Farmers Insurance: Off the Hook Forever?

Internal Farmers Insurance Group claims audits, obtained by the Chronicle, suggest the company has a history of troubling claims-handling practices -- leading to the denial of legitimate claims by homeowners in Texas and elsewhere -- that the state attorney general may now be barred from investigating, thanks to the terms of Texas' negotiated settlement with the insurance giant.

According to a series of internal Farmers documents reviewed by the Chronicle, including three memos and 43 individual claim audits, the company was aware of and concerned about seemingly persistent problems with both the timely and thorough handling of water damage and mold-related claims filed by homeowners. In each of three internal memos written in May 2002, members of a Farmers quality assurance team discussed the results of claims audits done at the request of Farmers' executives, including former National Mold Claims manager Isabelle Arnold, and Mark McKee and George Jones in the Texas Special Claims Center. (Arnold in June filed a whistle-blower suit, claiming that she was fired by Farmers for trying to reform the company's questionable mold-claims practices.) Each memo shows that the company lost money through improper claims handling by claims adjusters.

A May 17, 2002, memo to Arnold from Susan Owen, Farmers' quality assurance team leader, reported the findings of an internal audit of 39 mold claims. According to the memo, company auditors found that individual policy coverage was improperly evaluated or misapplied in 68% of the claims handled by staff adjusters and in 83% of the claims handled by independent adjusters under contract to Farmers. The auditors also found that the claimed loss was "not confirmed/ verified to support coverage decision" in almost two-thirds of the cases.

"Coverage issues were driven by a failure to investigate to verify the specific cause(s) or sources of water and mold damage to determine if coverage applied," Owen wrote. "Management did not get involved early enough in these claims or if involved did not ... proactively move the claim to an accurate conclusion." Owen was not the first to note the claims-handling problems. In a May 6, 2002, memo from Mark Osborn in "claims quality assurance" to George Jones at the Texas Special Claims Center, Osborn wrote that the company's failure to properly identify "policy exclusions" accounted for losses in 16 of 78 audited claims. On May 8, 2002, Osborn penned a second memo to Jones reporting the results of an audit of 83 closed-claim files, revealing problems with coverage assessment in 19 files.

Perhaps more revealing are the individual audits of 43 separate claim files, conducted between May 6 and June 25, 2002, which the Chronicle has obtained. Of the 43 claims -- which a source close to Farmers tells us includes claims made by Texas policyholders -- 25 were closed files, while 18 were still active when reviewed, including one claim dating back to 1998. According to the claim-review reports, auditors considered a host of factors in their review -- including whether coverage was evaluated properly, whether customer service was up to company standards, whether the claim investigation was "sufficient to provide an accurate outcome," and whether handling of the file was in compliance with "state and regulatory requirements."

In nine of the 25 closed files, auditors determined that adjusters had not properly assessed policy coverage. "If the efficient proximate cause of loss is wind," one auditor wrote regarding a claim that the company subsequently denied, "we probably have coverage for loss, and the [policy exclusion] noted in our denial letter probably isn't applicable." Regarding another closed and denied claim: "We have wind damage on this roof and didn't pay anything," the auditor wrote. "We denied entire claim, and we have covered wind damage."

For 17 of the closed claims, auditors noted that while policy coverage was determined correctly, there were other problems with the claim handling. "Our [claim] denial letter states that wear and tear, faulty construction, and improper installation of the plumbing is the cause of loss," wrote the auditor. "[O]ur file isn't documented for any of these causes of loss. We haven't documented the actual cause of loss in the file. Since we haven't investigated this loss very well," the auditor continued, "we may not have a very defensible denial."

Of the 18 open files, auditors found similar problems -- including improper coverage assessment on 12 files and insufficient investigation on 10. In four claims, the auditor noted specific violations of state regulatory requirements -- on one, from June 1, 2001, the auditor wrote that the "[o]verall length of claim, along with delays in handling would represent failure to adhere to Unfair Claims Practices" (an apparent reference to the Texas Unfair Claims Settlement Practices Act).

Former AG (now U.S. Sen.) John Cornyn filed suit against Farmers in August 2002, charging the company with a host of violations of state law against deceptive trade practices -- including overcharging for homeowners insurance policies and unfair use of credit scoring, which allegedly also led to inflated premiums. After months of legal wrangling -- including a challenge brought by several individual policyholders -- state officials in May announced they had negotiated a $117.5 million settlement with the company. "This court ruling is great news for Farmers policyholders, the Texas insurance market, and all Texas consumers," said Texas Insurance Commissioner Jose Montemayor on May 22. Not so, say a handful of Farmers policyholders that are still in a legal battle to have the state's deal thrown out. The settlement, they charge, is not fair for consumers and does little -- if anything -- to help stabilize the market and hold Farmers accountable. (Their challenge is scheduled for oral arguments before Texas' 3rd Court of Appeals on Dec. 17.)

Indeed, included in the settlement is a promise that the state will abandon its ongoing investigations of various company practices -- including an inquiry into claims handling. From Oct. 18, 2001, to Jan. 30, 2002, the AG's office issued six separate civil investigative demands (CID, equivalent to a subpoena) related to claims handling. If the state is successful in implementing the settlement, the AG will have to abandon those investigations -- and will have agreed to forfeit any future ability to reopen those inquiries. "All ... CID's ... shall be withdrawn and all associated investigations ... shall be terminated," reads the settlement agreement, filed on June 13 in Travis Co. district court. "The investigations associated with the time periods covered by each CID are concluded and there will be no new investigations or CIDs for these time periods."

And what other violations might have occurred which will never be investigated? On Nov. 14, the Chronicle reported the contents of a memo, written by Farmers counsel Thomas Rogers to Tony Melchionne at Farmers' National Catastrophe Center in Kansas, where Rogers reported that after reviewing various claim files in preparing to respond to one of the CIDs, he was going to withhold the "more troublesome" claim files -- suggesting the company should play the odds that the AG wouldn't make any further inquiries. The AG's office failed to respond to requests for comment on that story.

On Nov. 24, Texas Lawyer reported that in responding to concerns about the memo's implications, raised by attorneys for policyholders contesting the settlement, Assistant AG David Mattax, chief of the AG's financial litigation division, wrote that he is "concerned" by Rogers' memo but didn't see any reason to rethink the settlement. "[T]here is no justification for not proceeding with the settlement," Mattax wrote. Further, TL reported, Mattax wrote that the AG knew its investigation of Farmers' mold-claims handling practices was not complete at the time of the settlement, but that it was in the best interest of Farmers' policyholders to "achieve this landmark settlement."

Farmers spokesperson Michelle Levy told the Chronicle that the audits were not unusual, are conducted routinely in all of the insurer's lines of business, and had no relationship to any investigation in Texas or elsewhere. "We're always doing internal audits to find ways to give our customers a better experience," Levy said. "We are always striving to do a better job and scrutinizing ways we can improve."