Commerce Department should reconsider insurance penalties

Last week, the Minnesota Department of Commerce ordered State Farm Insurance Agency to pay $775,000 in fines because State Farm engaged in unfair trade and claim settlement practices such as pressuring medical practitioners to change opinions, slipping surcharges into contracts and underpaying claims.

The fine sounds big, but it was not nearly enough for a company that generated $715.7 million in premiums from homeowners and auto insurance in Minnesota alone and ranked 25th on the Fortune 500 list of America’s largest corporations. Additionally, State Farm owns a quarter share of all homeowner’s insurance and auto insurance in Minnesota.

Fines are meant to deter companies from engaging in unlawful practices, and in this objective the commerce department failed. For State Farm Insurance, $775,000 is chump change.

According to a commerce department report released June 27, 2002, State Farm violated Minnesota insurance laws more than 13,000 times. The department could have potentially fined State Farm $10,000 for each violation. Do some simple math, and one will find State Farm paid a pithy $59 for each violation of Minnesota insurance law.

With so many violations, breaking the law seems to be standard practice for State Farm. Undoubtedly, other insurance companies have and will follow State Farm’s example by “yes ma’aming” Lady Justice and gladly accepting small fines. When a company chooses to pay fines rather than change, a deterring factor no longer exists.

Yet, the saddest fact is that State Farm has a well-established history of corporate wrongdoing. In 1999, the state of New York fined State Farm $50,000 for submitting false information. In September 2001, State Farm was fined $75,000 in civil penalties for misallocating payments. In 2000, the Utah Supreme Court handed down a $145 million civil penalty for State Farm’s repeated violations. In 2000, deemed the Quackenbush Scandal, a $3 billion fine recommended by the California Insurance Board was reduced to $12 million by Insurance Commissioner Chuck Quackenbush. State Farm later paid for Quackenbush’s re-election campaign.

Higher fines should be addressed. Token penalties only encourage other insurance companies to follow State Farm’s lead. In reality, fines either do not have an impact or are passed onto customers in the form of higher insurance premiums. Maybe serious prison time in intimidating penitentiaries is the solution for disreputable executives. Certainly, State Farm is not the only insurance company committing wanton acts of deceit; their case is just another example of punishments not fulfilling purpose.

The Commerce Department must realize the object of fines and the agenda of its office is to prevent corporate crookery. Since insurance affects everyone, the department should impose penalties which will solicit change and provide the Minnesota consumer a sense of justice and safety. Posing eye candy claims reinforces insurance company sentiments that they are above the law because they can afford to be.