State Farm slapped with $2 million fine for underpaying auto insurance claims

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State Farm has agreed to pay a $2 million fine for having underpaid auto insurance claims.

The fee was the result of a Montana Commissioner of Securities and Insurance (CSI) investigation into the insurer that lasted about two years.

If corrections aren’t made, the insurer will be required to pay double the fine.

State Farm is required to change its claim handling practices in order to avoid continuing to underpay auto insurance claims. If it fails to do this, it will need to pay an additional $2 million beyond the original fine, according to the CSI.  The insurer chose to settle the case instead of appealing to the District Court, adding the CSI.

Independent auto insurance market conduct examination

The corrective actions the insurer must take include all the recommendations made in an independent market conduct examination report made by Examination Resources.  It must also keep its error rate under 8 percent in the categories that were used for the examination of a 50 third-party claim sample since April 15, 2022.

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What will State Farm do after completing its recommendations?

Once the recommendations have been completed for its training, procedures and policies within six months and for its claims payments within the span of a year, it will see $1 million of its total fine reduced. The other $1 million will also be removed if it meets its audit stipulation as identified in the settlement.

The examination occurred because the Montana CSI received many complaints.

Even before the Montana CSI launched its examination of State Farm’s claims payment procedures, it said that it had already “received numerous complaints from consumers about the company applying comparative negligence against them in situations where consumers believed they were not at fault.”

From November 1, 2018 through November 1, 2020, State Farm identified 573 claims in the state in which a third-party claimant was accused of comparative negligence.

Of those claims, 65 were selected at random by CSI, and of those randomly selected auto insurance claims, it was determined that in 20, “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.”

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