Anybody who has practiced insurance bad faith law for a while knows that some of the most important evidence in a claims case is nowhere near the individual claim file. Sometimes you have to travel upstream and find out who designed the claims process, what management was measuring, what goals were established, and whether the people actually adjusting claims were being pushed toward a particular result.
The developing State Farm hail litigation in Oklahoma has seemed strangely familiar to me from litigation I was involved in two and three decades ago. It also sent me back to Professor Jeffrey Stempel’s excellent book, Litigation Road: The Story of Campbell v. State Farm Insurance. Stempel used the remarkable 25-year Campbell bad faith litigation to examine insurance bad faith, discovery, evidence, punitive damages, settlement practices, and the way a seemingly ordinary claim can eventually expose much larger questions about how an insurer conducts its business. I recently discussed some of these issues in “New Consultant but the Same Cat-and-Mouse Game: Who Has State Farm’s Accenture Claims Analysis and Documents?”
For younger lawyers who did not live through Campbell, a little history is worthwhile. State Farm had a management program called Performance, Planning and Review, commonly known as PP&R. Evidence presented in the case indicated that the program came from high levels of management and involved predetermined claims payout objectives. Justice Ruth Bader Ginsburg’s dissent in the United States Supreme Court recounted the trial court’s finding that PP&R had the explicit objective of using the claims-adjustment process as a “profit center.” Evidence also included preset average payout goals and testimony from employees about pressure to reduce claim payments.
State Farm ultimately won a very important victory in the United States Supreme Court limiting the amount of punitive damages, because the Court held that Utah could not use punitive damages to punish State Farm for dissimilar conduct occurring throughout the country. That constitutional holding is taught everywhere. But sometimes the constitutional holding causes people to forget the remarkable evidence that got the case to the Supreme Court in the first place. The Utah litigation involved evidence that management goals and claims-handling practices were allegedly connected to controlling indemnity payments.
Fast-forward a few decades, change automobiles to roofs, move the litigation to Oklahoma, and some of the language now surfacing should make insurance claims nerds like me sit up in our chairs. One recently de-designated State Farm presentation uses the phrase “outcome-based claim handling.” Another State Farm document, titled “P&C Claims Fire Claim Quality,” lists as positive quality indicators that the total-roof-to-partial-roof replacement ratio had fallen from 4.1 in June 2020 to 2.3 in May 2021 and that wind and hail estimate-payment bands above $10,000 had declined 13 percent year over year. The same material discusses management involvement with certain total-roof replacement decisions involving smaller hail and lighter winds.
Now, let me put a large lawyerly stop sign right here. Those documents do not prove bad faith. State Farm says the program was designed to improve accuracy, consistency, and quality in claims handling. A lower roof-replacement ratio could theoretically mean adjusters stopped paying for roofs that did not need replacement. A reduction in larger estimates could theoretically reflect better estimating. Insurance companies should measure quality, train adjusters, and try to eliminate erroneous payments.
The question is what came first. Did State Farm determine how claims should properly be adjusted under its policies and then measure the resulting outcomes? Or did somebody determine that certain outcomes were too expensive and then develop claims practices intended to change those outcomes? These questions sound remarkably similar to the questions raised by PP&R decades ago.
The Accenture discovery fight makes the comparison even more interesting. The Oklahoma homeowners allege that State Farm retained Accenture for work involving wind and hail claims, industry benchmarks, roof-replacement outcomes, claim-handling tactics, and financial opportunities. Their motion to compel says an Accenture engagement totaled more than $1 million and identifies documents that plaintiffs contend priced reductions in full-roof replacements in tens of millions of dollars. Other portions of the filing reference a $169 million Texas figure. Much of the underlying material remains disputed or sealed, and Accenture and State Farm contest the plaintiffs’ characterizations. That means we need the actual evidence before reaching conclusions.
But there is nothing wrong with asking the questions. In fact, lawyers would be foolish not to ask them. If a consultant was retained to determine what legitimate roof claims should cost, that is one thing. If consultants and executives first calculated how much could be saved by reducing the frequency of full-roof replacements and then created management controls designed to produce that reduction, that is quite another. Indeed, I discussed how “consultants” can be used as part of this process last year in “Want to Win a Hailstorm Damage Lawsuit? Hire The Right Experts and Establish a Theory of Loss Before Filing a Lawsuit.”
This is where Stempel’s Litigation Road becomes particularly relevant. The fascinating part of Campbell was never simply that an adjuster made a poor decision on one claim. The litigation explored whether the individual claim decision was connected to something much larger within the company. The issue required discovery into corporate programs, management incentives, payout goals, training materials, employee evaluations, and practices far removed from the desk of the adjuster handling the Campbell file.
I am seeing the same discovery issues and avoidance of turning over evidence in Oklahoma. There have been fights over confidentiality, consultant files, metadata, executive depositions, corporate representatives, management reports, internal presentations, and even which State Farm executives must sit for depositions. None of that establishes the homeowners’ allegations. But it demonstrates why a bad faith investigation cannot always end with, “What did the adjuster know?” State Farm attorneys are doing everything they can to limit what policyholders can learn about these issues through motions for protection and secrecy orders so others cannot learn what is really going on.
There is also an important warning from Campbell for lawyers pursuing the Oklahoma cases. The United States Supreme Court made very clear that evidence about nationwide corporate conduct cannot simply become an excuse to punish an insurer for every alleged wrong committed everywhere. There must be a meaningful connection between the corporate evidence and the conduct that injured the particular policyholder. This means the strongest Oklahoma case will not simply prove that somebody in Bloomington created a PowerPoint presentation with unfortunate language. The evidence must connect the corporate program to Oklahoma, to the people supervising these claims, and ultimately to what happened on the policyholder’s roof claim.
So, the real work of proof begins with all the executives down to the field adjusters of how this began and how it worked. State Farm lawyers are trying to prevent this evidence from ever coming to light. This is what they did twenty and thirty years ago, and it is what they are doing today.
Understanding this history should make everybody in the claims environment curious. PP&R involved allegations that claim outcomes were being influenced by predetermined financial objectives. Today, we are reading State Farm documents containing phrases such as “outcome-based claim handling,” tracking declining full-roof replacement ratios as favorable quality indicators, and watching litigation over consultant analyses concerning the financial consequences of different roof-claim outcomes.
Maybe there is an innocent explanation for all of it. State Farm certainly says there is. But if I were teaching insurance bad faith today, I would put Professor Stempel’s Litigation Road on the reading list immediately before handing the students the Oklahoma documents. Then I would ask one simple question:
Are we studying history, or are we watching some of it repeat itself?
Thought for the Day
“Other times, you’re exploring an issue because you just want to find out more about it, understand it, or clarify it.”
—Professor Jeffrey W. Stempel
