Bloomberg Outs the Insurance Industry Michael Panzner In Chapter 13 of Financial Armageddon, I touch upon the issue of insurance and the risks that Americans need to be aware of in the troubled times ahead when choosing providers, deciding on coverage options, and selecting and maintaining policies. Among other things, I note that besieged by financial pressures, insurers are likely to revoke many existing policies following claims. In some cases, cancellations will come even in the absence of misfortune, as entire underwriting lines or geographic regions are eliminated because of losses. Many policies will offer less value for the money. Rising red ink, falling investment returns, and growing counterparty woes will leave numerous insurers at risk of failing themselves. Under the circumstances, they will inevitably boost premiums, scale back coverage, and take a much harder line about honoring the terms of outstanding policies. According to Bloomberg, that future is already here. In the September issue of Bloomberg Markets magazine, there is an eye-opening series of cover-story articles collectively entitled "The Insurance Hoax" that details the extent to which the industry is already working against the interests of its customers. For those who don't have access to the print edition, the reports are also available online. Here are the links, along with an excerpt from each article: "Home Insurers' Secret Tactics Cheat Fire Victims, Hike Profits"  by David Dietz and Darrell Preston  Julie Tunnell remembers standing in her debris-strewn driveway when the tall man in blue jeans approached. Her northern San Diego tudor-style home had been incinerated a week earlier in the largest wildfire in California history. The blaze in October and November 2003 swept across an area 19 times the size of Manhattan, destroying 2,232 homes and killing 15 people. Now came another blow. A representative of State Farm Mutual Automobile Insurance Co., the largest home insurer in the U.S., came to the charred remnants of Tunnell's home to tell her the company would pay just $220,000 of the estimated $306,000 cost of rebuilding the house. ''It was devastating; I stood there and cried,'' says Tunnell, 42, who teaches accounting at San Diego City College. ''I felt absolutely abandoned.'' Tunnell joined thousands of people in the U.S. who already knew a secret about the insurance industry: When there's a disaster, the companies homeowners count on to protect them from financial ruin routinely pay less than what policies promise. Insurers often pay 30-60 percent of the cost of rebuilding a damaged home -- even when carriers assure homeowners they're fully covered, thousands of complaints with state insurance departments and civil court cases show. Paying out less to victims of catastrophes has helped produce record profits. In the past 12 years, insurance company net income has soared -- even in the wake of Hurricane Katrina, the worst natural disaster in U.S. history. Highest-Ever Profits Property-casualty insurers, which cover damage to homes and cars, reported their highest-ever profit of $73 billion last year, up 49 percent from $49 billion in 2005, according to Highline Data LLC, a Cambridge, Massachusetts-based firm that compiles insurance industry data. The 60 million U.S. homeowners who pay more than $50 billion a year in insurance premiums are often disappointed when they discover insurers won't pay the full cost of rebuilding their damaged or destroyed homes. Property insurers systematically deny and reduce their policyholders' claims, according to court records in California, Florida, Illinois, Mississippi, New Hampshire and Tennessee. The insurance companies routinely refuse to pay market prices for homes and replacement contents, they use computer programs to cut payouts, they change policy coverage with no clear explanation, they ignore or alter engineering reports, and they sometimes ask their adjusters to lie to customers, court records and interviews with former employees and state regulators show. 'It's Despicable' As Mississippi Republican U.S. Senator Trent Lott and thousands of other homeowners have found, insurers make low offers -- or refuse to pay at all -- and then dare people to fight back. ''It's despicable not to make good-faith offers to everybody,'' says Robert Hunter, who was Texas insurance commissioner from 1993 to 1995 and is now insurance director at the Washington-based Consumer Federation of America. ''Money managers have taken over this whole industry,'' Hunter says. ''Their eyes are not on people who are hurt but on the bottom line for the next quarter.'' "State Farm Withholds Coverage From Injured Student" by David Dietz Katherine Merritt suffered a fractured skull and crushed face after the car she was riding in was hit head-on by a sport utility vehicle. Merritt, a 29-year-old graphic designer and waitress from Marietta, Georgia, says she didn't find out until two years after the 1996 accident that State Farm Mutual Automobile Insurance Co. was holding out on her as she sought payment for her hospital bills. The company had not told her about a $1 million ''umbrella policy'' it sold the driver of the SUV, her lawyers later discovered. An umbrella policy provides extra liability coverage for both home and auto accidents. Merritt's attorneys collected files of 53 State Farm cases in which drivers had umbrella coverage. In 37 of the cases, State Farm didn't disclose the policies until lawyers appealed through numerous letters or sued, according to the lawsuit. State Farm has tried to avoid paying millions of dollars in umbrella policy payments to auto accident victims making claims against company customers, lawsuits show. State Farm changed its approach to settling claims after McKinsey & Co., a New York-based consulting firm, told the insurer it could increase profits by paying out less in auto accident claims and home disasters, according to evidence presented in civil court cases. ''This is part of a system in the industry to squeeze an extra dime out of the claimant,'' says Robert Altman, an Atlanta attorney who represented Merritt in a 1998 suit in Georgia's Cobb County Superior Court that accused State Farm of fraud for hiding the SUV driver's umbrella policy. 'We Apologize' Merritt settled the case out of court in 2002 for an undisclosed sum. State Farm said incomplete computer files and miscommunication among company representatives were at fault for failing to disclose the extra policies, company letters in Merritt's lawsuit say. ''I assure you this was strictly an oversight on our part, and we apologize for any inconvenience this has caused your client,'' Tom Ellerbee, a State Farm claims superintendent, wrote to Athens, Georgia, attorney John Kardos in 1995. Kardos represented Richard Sims, a Georgia truck driver, who was incapacitated for months by an accident in February 1995 with a car whose driver was insured by State Farm. State Farm had at first offered Sims $100,000 while not disclosing that the other driver carried extra liability coverage of $1.1 million, court records show. Sims settled in 1996 for a $288,000 payment that included a 15-year State Farm annuity. "Hartford Erases Insurance Clause, Leaves Doctor With Fire Loss" by Christine Richard When fire swept through Terry Bennett's house in Hampton Falls, New Hampshire, on Aug. 2, 1993, the Harvard-educated doctor lost his four-story, custom- built dream home. It had been filled with artwork, antiques and classic cars collected over a lifetime. For more than a decade, Bennett, now 69, a general practitioner, fought Twin City Fire Insurance Co., a unit of Hartford Financial Services Group, to recover $20 million of losses not paid by his insurer. Years into his legal battle, Rockingham County Attorney James Reams investigated in 2003 and found that the insurance company had secretly deleted a section promising replacement coverage in Bennett's policy after the fire. ''This changing of the contract after a loss has been uncovered only because Dr. Bennett has the personal resources and determination to fight this injustice,'' Reams wrote in an April 21, 2003, letter to New Hampshire Attorney General Peter Heed. ''It may well be that this is not an isolated instance and may affect many policies and claims.'' The local office lacked the resources to fully investigate, he wrote. Both the New Hampshire Attorney General and the New Hampshire Insurance Department have so far declined to hear Bennett's case. When Bennett applied for coverage, his independent insurance agent, Mark Rowley, valued the doctor's house at $1 million pending an inspection, Rowley said in an Aug. 7, 1998, deposition. No Inspection Rowley said Bennett had also applied for replacement coverage, so he would be fully protected regardless of the initial estimate. Individual works of art and jewelry were to be separately insured, according to the sworn testimony. Twin City did no inspection before a fire destroyed Bennett's house six weeks after the policy was written, court records show. The Hartford, Connecticut-based insurance company paid Bennett $1 million for the house and another $700,000 for contents based on a formula that provided 70 percent of the house's value, according to a Sept. 10, 2002, filing with the Strafford Superior Court by Bennett's attorneys. By eliminating the replacement cost coverage, Hartford reduced its payout to Bennett by $1.02 million, according to the filing. Bennett oversees one of the last independent medical practices in New Hampshire. He says he can't talk about Twin City or Hartford, the sixth-largest U.S. insurer by market value, because he signed a secrecy agreement when he settled with the company in 2004. 'Burned in Process' Papers filed in his court case detail his dispute. ''I relied on Hartford and got burned in the process,'' Bennett said in a July 3, 2001, deposition. Gary Turk, a former Hartford employee, said in an Aug. 28, 2002, deposition that he deleted the replacement coverage request before the fire because Hartford didn't offer it on homes valued at more than $750,000 and that he requested a letter be sent to Bennett's agent notifying him of the change. Both Bennett, in a May 30, 2003, petition with the state insurance department, and Rowley, in an Aug. 4, 2002, deposition, said they hadn't seen the letter or consented to the change. Debora Raymond, a spokeswoman for Hartford, says the company met all of its obligations to Bennett and that the New Hampshire Insurance Department examined the case and found Bennett's arguments had no merit. The insurance department agreed to a hearing on June 10, 2003, and then canceled it under the supervision of newly appointed Insurance Commissioner Roger Sevigny, who had worked at Travelers Insurance Cos. for 30 years. Deleted For Reason Leslie Ludtke, the hearing officer for the department, says officials needed to gather more information and that the cancellation was not related to the change of commissioners. On July 7, 2004, without having conducted a hearing, the department issued a report saying Hartford appropriately deleted Bennett's replacement coverage because it violated company guidelines on file with the department. Bennett produced sworn testimony to the contrary. "Roofless Homeowners Win After State Farm Denies Tornado Claim" by Darrell Preston Michele Ray says she felt secure with her State Farm Mutual Automobile Insurance Co. homeowner's insurance. She had been a clerk in a State Farm agency for 12 years and says the company served its customers well. Then a tornado struck her brick ranch house just outside Hendersonville, Tennessee, on April 7, 2006. Eleven months later, Ray, 53, and her husband Tim, 57, were still living in their house under tarps, the living room floor covered with boxes once stored in their attic. That's because State Farm refused to pay what it would cost to rebuild, saying the damage wasn't caused by the tornado. The Rays would have to start from scratch to restore the house, two engineering firms and a contractor told them, because the foundation was ruined. In March, the Rays were waiting to be paid so they could repair the 1,800-square-foot (167-square- meter) home where they've lived for 23 years. State Farm had offered $97,000 toward the $254,000 the engineers and contractor said it would cost. State Farm's engineer, Robert Warren, owner of Warren Engineering in Murfreesboro, Tennessee, concluded that the tornado couldn't have damaged the house enough to need rebuilding. The Rays' State Farm agent, Ken Flatt, who saw the damage, had recommended the company pay the full amount, Ray says. Flatt declined to comment. Just before the tornado struck at about 2:30 p.m., Tim called Michele at work at the Jason Foundation Inc., a nonprofit company that works to prevent teen suicide. He wanted to warn her that the storm was heading for their neighborhood. 'A War Zone' Michele ran to her car for the five-minute drive home, where her mother was staying. She remembers seeing the tornado as she drove. It was 200 yards (183 meters) wide, according to a National Oceanic & Atmospheric Administration report. Winds gusted as high as 206 miles (332 kilometers) per hour. That's strong enough to rip roofs and walls off houses, uproot trees and overturn trains, according to the Fujita scale of tornado intensity. When Ray got to within six blocks of her house, the road was blocked. She got out of her car and ran, jumping over power lines and around downed trees and passing the roof of a house. ''It looked like a war zone,'' she says. She found her mother alive in a corner of the basement. Her home was devastated. The tornado's wind caused drywall to split and floors to buckle. Some bricks in the walls were so loose they could be pulled out and pushed back again. 'I Was Brainwashed' ''I was brainwashed by State Farm; I thought they were a good company,'' Ray says. ''When it comes down to it, you can't count on what they have told you.'' At the center of the dispute with State Farm were cracks in the wall of the basement. The Rays say the cracks were caused by the storm. Two engineering firms, Lamb Engineering of Hendersonville and Anthony Locke of Goodlettsville, Tennessee; a contractor, Joe Pope; and Hendersonville's chief building and codes inspector, D. Scott Morrissey, also reached that conclusion. State Farm's engineers say the cracks existed before the tornado. After the storm, State Farm sent a succession of adjusters. The first two didn't assess damage to the house. On May 15, 2006, a representative who came to the house told the Rays that basement cracks weren't caused by the tornado, Michele says. As a result, State Farm sent the Rays a check for $36,000, which Michele returned to her agent, Flatt. ''They completely denied that the tornado had done any damage to the basement,'' Ray says. Conflicting Reports Warren never inspected the house, Ray says. ''He never set foot on my property,'' she says. Warren says he sent an engineer, Michael Nocton, to visit. Warren says water pressure in the soil had damaged the foundation over the years. ''The displacement of the foundation wall is inconsistent with how the tornado damaged the house,'' Warren says he determined after seeing photos taken by Nocton, who didn't return calls for comment. While there are usually two sides to every story, I believe the reports represents a damning indictment of an industry that many people assume will be there when they need it most. Based on how things are going already, that expectation, like so many others, may prove increasingly wide of the mark. Michael J. Panzner When the stock market bubble burst in 2000, the collapse that followed wiped out over two-thirds of the value of the Nasdaq Index and decimated the hopes and dreams of millions of Americans. Now, imagine not one, but four such disasters looming on the horizon, all poised to erupt in a massive economic firestorm that will wreak widespread havoc in the months and years to come. The author identifies the most pressing financial risks we face today: First, a burgeoning tower of public and private debt wobbling precariously on a foundation of excess and fraud; second, a multi-trillion-dollar house of cards to which all Americans are exposed but few understand; third, a vast array of largely hidden government promises that will ultimately go unkept; and fourth, a retirement mirage that will leave millions enslaved to the workplace until the day they die.