Following a two-year examination of State Farm’s claim handling practices by the Montana Commissioner of Securities and Insurance (CSI) the carrier has agreed to pay a $2 million fine over underpaid automobile claims.

State Farm will be fined an additional $2 million if corrective actions aren’t made, according to the CSI. State Farm settled rather than appealing to the District Court, CSI said.

Corrective actions include all recommendations in an independent market conduct examination report by Examination Resources, and an error rate below 8% in the categories examined of a sample of 50 third-party claims since April 15, 2022.

After satisfactory completion of the recommendations related to policies, procedures, and training within six months and payment of claims within a year, $1 million of the fine will be dropped. The other $1 million will be dropped if the audit stipulation is met.

Examination Resources reviewed items of concern given by the CSI.

Before referring the matter to the examiners, CSI said it had “received numerous complaints from consumers about the company [State Farm] applying comparative negligence against them in situations where consumers believed they were not at fault.”

State Farm identified 573 claims between Nov. 1, 2018 and Nov. 1, 2020 in Montana that comparative negligence was applied to a third-party claimant.

CSI randomly selected 65 for review and found 20 in which it believed “the company did not conduct a reasonable investigation before applying comparative negligence to the third-party claimant or did not provide a reasonable explanation of the basis of the decision in relation to the factors or applicable law after applying comparative negligence and reducing payment accordingly.”

CSI received 32 additional complaints over the same issue and found 10 lacked reasonable investigation and/or reasonable explanation.

Examination Resources reviewed a random selection of 200 claims from 841 filed between the end of 2021 and the beginning of 2022. State Farm had reviewed them and made additional payments to 49 claimants, all of whom had raised complaints to CSI before payment was made, according to the market conduct examination report.

Findings by Examination Resources included:

• • State Farm didn’t pay for loss of vehicle use as required by a 2022 memorandum from the commissioner in 96 of 153 sampled claims making for an error percentage of 62.8%. The carrier agreed with 89 of the findings;
  • State Farm “did not attempt in good faith” according to Montana law to come to equitable settlements of claims in which liability was “reasonably clear;”
  • Errors were found in 91 out of 198 claims (46% error rate) for which State Farm didn’t promptly provide a reasonable explanation for its claim denial or the offer of a compromise settlement and failed to conduct a reasonable investigation;
  • Of the 198 claims in the sample that involved loss investigations, 80 errors were found (40.4% error rate) because State Farm couldn’t support its comparative negligence determinations with the investigation results or factual findings and how they would be applied to the incidents. Of the 63 claims that went before a neutral arbitrator, 35 were removed or reduced;
  • State Farm inconsistently applied comparative negligence across third-party claims for the same incident in the 55 bodily injury claims within the examined sample. Six of the 55 contained errors; and
  • Of the same 55 BI claims, seven should have included payment of medical expenses by State Farm under a Montana Supreme Court decision but didn’t. State Farm agreed that two should’ve been paid, and agreed in part on one of the seven.

Examination Resources recommended in its report that State Farm perform an internal review of all third-party auto claims from Nov. 1, 2018-April 15, 2022, and provide the results to the CSI for review.

It also recommended State Farm “review and update, if necessary, claim handling policies and procedures and manage the products of vendors to ensure a reasonable investigation is completed, including but not limited to law enforcement reports and claimant/witness statements, obtained in a timely manner, documented or recorded, and preserved in a manner that is clear and comprehensible and can be produced when necessary to support the investigation.”

CSI’s settlement and associated order require State Farm to re-evaluate all affected claims between Nov. 1, 2018 through April 15, 2022 in a manner consistent with Montana law and pay any additional money that may be owed to Montana consumers, according to the release.

“Today we send a clear message that Montana will not tolerate unsupported fault being placed on victims of auto accidents,” said Commissioner Troy Downing, in a news release. “I expect insurance companies to complete a full, fair, and transparent examination of the facts and law and to pay what is owed as required by law.”

As a result of the CSI’s examination, State Farm has said it’s already reviewed more than 2,430 Montana claims and paid over $1.18 million to state consumers.

While Commissioner Downing is “troubled by State Farm’s past conduct,” he expressed his appreciation to State Farm for their cooperation with CSI and efforts “to make this right,” according to the release.

State Farm didn’t respond to questions from RDN by the publication deadline.

State Farm faces similar accusations in Illinois court by more than 20 plaintiffs over underpaid actual cash value (ACV) on total loss vehicles.

The plaintiffs allege State Farm paid out 4-11% less than what was owed by applying a discount, or “typical negotiation adjustment,” to the ACV of aggregated used vehicle internet prices similar to the ones involved in the claims. The suit calls this practice “a fraudulent scheme” and a breach of their insurance policy contracts.

The class action lawsuit is currently in discovery.

U.S. District Judge Virginia M. Kendall noted in her December order that State Farm faces several concurrent lawsuits that challenge its use of a typical negotiation adjustment to determine total loss payments.

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