Allstate: "Good Hands" vs. "Boxing Gloves"
This month's Trial magazine includes a grimly fascinating article by Santa Fe lawyer David Berardinelli about the meteoric increase in profits at Allstate at the expense of policyholders and claimants. In 1995, Allstate installed a new claims-handling system called “Claims Core Process Redesign” (CCPR) designed by McKinsey & Co., the corporate consulting firm whose strategic thinking that made Enron a Wall Street darling and disaster.
McKinsey encouraged Allstate to secretly adopt a business strategy promoting the interests of its shareholders at the direct expense of its policyholders. McKinsey told Allstate: “The senior management team views the [profit] improvement program as a top priority, with unanimity in their belief that change needs to occur. . . . They are willing to make fundamental changes in people, procedures, management systems, structure, etc., to ‘do whatever it takes’ [to increase profits and shareholder value].” McKinsey repeatedly refers to the need to “modify bad-faith laws” and “modify the rules and regulations [governing insurance]” for CCPR to be effective.
McKinsey’s introduction of its business paradigm into the casualty insurance industry was fundamentally wrong. This wrong was probably best expressed almost 30 years ago by the California Supreme Court in one of the nation’s landmark insurance cases:
The insurer’s obligations are . . . rooted in their status as purveyors of a vital service labeled quasi-public in nature. Suppliers of services affected with a public interest must take the public’s interest seriously, where necessary placing it before their interest in maximizing gains and limiting disbursements. . . . [A]s a supplier of a public service rather than a manufactured product, the obligations of insurers go beyond meeting reasonable expectations of coverage. The obligations of good faith and fair dealing encompass qualities of decency and humanity inherent in the responsibilities of a fiduciary. Insurers hold themselves out as fiduciaries, and with the public’s trust must go private responsibility consonant with that trust.
In 1994, the year before CCPR was implemented, Allstate was paying out about 69 cents on claims for every premium dollar collected. By 1998, claim payments for private passenger auto claims plunged to about 51.7 cents out of every premium dollar, and by 2006 overall claim payments plunged to just 43.5 cents of every premium dollar collected.
Allstate's profits exploded. For the previous decade the average annual pretax operating income was $820 million. In the decade after implementing CCCR, the average annual operating profit was $2.5 billion per year, a 3,335 percent increase. The CEO who adopted the new claims system retired after four years after amaxxing a personal fortune of $53 million, while the current CEO has accumulated $150 million, primarily on the basis of denying and delaying claims and grinding policyholders and claimants into the ground.
The McKinsey strategy for Allstate to increase profits by grinding policyholders and claimants into the dirt is illustrated in a vast array of Power Point slides, which have not been released free of a protective order. One key slide contrast the "good hands" in the Allstate ads with boxing gloves indicative of a more combative resistance to paying even the most legitimate of claims.
In Berardinelli's words:
The “Good Hands or Boxing Gloves” slide shows how McKinsey intended to win the claims economic game in two phases that deliberately and illegally exploited the economic pressures placed on a policyholder suffering from financial loss. The first phase (Good Hands) required Allstate to change how it evaluated and negotiated claims; the second phase (Boxing Gloves) required it to change how it litigated claims.
The first phase involved arbitrarily lowering Allstate’s claims evaluations by using a computer program called Colossus, which was calibrated to produce evaluations at least 20 percent lower on average than Allstate’s pre-CCPR claim evaluations. Allstate would require its adjusters to make nonnegotiable, take-it-or-leave-it settlement offers based on these artificially low settlement evaluations.
McKinsey estimated that, when confronted with the threat of a substantial delay in getting any benefits at all, 90 percent of policyholders would succumb within six months to the economic pressures caused by their loss and give up without a fight, accepting the low offers. These policyholders would get “prompt” payment—the Good Hands treatment.
The second, Boxing Gloves, phase involved a plan to deliberately abuse the civil justice system as a weapon of attrition against the estimated 10 percent of policyholders who would refuse to accept Allstate’s reduced benefits. These policyholders would be driven into the “kill box” of McKinsey’s zero-sum economic game—the American civil justice system.
The Boxing Gloves strategy aimed to make litigating claims against Allstate so time-consuming and expensive that any victory by the policyholder would be purely Pyrrhic. McKinsey believed that most policyholders and their attorneys would refuse to endure the expense and delay of litigation if they knew that Allstate had made an institutional decision to try every disputed claim to verdict—no matter the amount in controversy and regardless of the cost to Allstate of doing so.
I believe all of this is true. However, in one case last year with Allstate on the other side, by the time we got ready trial I had them so much over the barrel regarding potential bad faith that they paid $300,000 on a $100,000 liability auto policy in a case with preexisting degenerative neck conditions and virtually no visible property damage to my client's car.
The Shigley Law Firm represents plaintiffs in wrongful death and catastrophic injury cases statewide in Georgia, and in other states subject to the multijurisdictional practice and pro hac vice rules in each state. Ken Shigley was designated as a "SuperLawyer" in Atlanta Magazine and one of the "Legal Elite" in Georgia Trend Magazine. He is a Certified Civil Trial Advocate of the National Board of Trial Advocacy, Chair of the Southeastern Motor Carrier Liability Institute and former chair of the Georgia Insurance Law Institute. He particularly focuses on cases arising from truck wrecks and accidents (tractor trailers truck wrecks, semi truck wrecks,18 wheeler truck wrecks, big rig truck wrecks, log truck wrecks, dump truck wrecks.
An article in the June 2001 edition of Trial provides further insight into Allstate's insidious CCPR philosophy.
See John Budlong, Domino Strategy, 37 Trial 20 (2001).
Allstate's "confidential plan, known as Claims Core Process Redesign (CCPR)," was adopted in "the early 1990s" and "generated a wave of litigation." Id. at 20-21.
"State attorneys general, state bar associations, and private individuals have filed at least fifty-six lawsuits against Allstate in twenty-two states, alleging that these CCPR practices are fraudulent, deceptive, confusing, and illegal. The suits seek damages and injunctive relief on behalf of third-party claimants and Allstate's own insureds." Id. at 21.
The plan apparently continued to operate even after a few courts deemed its practices illegal. Id. at 22 ("Despite such rulings, Allstate's illegal practice of law and defiance of state consumer protection acts continues unabated.").
Not all courts are sympathetic to such claims. Young v. Allstate Ins. Co., 296 F.Supp.2d 1111, 1123 (D. Ariz. 2003) (finding that the plaintiffs failed to show a genuine issue of material fact that CCPR is anything other than a sound business and claim-handling practice); Miller v. Allstate, 1998 WL 937400 (C.D. Cal. Sept. 21, 1998) (reviewing CCPR & granting Allstate summary judgment on plaintiff's institutional bad faith claim).
Crackel v. Allstate Ins. Co., 92 P.3d 882 (Ariz. App. 2004) presents an incredible (though, unfortunately, not uncommon) scenario. At the time the plaintiff's filed their lawsuit against Allstate's insured, they had incurred medical expenses of merely $1,600. Allstate offered them $101 to settle, but then pursued a litigation strategy that cost it in excess of $4,500 to defend facially valid claims and prepare for arbitration.
Of course, advocates for tort reform will ignore or downplay the significance of this type of pervasive lunacy while they simultaneously demonize the plaintiff's bar.
Lastly, an interesting article on how the Colossus software program evaluates claims is available at the following link:
http://www.badfaithinsurance.com/reference/PC/0023a.htm
I wonder why insurance companies will pay more to litigate than they would if they settled. After all, the only principle they would be concerned with is not paying more money, right? And since confidential agreements can be
entered into by both parties, it just
begs the question, or am I missing something here?
--- RESPONSE: It's a numbers game. They figure that if hardball tactics chisel or deter a high enough percentage of legitimate claims, then their overall claims expense will be less. KLS
I believe MSNBC did a story on a legislature from the State of Washington who wanted to take on the auto insurance industry but ran into PAC money, etc. roadblock.
Have a friend in Arizona going through a similar problem with Country Insurance that is in litigation since 2004.
