Individual state departments of insurance will coordinate their efforts through the NAIC to investigate State Farm's conduct. Market-conduct exams investigate selling, underwriting, and other company practices, and the expense is billed to the insurer under investigation. The NAIC decided to coordinate the multistate investigation after a story aired on NBC's Dateline program on June 23 questioning State Farm's medical claims-handling practices.

The story outlined alleged companywide practices of hiring medical-review firms that, in turn, hired unqualified, non-medical employees to write medical reviews of State Farm policyholders' Personal Injury Protection (PIP) and MedPay claims. The story also identified claims in which laypersons — people who weren't medical professionals — changed doctors' written medical reports.

PIP is no-fault auto coverage that pays for all "reasonable and necessary medical expenses." MedPay provides policyholders with coverage for reasonable and necessary medical expenses.

Phil Supple, a spokesperson for State Farm, says his company welcomes the inquiry and will cooperate fully with the state departments of insurance. Supple also confirms this is the first time State Farm is a target of a multistate market conduct exam.

Extent of alleged abuses

The NAIC says the investigation initially will focus on State Farm's use of more than 500 medical-review firms in perhaps as many as 40 states. However, the NAIC says the investigation has just begun and it's too early to tell the extent of alleged abuses. "Until the states can complete their exams, we cannot pass judgment on State Farm or their contractors," says George Nichols, president of the NAIC.

State insurance regulators in Alaska, Colorado, Florida, Illinois, Maryland, Missouri, Oregon, and Virginia have investigated or are investigating State Farm's conduct, according to knowledgeable sources. The NAIC says the multistate investigations will take advantage of the information that already has been gathered in those inquiries. A group of regulators from Colorado, Illinois, Maryland, and Oregon will spearhead the multistate inquiry of State Farm.

Supple acknowledges that some of the medical claims reviewed by CMR, a now-defunct medical-review firm State Farm hired to evaluate its policyholders' medical claims, were "mishandled" between 1992 and 1996. State Farm conducted an internal audit beginning in March 1999 and found 500 claims that were not paid in full or not paid up to the policy limits. Supple says State Farm paid those claims up to the policy limits without investigating the merits of the claims. "We could have gone back and investigated every one, but that would have been very expensive," he says. "Rather than investigating them, we just paid them up to the policy limits."

Multistate high stakes

In June, regulators in Florida and Georgia concluded a market-conduct exam of American General Life and Accident Insurance Co. and several of its subsidiaries that resulted in a $7.5 million fine against the group of insurers for allegedly charging blacks more for small-face-value life insurance policies. Regulators in Florida also helped negotiate a $206 million settlement of a class action lawsuit filed against American General for the same alleged practices.

In addition, following a 1996 multistate market conduct exam coordinated through the NAIC, Prudential Insurance Co. of America was fined $35 million by state departments of insurance for allegedly misleading policyholders about its life insurance policies. Prudential then doled out more than $2 billion to settle class action lawsuits that were filed after the multistate investigation concluded.

Knowledgeable sources predict that State Farm likely will face fines as a result of the investigation, but the NAIC says it's too early to speculate on the outcome of the inquiry. Sources also predict that class action lawsuits will begin to pile up against State Farm for its medical claims-handling practices, and that other large auto insurance companies will come under scrutiny in state government-led investigations into their medical claims-handling practices.

Indeed, the class action lawsuits against State Farm and the inquiries into other auto insurers have begun: A class action lawsuit filed in Omaha, Neb., against State Farm for its handling of medical claims is almost 18 months old, and Washington's Office of the Insurance Commissioner is auditing six auto insurers — Allstate Property & Casualty Insurance Co., Farmers Insurance Co., Mutual of Enumclaw, Pemco Insurance Co., Safeco Insurance Co., and State Farm — to make sure they are handling medical claims properly.

Supple of State Farm acknowledges that insurance companies are part of a litigious environment, which likely will continue after the conclusion of the investigation into State Farm's practices.