Eugene Anderson is a pioneer in the field of insurance law, and and is an icon in the field of insurance law. He is the founding member of Anderson Kill, arguably the leading insurance coverage law firm in the United States. Gene has written several legal treatises and legal journal articles on insurance, including Insurance Coverage Litigation, the ABA Manual for Complex Insurance Coverage Litigation, and more. Some even say that Anderson's career fighting insurers was the inspiration for John Grisham’s The Rainmaker, later turned into a film with Matt Damon playing the young lawyer suing a heartless insurer who denies the health insurance claim of a dying boy.
So, we are pleased to announce that Mr. Anderson has agreed to write the introduction to Trial Guides' upcoming book “From Good Hands to Boxing Gloves.”
Here is his introduction:
Good books are like candy; this good book is bittersweet. This book has two stories; the design and operation of Allstate’s “Claims Core Process Redesign” (CCPR) and an embedded story about the consultant, McKinsey & Co., and its perversion of insurance. This good book is about an American “religion” – insurance. The insurance religion has been perverted because it has been corrupted by unmitigated greed. In the 19th Century insurance was a profession on par with medicine, religion and the law.
About 1900 there were annual insurance lectures at Yale. See, e.g. Yale Insurance Lectures, Volume I, The Tuttle, Morehouse & Taylor Press (1903-1904).[1] The leading treatise at the time was Joyce on Insurance.[2] The basic form of insurance in the United States was property insurance.[3] Professional standards for insurance professionals were high. High standards with ethical conduct probably carried into the second half of the 20th Century during which time liability insurance was introduced.
The oath of chartered property and casualty underwriters was (and strangely still is) “I shall strive to ascertain and understand the needs of others and place their interests above my own.” The CPCU Professional Commitment, AICPCU/IIA Catalog 1999-2000 at 66 (AICPCU/IIA). That is a powerful promise.
The 1966 standard form comprehensive general liability insurance propelled the growth of insurance. Property insurance was mandated by mortgage lending institutions. Automobile insurance was mandated by state authorities. Thus, the insurance product is a compulsory consumer item.
A basic, fundamental principle of insurance economics and of contracts in general is that breach of contract is profitable. Break your word and you win! A successful breach of contract claim brings the victim of the breach only the benefit of the original bargain. The victim of the breach is out the time, trouble and costs (including legal expenses) of pursuing the perpetrator of the breach. With the decline of professionalism came the full realization that American contract law favored those who breached their agreements (not a very religious concept) a/k/a “The Greenberg Principle.”
“Just say ‘No’” has an especially sweet sound to any party (including insurance companies) who does not want to live up to their word. This is dubbed “efficient breach.” The bedrock economic principle is set forth in E. Allan Farnsworth, Legal Remedies for Breach of Contract, 70 Columbia L. Rev. 1145 (1970) (discussing the legal system’s lack of protection for the victims of broken contracts).[4]
Making matters worse for policyholders, insurance companies frequently combine “efficient” breaches with potent litigation abilities. Again, traditional notions of contract law nearly guarantee an insurance company victory. For policyholders making a claim for insurance coverage, the cooperation to be expected from a fiduciary entrusted with a duty of good faith and fair dealing is often simply not there. Instead, the policyholder may be confronted by a financial colossus with unmatched expertise and resources in insurance coverage litigation. As Liberty Mutual Insurance Company recognized:
[the policyholder] is likely not as familiar with litigation and claims evaluation and disposition as is the insurance company
. . . [T]he insurer is a professional defender of law suits . . . Unlike the insured, an [insurance company] is not a novice as to matters involving litigation.[5]
WOW!
Lawyer Berardinelli has provided an enormous public and professional service by exposing – on an incredibly detailed basis – Allstate’s corruption of insurance under the able tutelage of McKinsey & Co. An unstated, but possibly the most important, theme is that McKinsey & Co. recruits the "best and the brightest" graduates from American business schools and law schools to go into the “chisel and cheat” business and not into honest endeavor. The McKinsey & Co. lesson in the Allstate case is clear – do not prepare and sell honest food at an honest price when you can short weigh and then short change the customer. It is all about money, but not money injured parties can eat or use to pay for medical care.
The McKinsey & Co. website states that its mission is to help its clients “make lasting and substantial improvements in their performance.” For Allstate, McKinsey did the opposite. It helped Allstate deliver less and made the delivery more difficult for the customer.
Almost no lawyers spend the time to lay out – on a step by step basis – what they have done and how. Favorable decisions are badges of honor (and Mr. Berardinelli has many). In this book, he tells of the corruption of insurance on a massive scale; largely silent and unseen. Red file folders may contain gold, but not if they contain yellowing paper that never sees the light of day. Mr. Berardinelli’s red folders show the picture of highway robbers in grey flannel suits.
The Allstate “you do not need a lawyer” campaign was just plain false advertising. At the time, Allstate’s own files showed that represented claimants received more after paying legal fees than unrepresented claimants. This false campaign was stopped by the authorities – one of the few effective governmental actions.
Speaking of lawyers, Mr. Berardinelli shows from Allstate documents that McKinsey & Co. and Allstate planned (one might say “schemed”) to impose greater litigation on claimants, the court system and the taxpayers. Consider first the fact that the insurance industry has a taxpayer supported claim resolution system. To get an electric toaster working you do not need to take Macy’s to court. Accept the amount Allstate offers or go to court[6]. Why you and I should pay taxes to support a judiciary to resolve insurance claims is not clear. The multiple impacts of this burden on judges is not clear.
The McKinsey & Co. side of the story in the book tells the saga of an extraordinarily talented organization that turned its talents to ghoulism; that is, pay injured persons less and less. The best and the brightest from U.S. business schools and U.S. law schools join McKinsey & Co. and have turned their insurance talents to teaching Allstate how it could profit most by delivering less – and get away with it. McKinsey & Co. first worked for other insurance companies.[7] When retained by Allstate they knew the insurance trade. Some of the McKinsey & Co.’s consulting advice would stand lawyers in good stead. “Always promise less than you know you can deliver.” Structure client meetings so that there are no surprises. Both the good news and the bad are signaled before formal presentations. Rather than teach Allstate how to make insurance work and work better, McKinsey & Co. taught Allstate how to deliver less and less.
At about the same time McKinsey & Co. was working for Allstate, it was working for The American College in Bryn Mawr, Pennsylvania, a leader in financial services education founded in 1927 by Solomon S. Huebener. The American College teaches how to make the insurance product better and better. See The American College website regarding ethics. The McKinsey & Co. study for The American College is not publicly available.
A mystery remains as to why Allstate needed McKinsey & Co. to tell it how to chisel and cheat. Its shoddy claims practices were, for the most part, in effect at least as long as the 1970s when they were exposed by an Allstate employee[8]. Possibly it is because the corrupt practices are so distasteful that Allstate employees must be told they are “blessed” before the employees will begin to work on the crud.
Secret Societies and Code Words
A major side effect described in Mr. Berardinelli’s book is the expose’ of the role of McKinsey & Co. in the destruction of insurance. McKinsey & Co. is the Opus Dei[9] of insurance – effective, but unseen – and unregulated. Rather than enhance the insurance product in America, McKinsey & Co. has taught Allstate and other insurance companies how to deliver less and less. McKinsey & Co. teaches that highway robbery via Rambo litigation is both acceptable and profitable if called “Best Practices.”
Before one sheds tears for homeowners and private auto owners realize that large commercial entities get the same savage treatment. A former employee of a Fortune 500 company observed “Any company with an insurance claim for more than $10,000,000 should just forget it – throw the insurance policy away.” Mom and pop personally and mom and pop businesses are both cheated. Exxon beware!!
Sow’s Ears to Silk Purses
Every major disaster brings two things from Allstate.[10] The first is crocodile tears and the second is premium increase. Allstate’s major markets are automobile insurance and homeowners insurance. These are NOT voluntary purchases. Without automobile insurance, cars cannot be driven. The government provides highways, but not insurance. Banks require homeowners’ insurance – they are not choosey about which insurance company writes it and do not look to the claims paying reputation of the insurance company.
The United States provides a taxpayer supported court system to resolve insurance claims. “[T]he insurance industry has been called the banker of the tort system.” Brief of the American Insurance Association, The National Association of Independent Insurers, Farmers Insurance Exchange, Fire Insurance Exchange, The State Farm Insurance Companies, and Truck Insurance Exchange as Amici Curiae in Support of Appellant, at 3, fn.1, filed August 2, 1985, Aetna Life Insurance Co. v. Lavoie, (U.S. 1985) (No. 84-1601). Why should the taxpayers provide a free adjunct to the claims department of Allstate (or the other insurance companies)? This is an enormous governmental subsidy to the insurance industry. Taxpayers may pay for the system but Mr. Berardinelli shows that neither the taxpayers nor the policyholder claimants get their money’s worth. McKinsey & Co. touts the litigation system to reduce and deny claims. An insurance company can short weight and short change by forcing claimants to their knees with the help of an expensive and overworked judiciary. Insurance is the darling of the judiciary because the judicial system is to a large extent funded by insurance.
Going two ways on a one way street does not seem to discomfort Allstate. Insurance companies and their lawyers consider themselves to be above the law. See Houser, Good Faith As A Matter of Law: The Insurance Company’s Right to Be Wrong, 27 Tort Trial & Ins. L.J. 665 (1992). While insurance companies often assert a right to be wrong, policyholders have no such rights. Insurance company lawyers, too, contend that they have a right to be wrong. Edward Zampino & M. Farrett Coleman, Turning the Other Cheek: Can Insurers; Defense of Coverage Suits Constitute Grounds for Bad Faith Litigation?, 38 Tort Trial & Prac. L.J. 103 (2002) (contending that “[t]he federal courts have uniformly rejected attempts to create a bad faith remedy based upon alleged insurer litigation misconduct.”).
There is no industry other than the insurance industry that would even dare argue for a “right to be wrong.”[11]
Policyholders and claimants have no comparable right to be wrong.
[1] Available at The Insurance Library, Boston, Massachusetts. (P.S. In case readers do not know it, that was a big deal.)
[2] Joseph A. Joyce, A Treatise on the Law of Insurance Of Every Kind, The Lawyers Co-Operative Publishing Co. (1917-1918). Available at the University of Connecticut Insurance Law Center (http://uconl.law.uconn.edu/search/).
[3] Marine insurance is not Allstate’s bag and therefore not part of this book.
[4] The Farnsworth article is very hard to read. The essence can be found in the first two pages and the last three pages. There has been a backlash against the doctrine of “efficient breach of contract” but it still exists in the insurance world.
[5] Liberty Mutual Insurance Company’s Memorandum in Support of Motion for Partial Summary Judgment, at 7, filed July 5, 1988, National Union Ins. Co. v. Liberty Mut. Ins. Co., 696 F. Supp. 1099 (E.D. La. 1988) (No. 86-2000). Liberty Mutual has been sanctioned for being a “major league team” in the game of “hardball litigation.” See Adolph Coors Co. v. American Ins. Co., 164 F.R.D. 507, 509 (D. Colo. 1993).
[6] “So sue me, sue me, What can you do me?” Lyrics from “Sue Me,” Words & Music by Frank Loesser (Frank Music Corp.) from original Broadway production of Guys and Dolls (1950).
See also Riordan v. Nationwide Mut. Fire Ins. Co., 977 F.2d 47, 50 (2d Cir. 1992) (noting that the response of the New York Superintendent of Insurance to the policyholder’s complaint was to advise the policyholder to “retain an attorney and sue”).
[7] USAA and State Farm.
[8] See Cannata v. Allstate, Calif. Superior Ct., City and County of San Francisco, No. 603 623, September 10, 1974 and article entitled “Allstate’s Claims Practices,” THE INSURANCE FORUM, Vol. 4, No. 11, November 1977. Why McKinsey & Co. was able to play the significant role it did when much of what it counseled was apparent long before it was retained is another story for another time. Maybe it is time that an expert is someone from out of town.
[9] A semi-secret society of supporters of the Catholic Church. Definition from Wikipedia.
[10] “Sweet are the uses of adversity, Which, like the toad, ugly and venomous, Wears yet a precious jewel in his head.” William Shakespeare, “As You Like It” (Duke Senior at II, i).
[11] The level of corruption within the insurance industry is beyond belief. For example, when the New York Attorney General stopped contingent kickbacks, Marsh & McLennan – the world’s largest broker – laid off 5,000 employees.