Insurance Companies Protect ... Themselves
Published on Saturday, June 29, 2002 in the Boulder Daily Camera
Insurance Companies Protect ... Themselves
by Chistopher Brauchli

But if the while I think on thee, dear friend, All losses are restor'd and sorrows end
Shakespeare, Sonnet 30

It's easy to make fun of the insurance companies. And it's easy to forget all that they have done for us over the years. That's why the article in a recent Wall Street Journal was so distressing. It made it sound as though the insurance companies are the bad guys when, in fact, we all know they are our friends.

The article described how insurance companies have begun reacting to depression inspired by the fact that lots of people have been filing lots of claims. Although the article didn't say so, part of the depression may have been a natural consequence of events of Sept. 11 that caused lots of people to file claims. On top of that, Congress got the companies' hopes up by starting to enact legislation that would have helped the companies out and then abandoning the effort. But more of that later.

According to the article, as a result of their depression, many insurance companies have started canceling insurance policies belonging to people who file claims, even if the claims are not the fault of the claimants. The article described the plight of a family named Sherrill in Georgia who had been good customers of USAA for 20 years for their homeowners insurance and 31 years for their car insurance. Then the Sherrills had a string of bad luck that included a lightning strike, a burst pipe and a car break-in, for all of which they filed claims, not realizing it would upset USAA.

It not only upset USAA. It caused the company to send the Sherrills a notice of non-renewal telling them it would no longer insure them because of their bad luck. The company likes to insure people who have better luck than the Sherrills. They told the Sherrills that their kind of luck was not "compatible with our underwriting standards." That is to say, USAA's standards prefer people who don't file claims to those who do. The Sherrills were not the only unfortunate people described in the story.

Susan and Lester Guyon were another family that discovered that the new procedures applied to them. Nature was their tutor. Insured by Farmers Insurance Group for 35 years, they had the misfortune to be attacked by two hail storms within three years. When the second storm hit and they filed a claim for a new roof, the company dismissed them as clients saying one claim in ten years was acceptable and more frequent claims were not.

According to an internal memorandum at State Farm Mutual Automobile Insurance Co. which is the nation's largest home insurer, agents were told that people with two claims in three years were good candidates for non-renewal. It will not take as new customers, anyone who has had a claim within the preceding three years.

Although the story gives the impression that the companies are heartless, in fact what the companies are doing vis-a-vis their insureds demonstrates the kind of ingenuity that is the hallmark of big business. The companies clearly had to do something to keep their shareholders happy in response to the enormous losses many of them suffered as a result of 9/11, especially when those losses were coupled with a generally unfavorable economy. At first they thought Congress might help out and that would have been a wonderful solution.

In the aftermath of Sept. 11, Congress in fact considered passing legislation to bail out insurance companies in the event of future disasters because, as U.S. Rep. Michael G. Oxley (R-Ohio) so eloquently put it: "The glue that holds our economy together is insurance." Hearing that was something of a surprise but when one realized how right Mr. Oxley was, it became obvious that it was the most natural thing in the world for Congress to come to the aid of the companies in order to keep the economy together. The last thing anyone wanted after 9/11 was for the economy to come further unglued. Accordingly, the House of Representatives passed a bill that would have provided as much as $100 billion in government loans to the insurance industry to cover losses from future large-scale terrorist attacks.

The bill would have created a federal loan program to cover 90 percent of any insurance industry losses in excess of $1 billion. The first $20 billion would have been repaid by the insurance companies through a special assessment and the secretary of the treasury would then have decided whether to impose a special assessment on policy holders or have the balance paid by taxpayers. That was not all the bill did for the companies.

It limited a defendant's liability for pain and suffering, required that all suits be heard in federal court and placed a limit on how much lawyers could charge, adding a prison sentence for lawyers who charged more than the approved amount. The bill had lots of other great ideas as well but a Senate that did not realize that insurance is the glue that holds the economy together, did not approve of the legislation and it went nowhere. Not rescued by Congress, the industry is demonstrating its self-reliance.

By canceling the insurance of those who file claims and refusing to insure those who have had past losses, the companies will significantly reduce the amount they pay out, thus guaranteeing their own continued solvency. Instead of feeling depressed they should feel proud that they solved their problem without the help of the federal government, thus proving again that the free market system without government involvement is best.

Christopher R. Brauchli is a Boulder, Colorado lawyer and writes a weekly column for the Knight Ridder news service.