chapter 8 – Rebecca Mowbray, dragonslayer
In this morning’s Times Picayune Money section is the latest installment on the Allstate saga by Rebecca Mowbray. It details how the stet of Florida is taking on Goliath and telling them to fuck off. This is a great reason that all coastal states, from Maine to Washington state, should band together and develop their own insurance pools and incapacitate the insurance industry. Article follows…
When Florida Insurance Commissioner Kevin McCarty banned Allstate last week from selling new auto insurance policies in the nation’s fourth most populous state after the company flouted a subpoena regarding its homeowners insurance business, he took the unprecedented step of linking the state’s goals for homeowners policies to coveted car insurance sales.
“It’s big,” said California consumer advocate Amy Bach, whose group, United Policyholders, has been receiving e-mails and phone calls all week about McCarty’s move. “This is the first time that I have seen a regulator use the ultimate penalty: suspending a license to do business in the state against a major company.”
The standoff between Allstate and the state of Florida started Tuesday, when Allstate executives testifying at what was supposed to be a two-day hearing about the suburban Chicago company’s business practices were cut short after two hours because the company handed the state a 51-page objection stating that it wouldn’t comply with a subpoena.
While investigating possible improper rate setting and collusion, the state had asked Allstate to provide information about its business and relationships with financial rating agencies, computer modeling agencies and trade groups. The company provided about 40,000 pages of documents, but Florida officials said that most of the documents, which were stamped with the words “trade secret,” are publicly available on Web sites and that the company didn’t provide the information they were seeking. Other companies served subpoenas as part of the state’s probe have so far complied, Florida officials said.
The Allstate subpoena included a request for work performed by the consulting firm McKinsey & Co., which advised Allstate and other insurers in the 1990s about how to manage their claims to become more profitable. Plaintiffs in several Katrina insurance claim cases in New Orleans have also unsuccessfully asked for the so-called “McKinsey documents.” In Missouri, Allstate has been paying a $25,000-a-day contempt fine since mid-September for not producing the documents. So far, that is more than $3 million.
On Wednesday, McCarty banned Allstate from selling new car insurance policies in Florida until it complies with the subpoena. On Thursday, the situation escalated, and Florida banned Allstate from doing any new business in the state, including selling homeowners and life insurance policies, until it gives the state what it’s looking for.
Allstate has filed an appeal asking for a stay of McCarty’s orders. A court Friday granted a 10-day stay of McCarty’s order, allowing Allstate Corp. to keep selling insurance in Florida while the appeal is pending.
Advocacy groups support
Consumer advocates have been calling on states for years to gain leverage on all-important homeowners insurance issues by pushing back against companies on auto insurance, which is valuable to companies because insuring cars is more profitable, more predictable and less risky than insuring homes in disaster-prone states.
Some, such as Policyholders of America, encourage the passage of “anti cherry-picking statutes” that would prohibit companies from selling auto insurance unless they also sell homeowners. And, in a sweeping Jan. 10 report about insurance, the Consumer Federation of America suggested that Florida hit insurance companies in their pockets and have Florida Citizens Property Insurance Corp. start selling auto insurance as well as homeowners to bring companies to the negotiating table.
Industry groups declined to comment about the situation between Allstate and McCarty, saying that it was a specific issue between an individual company and a regulator. But they generally say that it’s unfair to link homeowners and auto insurance because they’re separate products.
The Property Casualty Insurers Association of America said it is concerned that the standoff could send bad signals to insurers that might be thinking about doing business or expanding their business in Florida.
“It certainly adds to the contentiousness of the regulatory and political environment in the state, said Joe Annotti, vice president of communications at the trade group. “It doesn’t get us any closer to stabilizing the insurance market or making buildings stronger and making people safer. Time will tell, but it could ultimately be counterproductive.”
But consumer advocates say the suggestion that it is improper to link homeowners with auto is bunk. At the end of the day, both generate profits for the company, and all lines of insurance are required to comply with laws.
As a practical matter, the types of insurance already are linked. Insurance agents routinely try to get customers to take out auto coverage with their homeowners policy, and offer discounts to do so. And fearful homeowners in Louisiana and other states often let the company that writes their homeowners policy write their auto insurance policies as a defense against getting dropped, even though the Insurance Department says it would be illegal to do so.
“On the ground, it ends up that people are buying auto to go with their homeowners as a defensive mechanism,” said Bob Hunter, director of insurance at the Consumer Federation of America.
Strategy could backfire
Gov. Bobby Jindal, who met with Fla. Gov. Charlie Crist in December to talk about insurance issues, declined to comment and referred calls to the Insurance Department. Insurance Commissioner Jim Donelon was unavailable for comment, but in the past when asked about cherry-picking strategies, he has said that forcing companies to do homeowners business because of their interest in automobile business would unfairly tie companies’ hands.
Robert Bordone, clinical professor of law and director of the Harvard Negotiation and Mediation Clinic Program, doesn’t follow the ins and outs of state insurance crises, but he said that when two sides dig in their heels, it’s harder to stay focused on the issues and get a resolution.
“My general sense is that it’s not optimal when your negotiation strategy is a forcing strategy rather than fostering strategy. The risk is that it could escalate,” he said. “When you use your leverage, the risk is that the other side could escalate in kind.”
But, Bordone said, there are times when parties to a dispute need to snap the other side back into focus if they feel they are being walked on.
“There are times when you may strategically decide you need to reality-check the other side, and let them know that you do have some leverage,” he said. “It’s important to signal, and maybe that is what the state of Florida is doing, that you won’t be bullied. Particularly when there’s a subpoena, the law requires that you do something, and if you don’t, the state is going to do what it can within its power.”
Regardless of which strategy will ultimately prove the wiser, at this point there could not be a more striking contrast between Florida, which is doing head-to-head battle with insurers as it tries to stem rising insurance rates that are affecting the state’s property insurance market, and Louisiana, which awarded $29 million in incentive grants to five insurers on Jan. 11 to stimulate the writing of new property insurance.
Bach, the California insurance advocate, said he thinks other states that have clashed with Allstate in recent months, such as Louisiana, New York, Texas and California, could see some benefit from McCarty’s tough stand.
Against the backdrop of last week’s events in Florida, it will be interesting to see what happens in Louisiana on Friday, when Allstate is required to respond to an order by the state to reinstate wind and hail coverage for South Louisiana policyholders whose coverage, the state contends, was improperly canceled on technicalities.
“McCarty said, ‘You’re not above the law.’ It is going to have a ripple effect. I hope that they will come to the table all over the country and hear the complaints about them and resolve issues rather than just taking a hardball, take-no-prisoners approach,” Bach said of Allstate. “Hopefully, the citizens of Louisiana will get some sort of peripheral benefit.”