MAY 1, 2006
LEGAL AFFAIRS
In Tough Hands At Allstate
It's fighting accusations that its methods deny policyholders legitimate benefits
David Berardinelli is something of a bon vivant. The Santa Fe (N.M.) plaintiffs' lawyer collects fine wine, has chefs from local restaurants over to cook in his home, and restores classic Porsches. He's also about to become a published author.
His book, From Good Hands to Boxing Gloves, won't burn up the best-seller lists. But it's already making waves. It tells the story of the key role played by management consultant McKinsey & Co. in reengineering auto insurance claims operations at Allstate Corp. (ALL ) -- and it's a story Allstate doesn't want told.
In February, a New Mexico state court rejected Allstate's efforts to keep Berardinelli from publishing his book, which will be marketed to trial lawyers nationwide later this year. Since 2004, Allstate has been defying an order by the same court to make available public copies of some 12,500 PowerPoint slides McKinsey prepared for the insurer, which form the basis of the book. That's quite unusual -- big companies almost never ignore judicial orders. In a court filing, Allstate has characterized its actions as "respectful civil disobedience."
What is it that Allstate so badly wants to keep under wraps? In a written response to BusinessWeek, the insurer says the McKinsey material contains proprietary business secrets. The documents also present a clear risk to the company's reputation. The title of Berardinelli's book is drawn from a McKinsey slide that suggests that Allstate should treat some of its claimants with "boxing gloves," rather than with its trademark "good hands." Collectively, the documents present a portrait of business strategies that are at odds with the insurer's carefully cultivated public image. Rather than simply rushing to the scene of an accident and doling out cash, Allstate deploys a variety of systems set in place by McKinsey to make sure it pays the minimum necessary -- and it plays hardball with those who seek more.
Berardinelli, 57, has provided BusinessWeek an exclusive copy of a draft of the book, as well as more than 200 typed pages of notes he took on the McKinsey slides. His tale illuminates the largely hidden role McKinsey has played as a key architect of claims practices in use across the insurance industry today. In addition to advising Allstate, McKinsey has also done work for Farmers Insurance Group, USAA, State Farm, and Fireman's Fund (AZ ). While many of the cost-reduction strategies McKinsey recommended at Allstate remain in place, some have been reined in following legal and regulatory challenges in several states.
EPIC WAR
Berardinelli's book is certainly a partisan one, written to support "bad faith" lawsuits that he and other attorneys have filed against Allstate alleging mistreatment of policyholders. He says that the McKinsey project, which lasted from 1992 until at least 1997, institutionalized aggressive practices aimed at enriching investors at the expense of customers. "When you strip away all the fancy jargon, all this is a plan for switching money from the policyholders' pockets to the shareholders' pockets," he maintains. In the decade after Allstate instituted the McKinsey program in 1995, the amount of money it paid out per premium dollar in car accident cases declined from about 63 cents to 47 cents, according to A.M. Best.
Mckinsey declined to comment, citing client confidentiality. But Allstate says Berardinelli's allegations are "unfounded and unproven." Rather than trying to cheat customers, the company says, its claims revamp was just good management: an effort to "become the premier claim organization in the industry." A major goal, it says, was to benefit policyholders by identifying "exaggerated and fraudulent claims." In its written response, Allstate further said its "processes are absolutely sound" and that its goal is "to investigate, evaluate, and promptly resolve each claim fairly, based on the merits."
The battle over the McKinsey documents is just the latest round in an epic, decades-long war between insurers and the plaintiffs' bar over access to one of the biggest treasure troves of cash ever created: the billions of dollars in premiums held by insurers to pay claims. For years, each side has cast the other as evil incarnate. In the early 1990s, when Allstate retained McKinsey, there was a widespread sense among insurers that they were paying too many illegitimate automobile-accident claims and that an aggressive plaintiffs' bar, fueled by a wave of newly allowed attorney advertising, bore much of the blame. One focus of the program McKinsey introduced at Allstate, called Claim Core Process Redesign (CCPR), was aimed at striking a blow at that trend.
But plaintiffs' attorneys around the country allege that various elements of CCPR go beyond eliminating fraudulent claims and operate in a systematic way to deny policyholders legitimate benefits. Copies of Allstate's massively thick CCPR manuals have been circulating among trial lawyers for years. Although plaintiffs have had piecemeal success in bad-faith cases against Allstate, the insurer points to seven court rulings that have rejected attacks on CCPR. Last December a Montana state court noted that while CCPR practices may be illegal "if misapplied in a particular case, they nevertheless are neutral with no manifestly illegal purpose."
Berardinelli is convinced that the McKinsey material could turn the tide. The documents "explain why McKinsey built CCPR," he says. In his book he compares Allstate to a vendor of canned peas and argues that the documents "show how McKinsey...deliberately designed Allstate's claim factory to arbitrarily 'underfill' every can of Allstate insurance."
He begins his story in 1992, when, Berardinelli believes, McKinsey made its initial presentations on the Allstate project. (Allstate confirms that it retained McKinsey in the early 1990s.) Berardinelli's notes on the McKinsey slides, which he has filed in court, show that the consultants' goals were far-reaching. The objective, according to notes on one slide, was to "radically alter our whole approach to the business of claims." The consultants also advised the insurer on what steps were needed to achieve those ambitious goals.
Just why Allstate brought in McKinsey at that time isn't clear. But Berardinelli notes that in 1993, Allstate's then owner, Sears Roebuck & Co., spun off 20% of the insurer to the public and distributed the rest of the Allstate stock to Sears shareholders two years later. Freed of their ties to the large and struggling retailer, Allstate executives could now connect their personal financial fortunes directly to improvements in the insurer's bottom line. Jerry D. Choate was president of Allstate's personal property and casualty operations when McKinsey was retained, and the notes on several McKinsey slides list him as a participant in the project. Choate went on to serve as Allstate's chairman and chief executive from 1995 through 1998. By the end of 1997 he had accumulated shares worth tens of millions. He could not be reached for comment.
Allstate's "gross opportunity" if McKinsey's plan were fully implemented, according to Berardinelli's notes on one slide, was $550 million to $600 million in savings, almost all of which would come from reducing claims payments, not from cutting expenses. The consultants then targeted several areas as presenting the greatest opportunity for reductions. Fraud was one, with one slide stating that "it may exist in approximately 11 percent of current claim volume," according to Berardinelli's notes.
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