Insurance Transparency Project

InsNerds,ITP is puzzled that it can find no press attention on the Jan. 12 order issued by state Judge Richard G. Van Dyck in Grady County, Okla., District Court citing State Farm for contempt for its conduct in a case stemming from the now-forgotten 1999 Oklahoma tornadoes that killed 36 and triggered 52,000 claims and $450 million in damages. You can find it in the ITP key documents section (search for “contempt”).

I-Fans will recall that a state jury last May awarded the Watkins family, one of 71 parties to a class-action, $3 million in actual and almost $10 million in punitive damages after finding that the insurer “intentionally and with malice” disregarded its duty to act in good faith by “repeatedly” hiring Haag Engineering Co., which, it was alleged, was “predetermined to disagree with policyholders” on the extent and nature of damages.

This Tulsa World story says plaintiffs’ lawyer David Marr started to have a good feeling when, during deliberations, the jury asked for the court for a calculator (search for “tornado”). He estimates the class could grow to 10,000.

A link to the Marr law firm’s State Farm class action site, which has relevant court documents, is on http://insurancetransparencyproject.com. Look for “Marr” under “Policyholder Sites.”

True nerds will further recall that State Farm then suspended (search under “Haag”) Haag from work on Katrina claims in September.

Doctoral candidates at ITP’s Institute for Advanced Insurance Studies will remember that Anita Lee of the Sun Herald reported that a federal (search under “grand jury”) grand jury in Jackson subpoenaed Oklahoma trial transcripts as part of a criminal probe of State Farm’s post-Katrina conduct– a separate one from Attorney General Hood’s state grand jury, which is on the brink of ending.
A couple points, you crazy “NatCats” and then War Eagle has to go clip recipes from yesterday’s “Dining & Wine” section in the Times:

In his order two weeks ago, Judge Van Dyck finds that State Farm violated a previous order to produce post-verdict documents and that the violation was “willful, deliberate and in bad faith.”

He also found that State Farm, its counsel, its executives (known as “designees”) Michael Carroll, Daniel Carrigan, and three other executives “repeatedly and in bad faith engaged in litigation misconduct.”  From the order, the problem appears to have been less-than-cooperative behavior during depositions and not obeying subpoenas.As one remedy, he ruled that facts asserted by plaintiffs in a previous motion be taken as “established” and that future jurors be advised that State Farm had been “found guilty of litigation misconduct” and could presume that, had answers been forthcoming, “they would be detrimental to State Farm’s interests.

State Farm is also prohibited in future proceedings from referring “in any manner its `investigation’ results relating to Haag” and independent adjusters “as being somehow exculpatory.”

Ouch. The parenthesis around “investigation” — that’s gotta hurt.

Judge Van Dyck also ordered Carroll and Carrigan “to obey their trial subpoenas,” which ITP tries to do almost every time. ITP will only note that it hasn’t seen any mention of U.S. Attorney Dunn Lamptondropping his reported investigation as a result of the settlement with Scruggs and the state. A native of Osyka, Miss., between New Orleans and Jackson, Lampton attended Southwest Mississippi Junior College on a basketball scholarship before graduating from Ole Miss and its law school. He’s a former state district attorney.
Oh, and check your watches: it’s been seven years since those tornadoes in Oklahoma.

Note to everyone: ITP will probably scale back its I-Notes! to less than once a day only because they seem to be taking time from moving forward on other I-projects. I missed yesterday and, well, the world seemed to keep turning.

Thanks as always to Ida.

Natural Catastrophes and Man-Made Disasters,

This Rebecca Mowbray piece in the Pulitzer-winning Times-Picayune describes Gov. Blanco’s road trip to the Property and Casualty Insurers Association quarterly meeting near Palm Springs to talk insurers into coming back to Louisiana.

The piece throws a spotlight on the emergence of two competing state models for dealing with insurers: Carrots vs. Sticks. Blanco is basically selling her state as the anti-Florida, which earlier this month passed what newspapers are calling a “Nader-esque” plan to rollback rates by increasing the obligations of the state-run insurer and of a state-run insurance back-up system, to some degree socializing Florida’s wind market.

Florida’s stunning about-face, led by Gov. Crist, from pro-business to statist clearly caught the industry off-guard.

As Mowbray writes:

“Insurers say Florida destroyed its insurance market by rolling back rate increases for the state’s insurer of last resort and increasing the obligations of the state-run catastrophe reinsurance pool without adequate financing, essentially putting the state in competition with the private market. Insurers say the state’s credit rating is now in jeopardy, and that the experiment will have dire consequences and ultimately will prove anticonsumer.”

ITP would only say that Florida’s credit rating is Florida’s problem.

In contrast, Blanco is selling the industry on the state’s efforts to make itself more attractive via state spending.
“Blanco will tell insurers about coastal restoration efforts paid for by offshore oil and gas revenue; comprehensive levee improvements under the watchful eye of new professionally managed boards; and broad-reaching community planning that encourages people to consider the risks of their neighborhood’s geography as they decide whether to rebuild, forces them to do so under the terms of the new statewide building code, and provides resources to elevate houses and fortify them with storm shutters and roof ties via hazard-mitigation grants from the Louisiana Recovery Authority.”

Blanco says she was encouraged by the outcome of a two-hour pitch session with St. Paul Travelers Cos.’ executives in December that resulted in the commercial carrier partly reversing a decision to pullback from the market.

“I was pleasantly surprised that we got that kind of response,” Blanco said. “It encouraged me more.”

Hmm. Who’s the Democrat and who’s the Republican again?

Interestingly, Florida’s radicalism has given Louisiana leverage:

“What we really want to talk about is how we can avoid the whole situation that’s happened in Florida happening in Louisiana,” said Joseph Annotti, vice president of communications for the Illinois-based Property and Casualty Insurers group. “We would like to hear from Gov. Blanco and Commissioner Donelon, who have been doing everything they can to spur a private-market solution.”

He adds:

“What happened in Florida was a very big wake-up call to us,” he said.

Here Mowbray makes a good point, though perhaps the sentence would have benefited from an “officials said” at the end:
“Couple the Florida legislative session with the likelihood of a massive State Farm litigation settlement in Mississippi, and suddenly Louisiana can look like the model of rational, moderate behavior.”

Who’s right? ITP would offer that they’re both wrong since whatever approach each state takes would make more sense if they did it together. But I would say War Eagle’s right, because he’s been saying that the Gulf post-Katrina would become an important insurance laboratory, and this is practically a controlled experiment.

Uncovered Perils,

The statement above is the last line of an Anita Lee story on how State Farm, Scruggs and Mississippi came to terms over Katrina claims. What’s notable is that it was uttered not by Amy Bach(1), but by Sheila Birnbaum, the legal powerhouse who heads Skadden’s Mass Tort and Insurance Group, and whose sharp tongue, according to this piece, curled the hair of more than one Southern gentleman during negotiations.

I suspect she knows what she’s talking about in the above quote. The only words I left out for space were “…or any insurer….”

All the swearing may have been in vain as Judge Senter all but rejected the deal on Friday. More on that later.

But it’s interesting to read about the struggle involving legal titans Birnbaum and Richard Scruggs. Scruggs explains that it was Judge Senter’s earlier ruling that insurance claims couldn’t be tried as a group, but only one at a time, that left the plaintiffs’ side with “cruel choice” of getting paid quickly or seeking to punish the insurer, which would take years.

As Scruggs says: “This is not something that people can take or leave. This is a fundamental factor in people moving on with their lives. “

One key to talks was Attorney General Jim Hood’s agreement to drop his criminal probe. As Scruggs says:

“It’s very difficult to overcome the legal barriers and at the same time try to put a little oil in the water of people’s anger at the insurance industry, which is very well justified. People want to see somebody go to jail. They want to see them punished and not just pay what they should have paid a year and a half ago.

“And that’s a very legitimate feeling. And I share that. But the cruel choice, though, is to put a few people in jail if they are guilty, or have State Farm and the other companies who might be next, step up and do what they’re supposed to do. When the court made the decision that it was going to try these cases one by one, it gave us not much choice but to do it this way.”

Hood isn’t quoted on his decision to drop the grand jury. ITP isn’t a lawyer, but on a common sense level, it is not clear how the payment of civil claims ends a criminal investigation. I would ask ITP’s attorney, Buck, but he didn’t come home this weekend.

Now on the site, a link to all Katrina-related insurance decisions in Mississippi federal court. The more your read them, the more you are impressed with Judge Senter.
And now up in the key documents section is Swiss Re’s Natural Catastrophes and Man-Made Disasters, 2005. This annual research report is a wonderful resource for putting Katrina in context historically and even compared to other disasters last year. It also makes for oddly absorbing reading and will provide much material for the annual ITP party/final exam at the Last Exit. Readers with a sense of the macabre will want to take the ITP pop quiz on
the site at the bottom of this item.

(1) Executive director, United Policyholders, leading advocacy group.

TAKE THE ITP POP QUIZ:
1. Katrina was the worst nat-cat of all time in dollar terms

A. True.

B. False.

2. In 2005, Katrina ranked how high in terms of loss of human life.

A. First
B. Second
C. Third
D. Fourth

3. 73,000 people died in an earthquake in Asia Minor on Oct. 10, 2005.

A. True
B. False

4. 20 were killed at kite-flying festival in Lahore.A. True
B. False

5. The worst disaster since 1970, 300,000 killed in a Bangladeshi earthquake, involved no insured losses.

A. True
B. False

Answers: 1. A; 2. D; 3. A; 4. A; 5.A

Fellow Residual Risks and Other Surplus Lines,

ITP made a mistake yesterday when it said the secretive deal announced between State Farm and the Scruggs firm involved 640 policyholders now in litigation. In fact, the deal, known as the Woullard Agreement, would involve State Farm holders who have not yet filed suit. ITP regrets the error and sometimes regrets having “transparency” as its middle name.

Ok, ITP will be traveling to the Gulf at the end of February to look for itself, but the general impression left by Rebecca Mowbray and others at the Times-Pic is that the Louisiana recovery is sinking into a bayou, and insurance is a big reason.

Don’t take my word for it. This Mowbray story says that $122 million in state tax credits for 97 projects to build more than 11,000 units of affordable and mixed-income housing may go unused because construction and insurance costs are too high.

“But developers say that with insurance costs having risen from 200 percent to 600 percent on apartment complexes since Hurricane Katrina, tax credits aren’t enough to plug the gap.”

She goes on to explain that tax credits are usually sold to investors and are geared to allow developers to turn $1 million in credits into $10 million in equity. In return for the credits, developers agree to rent some apartments at reduced prices.

But:

“Despite the power of the tax credits, the insurance problem is so serious that many of the much-heralded housing tax credits might go unused.”

A quote from Tim Leonhard, an executive at CharterMac (NYSE: CHC), a specialty real estate lender, who says:

“The insurance literally is going to kill deals. Only the strongest of the strong property owners, those with the deepest pockets, are going to be able to get deals done,” Leonhard said. “The vast majority of developers don’t have the financial ability to do that.“

And here’s Charles Fontenelle, a Metairie based agent:

“I’ve got about 20 deals on my desk, and we’re just waiting. The wait is because the insurance costs are too high,” Fontenelle said. “We tell them what the numbers are today, and they go back to the lenders, and they say, ‘We can’t approve this because you’re not going to make any money.’ “

It’s a terrific story, a nerd’s feast, a detail-filled wonk-fest about tax credits that few people will read and no one will remember when they talk about how bad the local paper is. But that’s OK, I’m sure Mowbray has gotten several raises since Katrina and is now up to about $325,000/year.

Meanwhile, the Grey Lady’s Citizen Nossiter reminds us that New Orleans may wind up only half its former size, and that it’s
dangerous.

I know I’m wearing out my welcome with my insurer pals, and even War Eagle’s charms can hardly soften the dings their industry gets from ITP basically every day. But, the industry in 2005 added at least $33 billion to its surplus, which now stands north of $600 billion. The worst-ever Katrina et al cost $60 billion.
And here’s III(1)’s definition of policyholder surplus:

“The amount of money remaining after an insurer’s liabilities are subtracted from its assets. It acts as a financial cushion above and beyond reserves, protecting policyholders against an unexpected or catastrophic situation. “

And here, again, is Allstate’s stock chart for the last five years versus the S&P, which hasn’t done bad either.

And here’s Allstate’s press release from last October announcing another $3 billion stock buyback program in 2007, adding to the $12.5 billion in buybacks over the last 10 years, in addition to the $5.8 billion paid in stock dividends.

And only because Buck’s been drinking again, here’s a piece in Crain’s Chicago Business about Ed Liddy(2)’s $33 million stock sale earlier this month.

ITP agrees with Bob Hunter (3) and believes it’s on insurers to justify price increases and share buybacks at the same time.

But, and here is where I’m over my head: ITP believes the problems are structural, not personal: artificially small markets and lack of transparency may not be the cause, but they don’t help.
(1) Insurance Information Institute, leading industry-backed research organization.
(2) Retired chairman and CEO of Allstate.
(3) Head of Consumer Federation insurance section, former Texas insurance commissioner, Carter/Ford-era federal insurance administrator, well-known boulevardier. Read his white paper on the site , first item.

(SEE ITP CORRECTIONS)

Transparent Ones,

Now up on the “Key Katrina/Insurance Documents” section” (click on “Scruggs/State Farm Settlement) is the settlement agreement announced yesterday between 640 policyholders and State Farm. This and more is posted by the Pulitzer-winning Sun Herald, next to another terrific story by the indispensable Anita Lee.

There are times when War Eagle can only shake his head sadly and tip his hat in professional admiration for the way State Farm and its powerhouse lead lawyer, Skadden’s Sheila Birnbaum, have deftly blocked any chance of obtaining relevant data about post-Katrina insurer performance.

The paragraph cited above, 8.17, says State Farm “will provide periodic reports” to the court, Attorney General Jim Hood and Commissioner George Dale on 1. the number of claims, 2. the number of claims resolved without arbitration, 3. the number arbitrated, 4. and all amounts paid, every three months until all Katrina claims are resolved. However, those reports are, as noted above, confidential and exempt from the Mississippi Public Records Act. The settlement makes these reports a “trade secret” and/or “confidential commercial and financial information.”

Please. Those kinds or reports are about much of a trade secret as Citibank “disclosing” how much it pays on a six-month CD. Or Boston Properties announcing what kind of dividend it’s paying. Or… ah, forget it. ITP is rousing its attorney, Buck, off the cot on which he sleeps and setting him to work on a third-party challenge to the settlement.

A belt-and-suspenders touch is found in paragraph 8.13.7, which says that class members (policyholders) can’t disclose their offer from State Farm to “any other person,” including –get this — “the Special Master,” the judge’s helper, without State Farm’s consent or as provided in Section 14 (don’t go there; it’s no help).

What can ITP say? This is old school. I’m sure my insurer pals will set me straight, but how are reports of aggregate claims data a trade secret? And if it hurts State Farm to be the only one disclosing such reports, what about if everyone does?

Hat tip to the best dang reporter in Mississippi.

I-Fans,

You don’t need ITP to tell you about the deal in Mississippi that ends civil and criminal probes in return for a settlement of 640 cases and an agreement to reopen up to 35,000 more claims. The deal could put at least $130 million, and maybe several hundred million dollars more, in the hands of policyholders and, according to Sen. Lott, clear the main impediment to the state’s recovery.

War Eagle is going over press accounts now trying to figure out how this benefits transparency. So far he can’t see that it does. In fact, this is a blow to ITP.

It’s not just for the obvious reasons that the state grand jury goes back to hearing car-theft and littering cases, the public-records pipeline shuts down in civil court and the 15,000 whistleblower records from State Farm’s adjusting contractor are placed in a lead-lined vault buried deep in a cornfield between Bloomington, Winkel and Funks Grove(1).

No, it’s really because the discourse hasn’t moved, at all. Don’t believe me? Read the NYT’s account and compare it to Anita Lee’s in the Pulitzer-winning Sun Herald.

I’ll save you the trouble. A fair reading of the venerable Joe Treaster’s piece in the Times is that State Farm had a good case, but faced the erosion of a brand built up over 80 years from an unrelenting PR campaign generated by well-meaning but misinformed policyholders.

“For State Farm, the nation’s largest home insurer and the biggest in Mississippi, the settlement allows for `a just, speedy and efficient resolution,’ as a spokesman, Phil Supple, put it.

“It would also remove a major public relations headache. While State Farm and the other insurers may have had some strong legal arguments, they have been widely perceived as insensitive. In many cases, residents whose houses were reduced to concrete slab foundations received just a few thousand dollars in payments. Some received nothing.”

Other subtexts, not in this particular story, was that Rep. Gene Taylor(2) and Sen. Lott were on a warpath, in part, at least, because their own claims were denied. Also that they and Attorney General Hood were demagoguing this case, and Scruggs(3) was being Scruggs. All of this is no doubt true.