special rules covering emergency repairs, and be assertive about their rights.

For large claims or complex situations, Feinman also recommends that policyholders get professional help from an experienced lawyer or public adjuster.

Ultimately, Feinman says, state regulators need to work harder to make the market more transparent and help consumers fight bad decisions because moral hazard definitely cuts both ways.