Auto Insurance Fraud: The Client is Not Always at Fault


Recently, State Farm Mutual Automobile Insurance Company reached a compromise agreement with Plaintiffs to resolve the State Farm class-action litigation pending in the United States District Court for the Southern District of Illinois.  The settlement provides benefits to the over four million current and former State Farm policyholders who were members of the class.

The settlement agreement will include recitals that State Farm denies liability and that it considers the claims to be without merit, that it is settling the unjust enrichment claim, and that the settlement is made simply to bring an end to the entire litigation.

Some History

The litigation arose from the earlier class-action lawsuit, Avery v. State Farm. Avery involved a challenge to the quoting or specification of aftermarket non-Original Equipment Manufacturer vehicle repair parts in the 1980s and 1990s. Avery resulted in a jury verdict in 1999, amounting to a $1 billion judgment against State Farm. The Illinois Supreme Court reversed that judgment in August 2005.

However, some customers of State Farm Mutual Automobile Insurance Co. claim the company conspired to help elect an Illinois Supreme Court candidate so he could vote to throw out the $1 billion award against the company. These customers then brought a lawsuit as a group.

Surprisingly, this story is eerily similar to John Grisham’s novel, The Appeal.  In the book, a large corporation backs the candidacy of a judge (under the table of course) in order to overthrow a large court settlement.

State Farm – Not a good neighbor

Interestingly enough, this is not the first time the company is in the hot seat.   In 2010, State Farm got into trouble in Texas for overcharging over 1.2 million customers dating back to 2003. State Farm repeatedly denied it overcharged its policyholders.

The company protested, declined to refund its customers, and fought the allegations for several years. Even when a judge ordered them to provided refunds, State Farm ignored that as well. In the end, State Farm was ordered to reach a settlement and refunded $352.5 million dollars. The company was not the good neighbor in this scenario.

The company is notoriously known for delaying and denying compensation. There was evidence of claim documents that came from State Farm that were tampered with.   There was also an alteration of the engineering damage report. If that was not enough, forgery of signatures on exemptions also occurred.

CNN reported on these allegations in 2007 after the victims publicly demonstrated with forceful evidence about State Farm’s unfair practices.

In some cases, State Farm claimed it investigated its own clients, and then accused these clients of committing insurance fraud, in order to avoid paying legitimate claims.

Lessons learned – what can the consumer do?

When shopping for an insurance company, the consumer should check the insurer’s complaint record — especially if it’s a small insurer that’s offering a good rate, but there’s not very much information about its reputation. Saving a few dollars per year in premiums can backfire if the insurer hassles you when you try to make an insurance claim.

It’s extremely important to report any problems you have with an insurer to your state insurance department. The most important thing to note is that this complaint goes on the record, and the regulators then will investigate the complaint. A recorded complaint can be included in public figures, which help warn other people about potential problems with the insurer. Additionally, regulators may be able to put extra pressure on the insurer to resolve your complaint.

The Business Model – Profits vs. Service

An insurance policy is a contract, or a promise, between the insured (customer) and the insurer (insurance company). The insurance company collects a premium from the customer for the issued policy and agrees to pay for any covered losses the customer suffers. It sounds like a pretty simple business model for earning money, but can be quite complicated.

Insurance companies are like any other business in the world. They have to make a profit to stay in business. There are two basic ways this can be accomplished. They can earn underwriting income, investment income, or both.   Here is where the main issue lies, insurance companies sometimes try to resort to other tactics to make or increase profits.

Underwriting Income

Underwriting income is derived from the difference between how much money is collected for all policies sold versus how much money is paid out in insurance claims for those policies in any given time period.

For example, Insurer “A” may collect $1,000,000 in premiums for policies issued or renewed in a given year. If they pay less than $1,000,000 in claims, they have made a profit. If they pay more than $1,000,000 in claims, they suffer a loss.

Insurers have a unique way to earn massive amounts of additional profit. Unlike many other types of businesses, insurance companies collect huge sums of cash throughout the year and may try deceptive tactics to not pay, or pay less on claims, on these policies.

Investment Income

This unique situation allows insurance companies to invest that money while it’s not being used. Huge profits can be reaped, or lost, as a result.

In fact, insurance companies can knowingly charge too little for insurance policies and plan for an underwriting loss if they believe they can make a profit from investing the money they receive before having to pay claims. This practice took place in the early 2000s when the stock market was booming.

On the flip side, insurance rates may be raised to make up for stock market losses.

Have you been a victim of insurance fraud?

If you or a loved one has been a victim of fraud by an insurance company in Texas, the law is on your side.

The insurance company is not on your side when you are an accident victim.  But, P&M Law is.  If you were injured in an accident, contact P&M Law at 832-844-6428 or text our attorneys directly at 832-438-3012.

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