Farmers Insurance and Xactware Xactimate

Farmers Insurance uses a software program called Xactimate
Program Name: Xactimate
Maker: Xactware
Parent Company: Insurance Services Office

State Attorney General Charles Foti filed a lawsuit against Farmers Insurance and other companies.

Once enough companies are on board using a certain product, others are under pressure to follow. Farmers, according to the suit, visited with other leading insurance companies in 1998 and 1999, and when it saw the financial benefits of using the standard claims-processing software, it started using Xactware, too.

Foti sues insurers over storm payouts

Six firms accused of colluding to limit returns to policyholders Thursday, November 08, 2007 By Rebecca Mowbray

State Attorney General Charles Foti filed a lawsuit in Orleans Parish Civil District Court late Wednesday alleging collusion, price fixing and antitrust violations by six major insurance companies, including State Farm and Allstate, as well as the firms that manufacture their claims-processing software and companies that offer them advice and collect their data.

The suit, filed in conjunction with several law firms heavily involved in Hurricane Katrina litigation, is based on the work of an ongoing investigation by Foti, who lost his re-election bid in the Oct. 20 primary.

In a statement released Wednesday night, Foti said the companies named in the suit violated the Louisiana Monopolies Act.

"This alleged scheme gave insurers an unjust advantage over policyholders, which they used before, during and after one of the greatest disasters this country has ever suffered, by reaping huge profits from the misfortunes of persons whom they pledged to protect from the risk of loss. I believe this unjust advantage resulted in the unjust enrichment of themselves to the detriment of the state, policyholders and commerce in Louisiana," Foti said. "But to be clear, these abuses were not new to the recent hurricanes."

Bob Hartwig, an economist who is president of the Insurance Information Institute trade group, said Foti's accusations are baseless.

"To allege that insurers act collusively in the settlement of claims is an accusation that has no merit whatsoever," Hartwig said. "Insurers operate independently from each other in settling claims. They do not consult with one another, and they adjust those claims according to their individual contracts with their customers."

In Louisiana, insurers paid out $28 billion on 1.2 million claims of all types from Hurricanes Katrina and Rita. "Those are very substantial numbers," Hartwig said. "Much of the rebuilding that's going on in Louisiana today is being done with insurance money."

The suit names State Farm Fire and Casualty Co. and Allstate Insurance Co., Louisiana's two largest residential insurers; Farmers Insurance Exchange, the state's fifth-largest homeowners insurance company; Standard Fire Insurance Co., better known as Travelers, the state's seventh-largest home insurer; military insurer USAA Casualty Insurance Co., the eighth-largest homeowners policy company; and tiny Lafayette Insurance Co., a division of United Fire Group.

The suit also names Marshall & Swift/Boeckh LLC and Xactware Solutions Inc., companies that manufacture leading claims-adjusting software; and Xactware's parent company, insurance data collector Insurance Services Office Inc. It also names McKinsey & Co., an international consulting firm that has advised many major insurance companies on practices to adopt in computing claims.

Many of the companies named in the suit could not be reached for comment after the filing of the lawsuit late Wednesday afternoon.

A McKinsey spokesman said his company doesn't comment on anything related to client work. Officials at Allstate and Travelers said they couldn't comment because they hadn't seen the suit, as did State Farm, which also said it stands by its claims-handling procedures.

"We haven't seen the suit. What I can say is that we handle each claim individually based on the merits of the claims based on our contracts with our policyholders," State Farm spokesman Fraser Engerman said. "We pay what we owe."

USAA spokesman David Snowden said attorneys for the company are reviewing the suit. "USAA's claims practices are based on a foundation of ethics, fairness and integrity," he said. "Since Hurricane Katrina, we've worked with our members to individually resolve more than 20,000 claims in Louisiana."

The sweeping suit says the defendants violated the Louisiana Monopolies Act and conspired to manipulate commerce for their own enrichment "by rigging the value of policyholder claims and raiding the premiums held in trust by their companies." Furthermore, the suit contends that companies "coerced their policyholders into settling their claims of damages for less than their value by editing engineering reports, by delaying payment and by forcing policyholders to litigate claims to receive full value."

The suit also says many insurance companies used the same consulting firm, McKinsey, to devise a strategy for reducing claims, and the success of those companies created financial pressure for others in the industry to follow.

By using claims-processing software manufactured by Marshall & Swift/Boeckh and Xactware, the industry has been able to standardize its tactics for low-balling claims and create a "tainted" database of claims settlement figures that the industry uses to further depress estimates for what people need to repair their homes, Foti alleges in the suit. Meanwhile, all of the data is centralized by Xactware's parent company, Insurance Services Office, better known as ISO, allowing companies to collude.

By using the outside vendors to unify "power and control," insurers systematically reduce the percentage of premium dollars that companies return to policyholders in the form of claims payments "under a shroud of secrecy," the suit says. While the industry has historically paid 70 cents on every premium dollar collected back to policyholders in claims payments, in Katrina, it paid 50 cents for every premium dollar, the suit says.

Foti's suit was filed in conjunction with Baton Rouge sole practitioner Joseph McKernan; New Orleans sole practitioner Mark Glago; and the New Orleans law firms of Herman, Herman, Katz & Cotlar and Capitelli & Wicker. The firms are working with Jane Johnson, Louisiana's assistant attorney general for antitrust issues, without any guarantees of earning legal fees.

Alex Watkins, an attorney at Capitelli & Wicker, said a number of plaintiffs lawyers went to the attorney general's office in mid-August with concerns about a larger pattern of conspiracy behind claims denials. At that time the St. Rita's nursing home case was unfolding, and Foti was under pressure to file suit against the Road Home program to collect underpaid insurance claims on behalf of grant applicants. Foti's office was interested, Watkins said, and launched an investigation that is ongoing.

With Foti scheduled to leave office in January, it is unclear what will happen to the price-fixing suit once a new attorney general is chosen this month.

In Mississippi, Attorney General Jim Hood filed suit against insurance companies shortly after Katrina. He dropped the criminal probe in January when State Farm agreed to reopen and consider settling thousands of claims. Last week, State Farm sued Hood, saying he had violated the terms of the deal ending that probe and has been harassing the company.

In May, a federal grand jury in Mississippi issued subpoenas for documents to Allstate and to Nationwide Mutual Insurance Co., which does not operate in Louisiana.

The suit Johnson drafted relies heavily on the theories of New Mexico attorney David Berardinelli, who wrote a book about the McKinsey company's work for Allstate called "From Good Hands to Boxing Gloves." The title of the book is taken from a McKinsey slide advising the company to don boxing gloves and pummel anyone who doesn't accept settlements for pennies on the dollar.

Foti's suit says insurance companies engaged in horizontal price-fixing "with the explicit approval of insurer management," and strategies to delay and deny claims. In the face of such strategies, homeowners are essentially buying insurance that will never adequately compensate them, meaning they are overpaying on their premiums.

The suit takes note of the record profits achieved by the industry in 2005 and 2006, despite fielding the most expensive hurricane seasons ever in 2004 and 2005.

In alleging the conspiracy, Foti's suit notes the vast influence that outside firms McKinsey and the software companies have on insurance companies. McKinsey, for example, advises two-thirds of the nation's Fortune 1,000 companies and has worked with State Farm, Allstate and other major insurers.

ISO says in news releases that it has a searchable database of more than 500 million insurance claims, and its Xactware is used by 16 of the nation's top 20 property insurers, the suit says. The company's software allows insurers to monitor what claims adjusters are doing through an XactAnalysis Quality Review, compare their work to the latest prices reported in the software's industry trend reports and to assign reinspections.

The trend reports allow insurers "to share the current prices being submitted by competitors and thus coordinate the horizontal price-fixing suppression, or attempted suppression, of the overall market in repair services at virtually every geographic level and price component," the suit says.

By December 2005, the cost of repairing a home in the New Orleans area had doubled since before the storm, and the cost of completely rebuilding a home had gone up by 50 percent, the suit says, yet the price lists of the insurers named in the suit had increased by only 15 percent to 20 percent.

The suit cites quotes by Frank Coyne, chairman, chief executive and president of ISO, boasting that computerized claims software and aggregated data are changing how companies do business, while companies that don't follow are going out of business. "In just a decade and a half, approximately a third of the insurers serving the United States vanished as escalating competition ate into top-line revenue growth and bottom-line profitability. But it isn't just the intensity of competition that's changing. . . . The nature of the competition is changing too, as advances in predictive modeling and other analytical techniques enable leading insurers of all sizes to target their marketing, underwriting and pricing as never before."

Claims adjusters, the suit says, are pressured or required to accept the pricing database information from the Xactware or Marshall & Swift/Boeckh software in the estimates they write if the adjusters want to be able to close claims and get paid for the work.

While the companies purport to be providing an independent and objective benchmark for pricing, the suit says, "they intentionally devalue the market price in order to underpay their policyholders and/or artificially deflate or attempt to deflate construction and repair costs in the affected market."

Meanwhile, the suit says State Farm has testified under oath that it can modify Xactware's price lists before adjusting claims. A pricing specialist conducted surveys of building material suppliers for the latest prices and updated its New Orleans prices several times per quarter between 2005 and 2007. However, the suit says, a State Farm price list containing 10,000 different items was exactly the same as a Travelers price list on Nov. 15, 2005, something that would be "a statistical impossibility without collusion."

No specific damage figure is mentioned in the suit, which asks for all damages, including but not limited to, treble damages, attorneys fees and costs, injunctive relief and all equitable, declaratory and general relief.

Xactware Xactimate Lawsuit

The Schafers now allege that State Farm used Xactimate, a Xactware software program, to determine the replacement value of their lost and damaged property. The Schafers claim that in determining the value of a claim, the software program uses a pre-determined price for each damaged item. The Schafers allege that: (1) State Farm requires claims adjusters to use the pricing set forth in the software program; (2) the prices in the software are below market value; and (3) Xactware works with various insurance companies who receive similar below market pricing databases

A number of complaints have been filed with the Justice Department regarding what appears to be an effort to fix prices in the property insurance claims repair business. It involves a company called Xactware, which is a wholly-owned subsidiary of the Insurance Services Organization.
I am an independent business owner and the practices in question impact my business, my employees and my family.
Can you make an inquiry about the status of these complaints?
Thank you.

Write a Letter to the FTC regarding Xactware

Click here to file complaint.

Here is an example letter:

To whom it may concern;
I am writing regarding a situation in the property damage restoration industry. This is primarily concerned with residential and small commercial losses and what I (and others) perceive as an attempt to impose pricing controls by the insurance industry at large through a company called Xactware located at:

Corporate Headquarters
1426 East 750 North
Orem, UT 84097
(801) 764-5900
Fax: (801) 224-5218

www.xactimate.com

Xactware currently claims that 80% of all insured losses are run through their estimating program.
“Eighty percent of insurance-repair contractors and 16 of the top 20 property insurers use Xactimate to determine the cost of repairs.” (From their website)

They produce a pricing database, which they market as a “pricelist”, which is actually a database of information of previously submitted settlement numbers for typical processes heavily dependent on “feedback” from insurance companies and from captive contractors who have agreements with those insurers to use the database as a “pricelist”. This methodology results in a self-fulfilling prophecy as insurers and their contracted companies feed back information to establish a “pricelist”.

The methodology is not based upon a reproducible definition of costs, particularly overhead costs. It uses circular logic to describe an item called “labor overhead” that is virtually wholly dependent upon the questionable data fed back to Xactimate.

As a practice, insurers, through their adjusting procedures, attempt to impose compliance with these “pricelists” by contractors as a broad group.

Because of Xactimate’s position in the industry, at the very least I believe they should be enjoined from presenting their data as a “pricelist”."

I know that I have, on numerous occasions over several years, both privately and publicly asked that Xactwae not represent their product as a price list-because it is not.

When pressed they will respond with canned replies that they do not set price, etc. etc. but continue to market their product as a "pricelist" thus implying that it is a "pricelist" and perpetuating the abuses of that product by many in the insurance industry.

I understand the marketing position they are trying to exploit, but this practice is deceptive and, I believe damages many in the restoration industry.

I hope there are others who are willing to express the same sentiments.

Ron Reese, CR, WLS

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