State Farm lost its most significant claims case while Ed Rust Jr. was the "owner/manager" of State Farm. Ed Rust Jr. was the person who ultimately decided that thousands of State Farm policyholders would be underpaid or denied benefits in Mississippi. He is the chief corporate leader of State Farm Mutual, the corporation that allows its wholly owned subsidiary, State Farm Florida, to essentially lie about its financial situation. Everybody—especially Rust–knows that State Farm Florida is paying millions that would otherwise be profits to State Farm Mutual. I suspect a number of highly qualified agents and claims adjusters wonder why there has been no change in the top management for two generations. After all, in the United States, we believe in earning leadership rather than being born into it.

Ed Rust Jr. is very capable and bright, but is he earning the position or does he just get to keep it because of his dad and long standing family ownership of State Farm’s management?

For example, in the 2001 case of Campbell v. State Farm Mut. Automobile Ins. Co., the Utah Supreme Court in 2001 found:

"2. The Nature of State Farm’s Misconduct

This factor specifically analyzes the nature of the defendant’s conduct in terms of its maliciousness, reprehensibility, and wrongfulness. It mirrors the "reprehensibility" factor described by the United States Supreme Court in BMW of North America, Inc. v. Gore, 517 U.S. 559, 134 L. Ed. 2d 809, 116 S. Ct. 1589 (1996). There, the Supreme Court stated that the defendant’s misconduct is "perhaps the most important indicium of the reasonableness of a punitive damages award." …Repeated "trickery and deceit" targeted at people who are "financially vulnerable" is especially reprehensible and worthy of greater sanctions. … Moreover, "deliberate false statements, acts of affirmative misconduct, or concealment of evidence of improper motive" also warrant larger awards. …

With these standards clearly in mind, the trial court made nearly twenty-eight pages of extensive findings concerning State Farm ‘s reprehensible conduct. We summarize here three examples from those findings of State Farm ‘s most egregious and malicious behavior.

First, State Farm repeatedly and deliberately deceived and cheated its customers via the PP&R scheme. See Court’s Findings, Conclusions and Order Regarding Punitive Damages and Evidentiary Rulings, Campbell, at 17-27. For over two decades, State Farm set monthly payment caps and individually rewarded those insurance adjusters who paid less than the market value for claims… Agents changed the contents of files, lied to customers, and committed other dishonest and fraudulent acts in order to meet financial goals…For example, a State Farm official in the underlying lawsuit in Logan instructed the claim adjuster to change the report in State Farm’s file by writing that Ospital was "speeding to visit his pregnant girlfriend." …There was no evidence at all to support that assertion. Ospital was not speeding, nor did he have a pregnant girlfriend. Id. The only purpose for the change was to distort the assessment of the value of Ospital’s claims against State Farm’s insured. As the trial court found, State Farm’s fraudulent practices were consistently directed to persons–poor racial or ethnic minorities, women, and elderly individuals–who State Farm believed would be less likely to object or take legal action.

Second, State Farm engaged in deliberate concealment and destruction of all documents related to this profit scheme….State Farm’s own witnesses testified that documents were routinely destroyed so as to avoid their potential disclosure through discovery requests….Such destruction even occurred while this litigation was pending… Additionally, State Farm, as a matter of policy, keeps no corporate records related to lawsuits against it, thus shielding itself from having to disclose information related to the number and scope of bad faith actions in which it has been involved.

Third, State Farm has systematically harassed and intimidated opposing claimants, witnesses, and attorneys… For example, State Farm published an instruction manual for its attorneys mandating them to "ask personal questions" as part of the investigation and examination of claimant in order to deter litigation… Several witnesses at trial, including Gary Fye and Ina DeLong, testified that these practices had been used against them… Specifically, the record contains an eighty-eight page report prepared by State Farm regarding DeLong’s personal life, including information obtained by paying a hotel maid to disclose whether DeLong had overnight guests in her room…There was also evidence that State Farm actually instructs its attorneys and claim superintendents to employ "mad dog defense tactics"–using the company’s large resources to "wear out" opposing attorneys by prolonging litigation, making meritless objections, claiming false privileges, destroying documents, and abusing the law and motion process…

Taken together, these three examples show that State Farm engaged in a pattern of "trickery and deceit," "false statements," and other "acts of affirmative misconduct" targeted at "financially vulnerable" persons…. Moreover, State Farm has strategically concealed "evidence of [its] improper motive" to shield itself from liability, which was furthered by State Farm’s treatment of opposing witnesses and counsel…. Such conduct is malicious, reprehensible, and wrong.

State Farm responds by arguing in its brief that even if its conduct was wrong, it does not "after all, involve murder, torture, or deliberate poisoning of the environment," and thus cannot warrant millions of dollars in punitive damages. Additionally, State Farm argues that under Crookston II, willful calculated fraud was not sufficient to justify a higher than ordinary ratio of punitive to compensatory damages…

State Farm fails to realize that, while Crookston II held that fraudulent conduct alone was insufficient to justify a large punitive damage award, it also observed that fraud combined with other factors justifies a higher award….the company’s ‘calculated and calloused attitude’ toward settling valid claims." …In this case, the jury was convinced, and the evidence shows, that State Farm engaged in a widespread pattern of fraud. Moreover, the evidence of its PP&R scheme demonstrates that State Farm specifically calculated and planned to avoid full payment of claims, regardless of their validity. Thus, the nature of State Farm’s conduct supports the imposition of a higher than normal punitive damage award."

The United States Supreme Court reversed the amount of punitive damages and sent the case back further review of State Farms’s claims culture. This occurred in 2004, before Hurricane Katrina, and the conservative Utah court held:

" In insurance each party must take a risk. But it is inaccurate to assert that if the insured event does not occur then the insured receives nothing in return for the premium payment made. Each insured receives at the time of contract formation present assurance of compensation if the loss occurs which is a valuable peace-of-mind protection.


Insureds buy financial protection and peace of mind against fortuitous losses. They pay the requisite premiums and put their faith and trust in their insurers to pay policy benefits promptly and fairly when the insured event occurs. Good faith and fair dealing is their expectation. It is the very essence of the insurer-insured relationship. In some instances, however, insurance companies refuse to pay the promised benefits when the underwritten harm occurs. When an insurer decides to delay or to deny paying benefits, the policyholder can suffer injury not only to his economic well-being but to his emotional and physical health as well. Moreover, the holder of a policy with low monetary limits may see his whole claim virtually wiped out by expenses if the insurance company compels him to resort to court action.

….As the facts of this case make clear, misconduct which occurs in the insurance sector of the economic realm is likely to cause injury more closely akin to physical assault or trauma than to mere economic loss….When an insurer callously betrays the insured’s expectation of peace of mind, as State Farm did to the Campbells, its conduct is substantially more reprehensible than, for example, the undisclosed repainting of an automobile which spawned the punitive damages award in Gore….

This deceitful conduct can only be explained as part of a scheme to reduce State Farm ‘s economic exposure. The possibility that its dissembling would expose the Campbells to an excess judgment must have been apparent to State Farm . To react as it did when the excess judgment became a reality only confirms the toxicity of State Farm ‘s behavior.

When considered in light of all of the Gore reprehensibility factors, we conclude that a 9-to-1 ratio between compensatory and punitive damages, yielding a $ 9,018,780.75 punitive damages award, serves Utah’s legitimate goals of deterrence and retribution within the limits of due process."

Unlike the vast majority of American corporations whose boards and regulatory audit committees would have cast out a CEO after such findings, State Farm’s board of directors and audit committees did nothing. This financial and independent giant thumbed its nose at regulators and the courts. It made no change. I would be more than happy to share anything that anybody has to offer to explain how such a small amount of punitive damages changed one of America’s largest corporations (allegedly non-profit).

Utah has Mormon conservatives, but what about Florida, where people from the north and south, liberal and conservative, must agree upon ethics? Is State Farm honest in Florida? How about this finding, which I reported in "State Farm’s Freakoutnomics:"

"The recommended Order from the Judge who reviewed the rate increase explains how State Farm’s theory of loss is sham economics. Starting at page 15:

"…State Farm Florida also paid State Farm Mutual $12.8 million for a credit risk provision….

Of the total $700 million paid to private re-insurers, State Farm Florida paid approximately $151 million to private re-insurers other than State Farm Mutual. State Farm Florida paid $549 million to its parent company, State Farm Mutual.

Payments to unrelated private re-insurers represent arms-length transactions between a willing buyer and willing seller of reinsurance coverage. However, the fact-finder is unable to determine from a preponderance of the evidence whether either the cost of reinsurance purchased from State Farm Mutual or the cost of the credit risk provision purchased from State Farm Mutual is excessive or reasonable….

The economic reality is that State Farm Florida is merely the legal form in which State Farm Mutual chooses to do business in Florida. State Farm Mutual and its wholly-owned subsidiaries, including State Farm Florida, comprise a "group or combination" that the Legislature defines as a "person" …

Transactions between State Farm Mutual and State Farm Florida for reinsurance and credit risk provisions totaling approximately $561.8 million, when viewed in the light of economic reality… may be transactions which State Farm Mutual engages in with itself and which lack any independent economic significance. Transactions with no independent economic significance would be sham transactions which may distort the economic costs… Such economic distortions may enable the group to derive a rate advantage from the legal form in which State Farm Mutual chooses to do business in Florida."

That is what the judge said and this is what I said:

"The above findings cannot be overstated. The judge made these findings after State Farm and Florida’s Office of Insurance Regulation fought over the details of State Farm’s request for a rate increase. The bottom line is that what State Farm Florida wishes to report as expense, is largely payments made to its parent company. Essentially, it is moving income from one pocket to another, while claiming it as an expense.

If the media would report on this finding with headlines such as, "Judge Rules State Farm Engages in Sham Transactions," I do not think that State Farm’s explanation of financial loss and threats to leave Florida would have such an impact. If people knew the whole story, they would know State Farm’s tales of financial loss in Florida are nothing more than propaganda."

In Mississippi, so many clients had altered engineering reports that it was obvious the problem was not just a mistake. Every time the change was made, it was to lessen the amount owed. Who in any position of leadership would allow this to wrongfully happen without picking up the phone and asking to quietly resolve the matters? I have never spoken to Ed Rust Jr. Other insurers have been understanding enough to have their officers call their policyholders who have catastrophic claims. Slabbed and Anita Lee are reporting events necessary for an understanding of State Farm’s litigation culture.

This week, the Florida Appellate Court decided the issue against State Farm and for Florida policyholders and for Kevin McCarty. The important thing is that a "sham" transaction and argument has been made to Florida Regulators and judges. Why should State Farm be able to hold a license in any state given the findings here and in Campbell? Because they have a tremendous amount of money and lots of really nice and friendly local agents? Maybe to keep the license throughout the rest of the country, State Farm should have to change culture at the very top. Do any of you think that you should run your family’s business by birthright? Why should Ed Rust, Jr.?

What do you think?