Louisiana Insurance Litigation Blog
The issue of application of Illinois punitive damages laws arises with respect to State Farm in large measure because of the recent decision in the matter styled Campbell v. State Farm Mutual Automobile Insurance Company, No. 98-1564 (UT S.Ct. 10/19/01) 2001 UT 89. With respect to State Farm’s adjustment practices, the court in that case considered the claims under the law of the state of Utah, allowing for the award of punitive damages. It considered in particular the following list of issues for the application of Utah’s punitive damage awards:
1) The relative wealth of State Farm;
2) The nature of State Farm’s misconduct;
3) Facts and circumstances surrounding State Farm’s misconduct;
4) The effect of State Farm’s misconduct on the Campbells and others;
5) The probability of future recurrences;
6) The relationship of the parties;
7) The ratio of punitive to compensatory damages;
Of particular importance to our analysis of State Farm’s exposure for punitives in subsequent cases are the findings of the Utah Supreme Court on the nature of State Farm’s misconduct. It is these findings which would apply to State Farm’s adjustment practices in any case in any state.
From the Campbell case the findings are as follows:
“2. The Nature of State Farm’s misconduct.
This factor specifically analyzes the nature of the defendant’s conduct in terms of its maliciousness, reprehensibility, and wrongfulness. It mirrors the “reprehensibility” factor described by the United States Supreme Court in BMW of North American, Inc. v. Gore, 517 U.S. 559 (1996). There, the Supreme Court stated that the defendant’s misconduct is “[p]erhaps the most important indicium of the reasonableness of a punitive damages award.” Id. at 575, 576. Repeated “trickery and deceit” targeted at people who are “financially vulnerable” is especially reprehensible and worthy of greater sanctions. Id. Moreover, “deliberate false statements, acts of affirmative misconduct, or concealment of evidence of improper notice” also warrant larger awards. Id. at 579.
With these standards clearly in mind, the trial court made nearly twenty-eight pages of extensive findings concerning State Farm’s reprehensible conduct. We summarize here three examples from those findings of State Farm’s most egregious and malicious behavior.
First, State Farm repeatedly and deliberately deceived and cheated its customers via the PP&R scheme. See Court’s Findings, Conclusions and Order Regarding Punitive Damages and Evidentiary Rulings, Campbell, at 17-27. For over two decades, State Farm set monthly payment caps and individually rewarded those insurance adjusters who paid less than the market value for claims. Id. at 18-19. Agents changed the contents of files, lied to customers, and committed other dishonest and fraudulent acts in order to meet financial goals. Id. at 17-27. For example, a State Farm official in the underlying lawsuit in Logan instructed the claim adjuster to change the report State Farm’s file by writing that Ospital was “speeding to visit his pregnant girlfriend.” Id. at 35. There was no evidence at all to support that assertion. Ospital was not speeding, nor did he have a pregnant girlfriend. Id. The only purpose for the change was to distort the assessment of the value of Ospital’s claims against State Farm’s insured. As the trial court found, State Farm’s fraudulent practices were consistently directed to persons – poor racial or ethnic minorities, women, and elderly individuals – who State Farm believed would be less likely to object or take legal action. Id. at 26-27.
Second, State Farm engaged in deliberate concealment and destruction of all documents related to this profit scheme. Id. at 31-33. State Farm’s own witnesses testified that documents were routinely destroyed so as to avoid their potential disclosure through discovery requests. Id. at 29-30. Such destruction even occurred while this litigation was pending. Id. at 30. Additionally, State Farm, as a matter of policy, keeps no corporate records related to lawsuits against it, thus shielding itself from having to disclose information related to the number and scope of bad faith actions in which it has been involved. Id. at 30.
Third, State Farm has systematically harassed and intimidated opposing claimants, witnesses, and attorneys. Id. at 33-37. For example, State Farm published an instruction manual for its attorneys mandating them to “ask personal questions” as part of the investigation and examination of claimant in order to deter litigation. Id. at 34. Several witnesses at trial, including Gary Fye and Ina DeLong, testified that these practices had been used against them. Id. at 34-35. Specifically, the record contains an eighty-eight page report prepared by State Farm regarding DeLong’s personal life, including information obtained by paying a hotel maid to disclose whether DeLong had overnight guests in her room. Id. at 35. There was also evidence that State Farm actually instructs its attorneys and claim superintendents to employ “mad dog defense tactics” – using the company’s large resources to “wear out” opposing attorneys by prolonging litigation, making meritless objections, claiming false privileges, destroying documents, and abusing the law and motion process. Id. At 36-37.
Taken together, these three examples show that State Farm engaged in a pattern of “trickery and deceit,” “false statements,” and other “acts of affirmative misconduct” targeted at “financially vulnerable” persons. BMW, 517 U.S. at 575, 576. Moreover, State Farm has strategically concealed “evidence of [its] improper motive” to shield itself from liability, which was furthered by State Farm’s treatment of opposing witnesses and counsel. BMW, 517 U.S. at 579. Such conduct is malicious, reprehensible, and wrong.
Without dwelling on the details of the findings in that case, you should note that one of the expert witnesses who testified, Ms. Ina DeLong, has offered an affidavit in other cases which provide that:
“The properly handled claim at State Farm is the exception, not the rule. Claim representatives have little or no training and are rewarded for keeping costs down.”
She further provided that:
“State Farm knows that the key to underpaying claims is to provide little or no training and keep claims representatives separated from anyone with real knowledge of what [the] damage looks like or what an appropriate repair is. The claim representative is incompetent by design and is given minimal draft authority until they prove to State Farm management that they understand the importance of the ‘bottom line’, the goal of being the ‘most profitable claims service in the industry and prove that they won’t let anything get between State Farm and their money.’ Most training is ‘on the job’ where the untrained claim representative is accompanied by another equally untrained claim representative and if they are successful, their approach, they assume it is correct and continue to do it. The only gauge for determining the accuracy of their assessment is the policy holder that has been rocked by disaster and has not been warned that the adjuster is either untrained or reaps huge rewards for keeping costs down. The policy holder isn’t provided with any information regarding steps they could take to protect themselves against such abuses.”
As if that was not enough, Ms. Ina DeLong further offers that:
“The claim representatives that inspect the losses have little or no authority to make a coverage decision, or make payment, and can only report back to others that will be making the decisions regarding coverage and payment. This means that the decision makers can only view the claim through the eyes of the untrained adjuster and are free from any emotional involvement, or the real facts of the loss. Not exactly what the public expects when they hear the ‘good neighbor’ jingle.”
“The real agenda at State Farm regardless of the slogan of ‘pay what we owe; nothing more, nothing less’, and the ‘good neighbor’ advertising, is to do all in their power to pay as little as possible, as late as possible, if ever at all. This frequently works because the insurance buying public has bought into the warm fuzzy ‘good neighbor’ advertising. State Farm has contested to see who can close the most files without any payment, referred to as ‘CWP’. State Farm’s management refers to these sayings as ‘claims profit.’ To calculate profit, State Farm subtracts the amount they paid on the claim from the amount they should have paid. An insurance company is not suppose to make its profits in the claims handling, but rather in the underwriting and actuarial process.
Now with respect to these findings and accusations against State Farm, other states are beginning to present the issues with respect to conflicts of laws and principles as they relate to State Farm by reviewing the law in the State of Illinois, where the defendant is incorporated and the principal place of business for the defendant is in Illinois. Moreover, arguments are in some cases being successfully made that the conception of the deceptive business practice occurred in Illinois. It is also pointed out that the refinement of the deceptive business practice occurred in Illinois because the strategy of how to implement the deceptive business practice originated and is managed from Illinois.
The persons who dictated, created and implemented the deceptive business practices have, at all times, been located in Illinois as will be attested to by James Mathis and Ina DeLong, experts who testify in this kind of cases.
It should be noted that all local offices of State Farm act only insofar as permitted by the corporate offices in Illinois. Marketing decisions originate and are premised on approval from corporate office in Illinois. Further, the decision in determining why a deceptive business practice was needed was a corporate decision from Illinois. Moreover, the training of the adjusters is through a training program which originates in and is more often than not taught in home offices in Illinois. The application of Illinois principals of law therefore can easily be argued as available and the question has to be raised as to whether or not Illinois punitives would be helpful.
Illinois case laws on punitive damages note that the limited punitives that might be available for insurance company violations in Illinois, do not preclude the application of Illinois Consumer Fraud Act to actions of insurers. A case on this issue is seen in the action of Fox v. Industrial Casualty Insurance Co., No. 80-1480, 98 Ill.App.3d 543, 4245 N.E.2d 839, 54 Ill.Dec.89). In that case the court found that:
“We do not read these cases to hold that an insured is limited to filing actions against insurers based only on violations of the insurance code, nor does the careful reading of the code warrant this conclusion. …. The sale of insurance is clearly a service and insureds are thus consumers and within the protection of the Consumer Fraud Act. Private causes of action are also authorized under the act.”
For instance, the Consumer Fraud Act was applied against State Farm in a claim for refusing to use original equipment of manufacture’s as oppose to low cost generic replacement parts. Both compensatory and punitive damages were awarded in that case.