The September 2007 issue of Bloomberg Market Magazine entitled The Insurance Hoax by David Dietz and Darrell Preston has wreaked havoc on the insurance industry as a whole as the two authors claim that some major insurance companies in the United States, specifically Allstate and State Farm, practice what the authors call as cheating on policyholders as they tend to shortchange their customers. Further, the controversial news article went as far as saying that insurance companies do this form of cheating to make their stock values bigger and to reward stockholders.
The articles starts off with the story of a State Farm customer who was informed by a company representative that she would only receive a sum of $184,000 of the estimated $306,000 cost of rebuilding her home after it was devastated by the largest wildfire in the history of California. In addition, the article states that by reducing what is due of these insurance companies for payment losses, they have accumulated big profits over the last 12 years. As a proof to this scheme, the authors say that even in the wake of Hurricane Katrina, casualty insurers reported record profits of $73 billion in 2006, or slightly over 49 percent higher than the profit in 2005.
According to the authors, property insurers systematically deny and reduce the claims of policyholders, as evidenced by court records in California, Florida, Illinois, Mississippi, New Hampshire and Tennessee. Moreover, according to court records and interviews with former employees and state regulators, insurance companies do routine refusal to pay market prices for homes and replacement contents, use computer programs to cut payouts, change policy coverage with no clear explanation to policyholders, change engineering reports, and worst, they sometimes ask their adjusters to lie to their customers. As a result of this scheme, U.S homeowners, who pay more than $50 billion annually in insurance premiums, are often disappointed when their insurers tell them that they will not receive the full cost of rebuilding their destroyed or damaged homes.
The authors conclude that this scheme is a secret about the insurance industry that is often discovered later by customers when disasters come and homeowners are not protected from financial ruin which insurance companies promise them. Today, a lot of law firms across the United States handle insurance coverage cases due to to thousands of complaints involving state insurance departments.
