House Rules

Think your home is fully insured? Think again.

When Renee McGaw purchased her East Washington Park home five years ago, she knew the kind of investment she was making. A single mother, she plowed every dollar she could spare into the house, redoing the kitchen and bathrooms, replacing gutters and repainting, determined to see her equity grow.

The blizzard of last March stopped McGaw's plans cold. The epic snowfall collapsed the roof of her 1922 bungalow, pushing the walls outward and making the house uninhabitable. But McGaw didn't panic; she had a homeowner's policy from State Farm Insurance that offered $235,000 in coverage in the event of a catastrophic loss. With additional provisions for demolition, cost overruns and other expenses, the policy actually provided up to $319,000 to replace her home.

Imagine, then, McGaw's reaction when State Farm's adjusters told her the company was proposing to settle her claim for $158,000. "I was stunned," she says. "It's about half my policy."

Contractors consulted by McGaw estimated that it would cost from $266,000 to more than $300,000 to replace her double-brick bungalow. But State Farm insists that its software program shows that a similar house can be built for far less than her policy limits. One adjuster told her that it wasn't the company's fault if her agent sold her too much insurance.

State Farm has since adjusted its estimate to $170,000, but McGaw says the company's calculations don't take into account the realities of construction costs in Washington Park. "Maybe in the middle of Kansas I could build this house for what they're saying, but not in the middle of Denver," she says.

For the past seven months, McGaw and her daughter have lived in a rental property across South High Street from her former house. She knows of neighbors whose homes were also totaled by the blizzard who have since received settlements from their carriers for their policy limits, razed their properties and are rebuilding. But she's still wrangling with State Farm, which insisted on demolishing the property in stages to see what could be preserved; now the company is trying to save the 1922 floor joists and the basement, which don't meet current building codes.

McGaw is hardly alone in her predicament. Homeowners who rely on insurance agents' assurances that their coverage is adequate often discover that the company considers them to be overinsured -- or, worse, woefully underinsured -- when they file a catastrophic claim. And attorneys who specialize in bad-faith lawsuits charge that State Farm -- the "like-a-good-neighbor" behemoth that commands close to a quarter of the homeowners' insurance market in Colorado -- has mastered the art of shortchanging its policyholders ("Hidden Damage," June 27, 2002).

"If State Farm was your neighbor, you'd move out of the neighborhood," says attorney Kyle Bachus. "They create an impression through their advertising that they know what they're doing and you need one of their skilled agents to help you figure things out -- up until the point you make a claim. Then it's their position that it's your obligation, not theirs, to have the right coverage."

State Farm spokeswoman Kelly Campbell says that consumers "need to make a choice about how much protection they buy. The software product that agents use is a very good estimate, but homeowners have to decide if they feel that's adequate."

But bad-faith disputes usually encompass more than agents' representations; they also have to do with the way companies conduct the appraisal process once a claim is filed. Last year, State Farm paid $3.75 million to settle a bad-faith lawsuit filed by Bachus and co-counsel Sam Livingston on behalf of Kay Watts, an elderly woman whose Fort Collins house burned down in 2000. In the course of the litigation, Bachus and Livingston uncovered several questionable practices by the company that have since sparked an investigation of the matter by the Colorado Division of Insurance.

Left a quadriplegic by an auto accident decades ago, Watts had contacted her State Farm agent shortly before the fire to make sure her coverage was adequate. But after the fire, which started in an attached garage, a State Farm adjuster denied that the agent had ever visited her and attempted to settle her claim for half the value of her home. Ultimately, despite missing records and other problems, Watts's attorneys were able to establish that the agent did visit her and had even informed the adjuster of his actions.

"The essence of their case was 'You can't prove it,'" Livingston recalls. "But the person who wrote that letter [denying the agent's visit] had interviewed the agent four times. Records were destroyed, and they lied to her."

Under the terms of her policy, Watts and State Farm were each supposed to appoint an unbiased, independent appraiser to work out the true value of her house. But State Farm's appraiser was an attorney who had an ongoing professional relationship with the company -- a relationship that was never disclosed to Watts. "You don't use your own attorney as an independent appraiser," Livingston says.

Nine months ago, Livingston filed a complaint with state regulators alleging fraud by State Farm. Kirk Yeager, the state insurance division's deputy commissioner of market regulation, says the Watts case is still under investigation by his agency. "We need to go through a lot of the materials in a very complex case," he says.

Yeager says there is no state law that prohibits insurance companies from using their own attorneys as "unbiased" appraisers. "It's something we need to look at on a case-by-case bias," he adds. "It's certainly a red flag."

State Farm's Campbell won't comment on the Watts case and doesn't know if the company still uses its attorneys as appraisers. In McGaw's case, the company's appraiser is a contractor, but McGaw doesn't regard him as unbiased, either. She says he told her appraiser at their first meeting that he'd been instructed by State Farm not to negotiate the main points in dispute or he wouldn't be paid.

Last month, McGaw filed her own complaint with the Division of Insurance concerning State Farm. Among other allegations, she claims that one company official attempted to discourage her from hiring an attorney, telling her father that things "will only get worse" if she did, and that the company is "making a mockery of the appraisal process."

Campbell says State Farm is drafting a reply to McGaw's concerns. She says the company hasn't reached any final figure on what it will pay to compensate her loss. "The replacement cost for Ms. McGaw's house has not yet been determined," she says. "The appraisal process has not been completed. We will honor whatever the result of that process is."

Bachus says whatever amount State Farm offers probably won't be enough to rebuild the bungalow McGaw once had. "They're not really bidding to rebuild her home," he says. "They're bidding to build a house with similar qualities but not the same materials or methods. What you can sell it for is different than what it would cost to rebuild the same house from the ground up in 2004 dollars. That's never explained to anybody."

Yet pursuing a bad-faith case against a major insurer is "horribly difficult," he says. "They have a lot of money and a lot of power, and they know all the tricks. They understand how to manipulate the paperwork, and they hold all the cards."

Recently, McGaw received a renewal notice on her homeowner's policy. The coverage limits had been raised to $244,000, she notes, suggesting that State Farm is still happy to accept her premiums for that level of coverage, even if the company doesn't believe her house is worth it.

"It's their rules, and they won't play by them," she says.

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