Take It to Court.

Allstate is turning up the heat on low-damage auto claims, a trend that may be catching on--to the chagrin Of trial lawyers.

The adversarial relationship between Allstate Insurance Co. and trial lawyers is taking a sharper turn: In the past seven months, lawyers' associations from Connecticut to Oregon have organized seminars specifically designed to show trial attorneys how to counter Allstate's take-no-prisoners policy on third-party injury claims from low-impact auto crashes.

The simmering animosity also has spilled over to courtrooms, where lawsuit after lawsuit has attacked All-state's use of a controversial pamphlet that asks accident victims to consider whether they really need a lawyer to reach a settlement with the insurance company.

"Allstate," the Connecticut Law Tribune wrote recently, has become the insurer tort lawyers love to hate."

These attorneys say Allstate's actions are intended to squeeze them out of the legal process, an accusation the company denies. Allstate says the lawyers are reacting to its revamped claims process--a change, it says, that was aimed at rectifying unequal claims practices in the past by providing more even-handed and consistent treatment. These lawyers are so vocal, the insurer notes, because the strategy is hurting their incomes.

"With the trial bar, there has been some discussion that we've become overly aggressive," said Christine Sullivan, director of Allstate Property & Casualty Claims Service Organization. "But our approach is to fairly evaluate and negotiate each claim on an individual basis. In most cases, we're able to reach an amicable settlement. If not, we're willing to try the case."

But while the second-largest U.S. personal-lines insurer is more open about fighting these claims, it's not the only carrier to take a tougher stance these days regarding soft-tissue injuries--the whiplashes, sprains and bruises that don't show up in X-rays and can be difficult to prove. In fact, insurers suspect that many of these claims are fraudulent.

The Alliance of American Insurers notes that other carriers are fighting back in this area, but "more on a case-by-case basis," said Kirk Hansen, director of claims.

There was a time when many insurers would sooner make a settlement in a soft-tissue injury case than go to the trouble of contesting the claim in court. But that seems to be changing, said Hansen, whose national trade organization, based in Downers Grove, Ill., represents 318 property/ casualty insurance companies. "We see more companies tending not to pay what was once termed nuisance-value or defense-cost cases."

Case by Case

State Farm Group, Bloomington, Ill., the largest personal-lines insurer in the United States, evaluates soft-tissue injury claims on an individual basis, looking at the magnitude of impact of a collision and comparing that with the level of soft-tissue injury being claimed, said spokesman Dick Luedke. Nevertheless, the company does not make blanket judgments based on those two factors because it recognizes that there's not always a direct relationship, he said.

"The bottom line is we want to pay what we owe, but at the same time, we don't want to pay more than we owe out of fairness to our entire policyholder group," Luedke said. "We don't want to provide an open checkbook."

Claims Clout

With so many insurance companies vying for market share, there's a lot of competitive pressure to limit costs, Hansen said. "You don't make money unless you are competitive," he added. And companies facing pressure to improve short-term profits have little room to maneuver.

These carriers can tighten their underwriting, but the results won't show up for years. And there's scarce leeway on rates because they are regulated by the states, notes Gerry Goldsholle, former assistant general counsel of Metropolitan Life Insurance Co. and former chairman of the insurance committee of the American Bar Association's Section of Administrative Law.

"The only short-term control that insurance companies have is with their claims policies," said Goldsholle, now chief executive officer of FreeAdvice.com, a consumer legal Web site based in Mill Valley, Calif. "That's why in property/casualty, the claims guys carry the clout."

Taking an extremely hard line on claims--a "scorched-earth defense," as Goldsholle termed it--is a good way for a company to improve its financial results, he said. But this technique of "millions for defense, not one cent for settlement" is nothing new. "It is actually a return to an approach some insurers deployed years ago, because companies who got that reputation were able to intimidate plaintiffs' lawyers and discourage them from suing or settling claims for pennies on the dollar," he said.

While the technique saved money on some claims and discouraged many lawyers from taking cases where certain "tough" insurers were involved, the policy also generated enormous ill will, creating a climate in which courts increasingly allowed punitive damages and bad-faith claims, Goldsholle said.

"In California, it got so bad that the state Supreme Court even allowed bad-faith suits by injured persons against the third-party insurance company," he said. "While counter pressures eventually led the Supreme Court to overrule punitive damages in third-party claims, it has become a matter of public debate--and debates often turn on what will undoubtedly become an example or two of a miscarriage of justice."

So it has a familiar ring when trial lawyers complain these days that All-state refuses to negotiate or accept arbitration awards, preferring instead to go to court if the claimant insists on a trial. There, the insurer exercises all its rights and pulls out all the stops, requesting a jury trial and summoning numbers of expert witnesses, a process that can prove to be drawn-out and costly for plaintiffs. The Association of Trial Lawyers of America said Allstate appealed 60% of arbitration awards in 1999, compared with 25% for State Farm and Farmers Group, reported the Tacoma (Wash.) News-Tribune.

As a result of this strategy, many trial attorneys say they can't afford to take on small auto cases, especially if Allstate insured the at-fault driver. It's not worth it to them to try a $10,000 claim if costs are likely to rise that high.

"Every lawyer knows that a lot of these guys are essentially plaintiffs' mills," Goldsholle said. "People come into these law firms, their cases are handled by low-level legal assistants, and the whole purpose is to get a quick settlement.

"If you can get a $5,000 settlement with one phone call that takes an hour's time, that's a lot more attractive to some lawyers than suing, spending two weeks of their time and going through the court docket to possibly win $20,000. "The emphasis is on possibly; even after those efforts, he added, there's no guarantee that the jury will rule in the plaintiff's favor.

Fighting Fraud

In addition to lowering claims costs, another motivating factor that insurers have in contesting third-party claims for injuries alleged in low-impact crashes is to combat fraud.

According to the National Insurance Crime Bureau, insurance fraud bears a $20 billion annual price tag, costing each U.S. household an average of $170 to $200 in premium each year.

Billy S. Cox Jr., the director of transportation forensic services for Engineering and Fire Investigations, King-wood, Texas, is in the business of unmasking insurance fraud.

Over the past five years or so, many insurers have been making greater use of this company's specialty, bio-mechanical analysis, to investigate soft-tissue claims. The science of bio-mechanics is the study of forces on people and how they respond to those forces, Cox said.

His company, a subsidiary of GAB Robins, Parsippany, N.J., regularly stages low-impact crashes using volunteers. By applying instruments to the volunteers' heads, torsos and lumbar spines, Engineering and Fire Investigations can measure the forces produced when two similarly weighted vehicles collide at speeds of up to 10 mph-- "about the threshold where people start complaining" of injuries, Cox said. "Soft-tissue strain injuries can result from quick, impulsive changes in velocity, as your muscles try to hold your body back."

Cox has encountered a lot of insurers who abide by the axiom, "no damage, no injury," and who will fight a claim if an accident vehicle looks untouched. "But we have found that to be a false assumption," he said.

First of all, many vehicles can handle a more substantial impact of 15 mph without showing damage, Cox said. Insurers also don't figure in a number of variables, such as the claimant's height, how the person is seated and restrained in that seat and the person's medical history he said.

Cox testifies regularly for the defense in cases involving low-impact crashes. Once, a lawyer representing a major carrier designated Cox as its expert witness in a case brought by a woman who said she had suffered an injury to the temporo-mandibular joint, or TMJ. This is the joint that connects the lower jaw to the head. Frequently, people involved in rear-end collisions will cite a TMJ injury, but tests by Engineering and Fire Investigations and other published research generally do not support that, Cox said.

In this instance, the insurer was denying the claim based on the "no damage, no injury" approach. But in examining the case file, Cox noted that the woman was short and had been seated only 8 inches from the steering wheel, thus putting her in position to rebound from the seat and hit her chin on the steering wheel if a rear-end collision of sufficient magnitude occurred. Moreover, pictures in the file showed her with extensive facial bruises.

Cox told the lawyer that he thought the plaintiff had a legitimate claim, "and they settled, but at this point they were two years down the road in the case," he said.

Engineering and Fire Investigations determines that about half the files it peruses are legitimate claims, Cox said. Of the remaining disputed claims, he added, only about 2% ever get to court. These tend to be when plaintiffs demand thousands of dollars in damages for injuries that, if valid, should have healed in a relatively short period of time.

Combatting Fraud

"A lot of these auto accidents are phony," said Barry Zalma, a Culver City, Calif., attorney who specializes in insurance-coverage disputes and the investigation of suspected fraud in insurance claims. "There are little things you see in medical records, like the people who sign in for physical therapy when the doctor's not there. I've seen people who've created phony invoices. They don't even try hard."

Many times when insurers take a fraud case to trial, the plaintiff doesn't appear, Zalma said.

In Zalma's opinion, Allstate deserves to be commended, rather than condemned, for its strategy on soft-tissue claims. "If Allstate is doing what they say, that is, insisting on going to trial when they believe a fraud exists, they deserve all the good things I can say about them," he said. "This is the only way to stop fraud. If an insurer doesn't fight fraud, the word goes out on the street that they are an easy touch, and the claims count goes up."

Moreover, he points out, Allstate, like other insurers, is under no legal obligation to make a third-party settlement unless coverage, liability and amounts owed are clear. "An insurer makes a promise when it sells a policy that if you, the policyholder, hurt someone, it will defend and indemnify. It doesn't say it will pay the injured party whatever he asks for, It doesn't say it has an obligation to do that"

A proactive approach like Allstate's can wind up saving insurers money in the long run, Zalma said. For example, one of his clients insured a storage facility that reported a rash of thefts. The insurer "was getting killed with theft losses, with the maximum payout of $2,500 each."

Suspecting fraud, the insurer elected to take examinations under oath on all suspected claims. As a result of taking a hard line on suspect claims, the insurer found that nationwide its average claims cost--including adjustment and legal fees--decreased. "The average cost went down $250 a claim. Just figure--with 4,000 claims a year, that insurer saved $1 million. Fighting fraud can save money," he said.

As Goldsholle sees it, the vigorous defense of claims when an insurance company honestly believes it is in the right--almost regardless of the short-term costs--is a tactic that many good, respected companies employ.

"Our approach at MetLife was not to settle a bogus claim when we were convinced that we were in the right, and the claim was not at all meritorious," he said. "Coupled with a pay-or-settle policy for those where you think there is merit, it is a principled approach."

U.S. Auto Claims Statistics

Auto writers saw the loss ratio for physical-damage claims drop between 1996 and 1998. The loss ratio for bodily injury and property damage dipped briefly before rising in 1998.

Year                  Earned Premium Incurred Losses Loss Ratio
Bodily Injury and
Property Damage
1996                  $7,841,256,462  $5,381,427,984       68.6
1997                  $7,982,286,412  $5,228,232,642       65.5
1998                  $7,672,939,838  $5,289,973,468       68.9
Physical Damage:
Collision
1996                  $2,344,251,100  $1,765,055,252       75.3
1997                  $2,677,512,956  $1,936,367,884       72.3
1998                  $2,917,767,413  $2,090,266,689       71.6
Physical
Damage: Comprehensive
1996                  $1,327,965,441    $912,222,351       68.7
1997                  $1,699,422,741  $1,079,429,439       63.5
1998                  $1,843,978,750  $1,231,100,619       66.8
Note:
Lossess include all loss-adjustment expenses and adjustments for incurred
but not reported reserves.
Sources:
Insurance Services Office Inc. National Association of Independent
Insurers and National Institute of Statistical Sciences

The Fraud Factor: Insurance Rates on the Rise

Fighting claims fraud is one way to help slow rising insurance rates, said John G. Richards, former South Carolina insurance commissioner.

Richards, an insurance commissioner for more than a decade, was an active member of the National Association of Insurance Commissioners when that group began delving into the problem of insurance fraud. Currently, he is vice president for new business development at Mynd Corp., a Columbia, S.C.-based provider of enterprise and electronic-commerce application software, professional services and outsourcing for the insurance and financial-services industries,

As commissioner, he presided over hearings in the early 1990s on an insurance company's request for a rate hike amid increasing consumer distress. South Carolinians like their counterparts across the United States, were complaining about the rising cost of auto insurance, Richards said.

"One thing I found--and I didn't think the industry was doing as much about this as it could--was the issue of fraud" as a factor behind rising insurance rates, Richards said. "I and the other commissioners began encouraging insurance companies to address this issue."

The commissioners began asking their state legislatures to create fraud bureaus and to recommend that insurance fraud be made a major felony.

Richards said he encouraged insurers in South Carolina to investigate suspicious third-party claims in detail. If they determined that these claims did not merit payment, he advised the insurers to fight them and, if necessary, take them to court.

"At the same time, as a regulator, I felt any legitimate claim should be paid fairly and promptly" he said.

Richards said he has little patience with tort attorneys who criticize insurers for taking a tougher stance on injury claims from low-impact auto accidents.

"You have to view this in the full light of day," he said. "I would question what portion of the legal community was taking this action--was it because of legitimate concern or self-interest?"

The Cost of Fraud

Insurance fraud declined from 1996 to 1997, the most recent years for which figures are available. Data show the money lost to claims fraud decreased in all sectors of the industry.

                                                       %
                            1996          1997      decrease
Overall claims fraud    $85.4 billion $79.7 billion   7.0
Health claims fraud     $58.4 billion $53.9 billion   7.7
Auto claims fraud       $14.3 billion $13.9 billion   2.8
Business and commercial
claims fraud            $10.6 billion  $9.8 billion   7.5
Source: Coalition Against Insurance Fraud

Actions Against Allstate

Allstate Insurance Co. might wish its headquarters in Northbrook, Ill., came equipped with a moat and a drawbridge.

The insurance company is decidedly under siege, the object of numerous lawsuits attacking its claims policies in dealing with minor-impact auto accidents or challenging the legality of literature the company sends to victims of car crashes involving its policyholders.

Some of the more recent proceedings to generate headlines:

* In February, a state Supreme Court judge in Nassau County, N.Y, levied $11,000 in sanctions against Allstate for refusing to agree to a compromise on its policyholder's liability in an auto-accident case. The judge blamed Allstate for taking an "obstructionist" position and forcing a trial. If this opinion is affirmed, trial lawyers think it would allow courts to punish insurance carriers whom judges find intransigent. Defense lawyers have filed an appeal, arguing that the court had no jurisdiction over the defendant's insurance company.

* In January, a state Superior Court judge in King County, Wash., ruled that Allstate's representatives wrongly acted as lawyers to prevent claimants from hiring their own attorneys.

The female plaintiff had been badly injured in an auto accident by a driver insured with Allstate. His liability limit covered only one-third of the woman's medical expenses of $75,000, according to the Seattle Times.

After the accident, the newspaper reported, Allstate claims adjusters allegedly contacted the victim and told her they would serve as her claims representatives, provided she didn't hire her own lawyer. The judge reasoned that this was an apparent conflict of interest, the Seattle Times said, since an insurer aims to minimize the money it pays out to claimants against its policyholders and, therefore, can't legally represent those claimants.

As of mid-March, Allstate's appeal was still pending, said Christine Sullivan, director of Allstate Property & Casualty Claims Service Organization.

* The same issue surfaced in March when a Crystal Springs, Miss., woman filed $250 million lawsuit against Allstate for allegedly telling her she did not need a lawyer for her auto-accident claim.,

* Robert I. Reardon, a New London, Conn., lawyer and former president of the Connecticut Trial Lawyers Association, is suing Allstate in federal court for fraud and bad faith, based on the insurer's "Do I Need an Attorney?" campaign. Reardon said he was taking the action on behalf of injured people with claims against Allstate who say they were discouraged from retaining counsel and subsequently received settlements that were too low, the Connecticut Law Tribune reported in February.

Controversial Pamphlet

Allstate said its pamphlet answers those questions it has received most often from accident victims. "People think if they're injured they must seek the assistance of an attorney immediately," said Deborah Campbell, vice president of Allstate's claims organization, in comments to Best's Review last year. "We're trying to let people know what their choices are, and whatever choice they make, we will honor it."

Despite recent lawsuits, Allstate is not rethinking its use of the controversial pamphlet. "There's really no thought or plan to change our current process," Sullivan said. "We've had a number of inquiries from states' attorney general offices and state bar associations, and we've worked with them to modify or change some of the language. But we have no plans to change our approach."

Allstate has renamed the pamphlet, "The Role of the Attorney in the Claims Process."

"This will supply claimants with straightforward information," Sullivan said.

Battle Tactics

Beyond the courtrooms, tort lawyers have been marshalling their forces. After a frustrated attorney in Washington state last year organized a seminar called "How to Hammer Allstate," with tips on ways to impeach the insurer's experts, the idea caught on with trial-bar associations across the United States. Even the Association of Trial Lawyers of America, which had never before held a seminar targeting a single company, drew hundreds of listeners last October to its four-hour conference call on the topic.

Distrust of Allstate runs so high among these attorneys that the bar associations have kept information on their seminars as secret as possible. The national association, several state chapters and some activist lawyers did not respond to requests to be interviewed for this article.

Allstate officials brush off the lawyers' seminars as inconsequential.

"We're really not overly concerned about what the trial bar does with its seminars," Sullivan said. "We're more concerned that the claims-handling process provides consistency."

In 1994, the insurer began redesigning this process after an in-depth internal study looked at how Allstate dealt with claims and found numerous inconsistencies, Sullivan said.

"We're the first to admit we had some inconsistent claims practices out there--we were offering too much or too little in some cases," said Jim Dudas, a company spokesman. "We're trying now to bring a level of fairness."

Settlement Software

One of the lawyers' biggest complaints is Allstate's method of determining settlements. The company uses a licensed software program called Colossus, which analyzes historical data on similar accidents and calculates how much a particular injury is worth. But critics say it fails to account for an individual's pain and suffering.

Allstate's Sullivan said the company doesn't rely solely on the program to reach a claim amount. "This is a recommended guide for adjusters, simply a guide and a tool," she said. "The adjuster still is responsible for evaluating each claim on an individual basis."