State Farm fined $775,000 for insurance allegations

Donna Halvorsen
Star Tribune
Published Dec. 5, 2002

State Farm Insurance has agreed to pay $775,000 in civil penalties and investigative costs for allegedly violating Minnesota insurance laws, the state Department of Commerce said Wednesday.

But the cost to the company may be much higher in policy adjustments, as some homeowners' insurance premiums will be reduced.

Commerce Department officials said State Farm illegally hit owners of older homes with surcharges, made it difficult for accident victims to get medical bills paid and steered business away from independent auto-glass shops.

While denying the allegations, the company has agreed to change its practices in all three areas.

As a result of the agreement, auto-accident victims could get faster payment on medical claims, and auto-glass shops not affiliated with State Farm may get more business.

State Farm, Minnesota's biggest home and auto insurer, said the agreement was in the best interest of its policyholders.

Commerce Commissioner Jim Bernstein said the fines and costs State Farm agreed to pay in Minnesota represent the largest amount the company has paid to any state insurance regulator.

Bernstein said State Farm officials never told him or investigators why they engaged in behavior the state considered illegal. "I think greed and bad judgment got in the way," he said.

State Farm claims manager Lee Smiertelny said most of the amount paid in the settlement reimburses the department for its investigative costs. All the money will go into the general fund, said Commerce spokesman Bruce Gordon.

"Our first concern is always our policyholders," Smiertelny said. "The agreement we made with the Department of Commerce on these complicated issues really reflects our best effort to keep in mind our policyholders and our relationship with the Department of Commerce.

State Farm has 22 percent of the homeowners insurance market in Minnesota and 19 percent of the auto market. The breakdown of the fines and costs require State Farm to pay $500,000 for the medical claims, $200,000 for the auto-glass infractions, and $75,000 to settle the home insurance issues.

Medical claims

State Farm was accused of pressuring the independent medical personnel who checked out no-fault medical claims to change their opinions in order to reduce costs. (The no-fault law was intended to reduce lawsuits and provide prompt treatment for accident victims regardless of who caused the accident.)

As a result, State Farm agreed to:

Stop forcing policyholders to go to court to get benefits they are entitled to by law.

Stop using chiropractors' reports to deny or reduce benefits for non-chiropractor medical treatment .

Set up rules to prevent the company from influencing or changing the results of independent medical exams.

Provide medical records to those conducting medical exams before the exam.

Stop disclosing personal information without the policyholder's approval.

Hire a consultant to review its procedures for handling no-fault claims.

Bernstein said he's aware of complaints that other insurers in the state have violated the no-fault provisions as well, and the state will take action against them "if these companies do not change their practices."

Auto glass

In the auto-glass matter, officials say State Farm paid less than the "fair market" price to glass shops on more than 1,800 auto-glass claims. Instead, the insurer paid a price usually about 55 percent of the list price.

As a result, State Farm agreed to:

Pay at least 86 percent of the list price for auto-glass claims received since July 27 and not yet paid in full. In the future, it will use a new system that will be fairer to independent glass companies, Bernstein said.

In instances when policyholders want to use a glass shop outside State Farm's network, the company will obtain bids and pay the lower amount to the glass shop chosen by the policyholder.

Home insurance

The Commerce Department said State Farm illegally based premiums on the age of houses, not the age of the electrical systems, in its utility rating plan. State law prohibits charging higher premiums based solely on the age of the home in order to avoid "red-lining" -- discrimination based on geographic location.

Under the agreement, premiums on homes 40 years old or older will be reduced by 3 to 18 percent after surcharges are removed. Some 149,510 State Farm policyholders in Minnesota are paying surcharges.

-- Donna Halvorsen is at dhalvorsen@startribune.com .

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