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State Farm faces a national probe

Insurer is accused of denying many claims for injuries in accidents

SHARE State Farm faces a national probe

The National Association of Insurance Commissioners said Monday it had begun investigating reports that State Farm, the largest auto insurer, improperly denied claims for treatment of injuries in accidents nationwide.

George Nichols III, the president of the association, which represents insurance regulators in all 50 states, said it was not immediately clear how widespread the practice might have been but that investigators intended to study claims for treatment of injuries in all the states.

Nichols said the investigation would initially concentrate on companies known as medical review utilization organizations that are intended to provide independent judgments on whether claims for injuries should be paid or rejected. But he said the precise scope of the investigation would be worked out by a core group of regulators, including those from Illinois, where State Farm is based; Maryland; Colorado; and Oregon.

State Farm acknowledged that some claims might have been improperly handled and said that it welcomed the inquiry. Under insurance regulatory practices, State Farm, as the subject of an inquiry, will have to pay for the work of the investigators.

Investigations of this type, known formally as multistate market conduct exams, have been rare, but they have resulted in fines of millions of dollars for some companies.

In one of the biggest recent cases, the Prudential Insurance Company of America, one of the largest life insurers, was fined $35 million in 1996 for misrepresenting the costs and terms of coverage to millions of customers. It later paid more than $1 billion to settle class-action suits arising from the investigation. Just last year, American Bankers Insurance was fined $15 million for misleading customers and sometimes refusing to pay claims for insurance on such things as credit card balances, furniture and appliances.

Last Tuesday, Deborah Senn, the insurance commissioner in Washington state, ordered her own investigation of State Farm and five other insurers on similar grounds. The other companies are Safeco Insurance Co., Farmers Insurance Co. of Washington, Pemco Insurance Co., Mutual of Enumclaw and the Allstate Property and Casualty Co.

Critics say some of the medical companies working with State Farm and other insurers employ reviewers who lack medical training. Other critics say these organizations are sham operations designed to help insurance companies reject claims and keep down costs.

A State Farm spokesman, Philip Supple, said the insurer sent less than 5 percent of its injury claims to these companies and paid the others "without any review at all."

He said that State Farm had begun its own investigation last May after State Farm employees began to question information that was being provided and some customers filed suits. State Farm contracts with about 75 of these companies, he said. In reviewing 4,900 claims, Supple said, State Farm concluded that 500 might have been improperly reduced and subsequently paid the claims with interest.

Supple said State Farm "wants to make sure the utilization review process is fair and objective." He said that customers who had concerns about their claims and wanted to take "a second look" could do so by contacting their State Farm agent or claims representative.

Nichols said he and other regulators first became aware of questions about State Farm's claims practices through a report broadcast on the NBC magazine show "Dateline" in late June.

He said he called Edward Rust, the chief executive of State Farm, on July 15 to tell him that an investigation was being started. "He said he would fully cooperate with our activities," Nichols said. The insurance commissioner said that State Farm would be formally notified of the investigation in a letter this week.

About 40 states have established regulatory review panels to deal with challenges of claims payment for health insurance, but, in most states, neither the panels nor any other regulatory body has oversight on auto injury claims. That is likely to change, regulators said, as a result of the State Farm investigation.