From: Mike Fernandez, Vice President, Public Affairs, State Farm
To:  Ronald Henkoff, Editor, Bloomberg  Markets Magazine
Re: “The Insurance Hoax,” Bloomberg Markets Magazine, September 2007

The only hoax being perpetrated with your September broadside attack of the property and casualty insurance industry is that it masquerades as journalism.  Read by an informed observer, the many inaccuracies and selective use of facts leads to one conclusion: your reporters know little about our industry and have been duped and fed by an enterprising trial bar – fighting to maintain its spot at the feeding trough of frivolous lawsuits. 

Let me get specific:

Customer Service - The article begins and repeatedly refers to insurers which “routinely cheat customers and pay less than what policies promise.”  The term “routinely” in the above context is supported by nothing more than anecdotes and a handful of lawsuits, most of which are routinely peddled by the trial bar to the news media and seeded typically right before jury selection is to take place in an upcoming insurance court case.  Mr. Henkoff, there is empirical data that measures insurers’ performance.  Each state can provide carrier complaint ratio data.  If your reporters would have looked at the aggregate of that data, they would have found State Farm has the lowest complaint ratio of any national insurer in America.  Insurers also measure their effectiveness in customer satisfaction by customer retention and market share.  Again, State Farm must be doing something right by its customers – it leads in those two areas, as well.

In pointing out the repetition of the same, few claim anecdotes being pushed to media outlets, members of my State Farm team also told Bloomberg that our company settles between 12 million and 13 million claims, every year.  Again, “routinely” cheat customers?  Where are all the other and new examples?  How do you quantify “routinely”?  And how has State Farm remained the number one choice for auto and homeowners insurance for literally decades?

News or Trial Bar PR? - The examples the “Hoax” authors’ used relative to claim experience are examples State Farm has seen before.  The Watkins’ tornado dispute, Ms. Tunnell’s wildfire under-insurance issue and most of the others have been covered, repeatedly, in other media – again, courtesy of a financially-motivated trial bar.  Plaintiffs’ lawyer David Berardinelli has attempted to replay many of these stories as an opening calling card in BusinessWeek, CNN and Money Magazine, in just the past year.  Evidence of this trend was shared with your reporters – a good-faith effort on our part to warn journalists they are being used.  Did Bloomberg not think it appropriate fair disclosure to report Mr. Berardinelli is currently hawking his book, “From Good Hands to Boxing Gloves” – a $250 guide to suing insurance companies – a book only available to trial lawyers?

Profits Sometimes, Shareholders Never - Record breaking profits? (“State Farm’s profits have doubled since 1996…” page 37)    In brief, insurance is a cyclical business (impacted by catastrophes, claims and financial market fluctuations) and our customers expect us to be good stewards of their policyholder dollars and be ready to pay claims when due – whether profits are up or down.  Bloomberg failed to show the industry lost billions in the early 2000’s.  State Farm lost nearly $8 billion from 2000 to 2002 – record losses two years in a row.  Nor did Bloomberg share with its readers that while we had substantial profits in 2006, those profits were less than our Hurricane Katrina claims payments in 2005. Nor did Bloomberg provide any context for the level of profits.  Let me try:  If you took all the assets (net worth) of the company and divided them by the number of total policies and accounts (from all lines homeowners, auto, business insurance, life insurance, health insurance and other financial services), the result would be about $750.65 per account.  But then again, insurance companies are prohibited from using dollars collected for auto insurance to pay for home insurance claims, and  state laws prohibit insurance companies from using homeowner premiums collected in one state to be used to pay claims in another state.  That said, the larger point should not be lost, insurance companies are required by law to cover only what coverage exists in the contract.  This last point is too often lost on the media and the trial bar as they seek to make insurance companies responsible for uncovered losses. 

Bloomberg’s article also repeatedly implies insurers minimize claims payments in an attempt to maximize profits to please shareholders.  While making this assertion, the reporters fail to acknowledge that the nation’s largest insurer, State Farm, insuring about one of every five cars and about one of every five homes in the U.S. is a mutual company and as a consequence and as a matter of policy puts customers first – it has no shareholders!

Ms. Tunnell was informed and never sued because she had no legitimate claim - The lead item in the story about replacement cost and Ms. Tunnell fails to tell the reader that State Farm sent out multiple communications to policyholders about the change in the contract when it is was made (years before the San Diego fire), that media covered the change extensively and that policyholders had options available to purchase additional coverage to achieve replacement value.   

To underscore and provide evidence of the inaccuracies, I have attached a written record of State Farm’s interaction with Bloomberg reporters and copies of some of the materials that were mailed to Ms. Tunnel.  Still, your reporters chose to make her “unthinkable” treatment by State Farm the opening and significant sidebar to your coverage?  I am also, with permission, attaching a printed copy of an insurance coverage blog by David Rossmiller who nails this journalistic abomination from his third party perspective.  As pointed out in your article, Ms. Tunnell chose not to sue.  It was not to avoid stress, her case had no merit.  So, how is this a significant part of your “Hoax” story?

The McKinsey Report - After spending several pages indicting other insurers use of the consulting firm McKinsey (interestingly not disclosing Bloomberg, LLC’s own engagements with McKinsey), the article on page 46 of “Hoax” indicates, “State Farm won’t discuss what role McKinsey played in helping the insurer shape its approach toward customers.”  Again, I draw your attention back to the attachment regarding the conversation with your reporters which clearly points out that we provided a response, namely that the ACE program was only used for a short period of time in the 1990s as a way to go after insurance fraud and we have not used it since.  In the eyes of readers, your portrayal that State Farm won’t talk misleads them to believe it’s connected to the earlier allegations and, by refusing to talk, State Farm is hiding something.  The truth is that we did talk and the point being raised by the reporters is not relevant – at least not to State Farm.
 
Hurricane Katrina and the use of Engineers - The article attempts to paint a picture that insurance companies pressured engineering firms to produce results that would minimize payments to policyholders.  The article fails to point out the fact that overall in the cases where State Farm used engineering reports it actually paid more out to its policyholders under its contract than under the national flood insurance program.  Further, as evidence that there was wrong-doing, the reporters cite an e-mail from a Mr. Down at Forensics Engineering questioning motivations.  What the reporters fail to provide is the under oath deposition of Mr. Down where he denies there was any problem and says that his e-mail inquiry was taken out of context.  Robert Kochan, President of Forensics Engineering, additionally has made this clear.  We further gave your reporters copies of AP news articles that confirm Mr. Down did not even work Katrina claims and had written the so-called incriminating emails based on rumor.  So why didn’t Bloomberg include this information or an excerpt from sworn deposition?

I could go on – Unfortunately, I could go on.  There were many other mistakes, both small and large.  Among the other errata: on page 40 reporters write of a house being “destroyed” during a tornado in 1999 but the case involved a loosened brick veneer that could be secured with commonly used anchors designed for that purpose; the authors indicate Katrina fatalities at 16,000 without a citation when the officially reported amount is nearly 2,000;  the Xactimate estimating tool is cited as an outgrowth of the McKinsey report but usage of the tool in the industry pre-dates the McKinsey report; and the reporters referenced the unfortunate experience of Katherine Merritt where State Farm admitted its error and corrected the problem, but then the reporter did a side-bar suggesting that this error was part of a larger “hidden policies” phenomenon and dubbed it a “trend” without providing any proof that Ms. Merritt’s circumstance was anything other than an isolated mistake that was righted.

As someone who years ago worked for National Public Radio, served on the board of a regional newspaper chain, and have been both a consumer and fan of the Fourth Estate, I am appalled by the lack of journalistic ethics and wanton disregard for the facts shown by your reporters.  Their efforts may indeed not only mar the reputations and defame the companies cited, but cause them financial harm.  We find this very troubling and request a face-to-face meeting with you and your editorial staff to seek ways to remedy the harm this “Hoax” has caused.