By Sean Dilweg, Former Wisconsin Insurance Commissioner

Los Angeles County has sued State Farm General over its handling of claims arising from the 2025 Eaton and Palisades fires.

The complaint alleges that State Farm delayed, denied and underpaid claims, changed adjusters repeatedly, underestimated losses and improperly handled smoke-damage claims. County officials say their investigation found unreasonable delays and “systematic underpayments.” State Farm strongly disputes that characterization and says it has paid more than $6.2 billion on wildfire claims, including approximately $1 billion for smoke-related damage, and has closed roughly 78% of the claims.

Those allegations will now be tested through litigation.

But the case raises a larger insurance-regulatory question that deserves attention regardless of who ultimately prevails:

When does a collection of disputed claims become evidence of an institutional claims-handling problem?

That distinction matters. Every large insurer receives complaints. Catastrophes produce extraordinarily difficult claims. Adjusters disagree. Experts disagree. Estimates change. Policy language must be applied to thousands of different factual circumstances.

A bad outcome on one claim does not necessarily establish a bad claims practice. Neither do ten claims. But at some point, patterns can matter. The difficult regulatory task is determining where that point lies.

Individual Claims Are Supposed to Be Individual

Insurance claims handling is inherently fact specific. Two homes on the same street can suffer dramatically different losses. Construction methods vary. Smoke infiltration varies. Contents vary. Policy limits and endorsements vary. The quality of documentation varies.

That is why insurers investigate claims individually.

It is also why determining whether a carrier acted reasonably generally requires examination of the specific information available to the insurer when it made its decision.

This becomes particularly important with smoke claims. A house that remains standing after a wildfire can still present difficult questions involving soot, particulate contamination, HVAC systems, insulation, porous materials and habitability.

State Farm says it evaluates each claim based on the facts of the loss and the coverage provided by the policy. Los Angeles County alleges that the company instead suppressed or underpaid smoke-related claims on a broader basis.

That difference is crucial. One describes individualized adjusting. The other describes an institutional practice.

What Would Evidence of a Systemic Practice Actually Look Like?

A regulator, or ultimately a court, should be careful not to infer a companywide practice merely from the existence of numerous unhappy policyholders.

Catastrophes generate complaints even when an insurer is operating reasonably. More persuasive evidence of a systemic practice would ordinarily involve common decision-making structures.

For example:

· centralized claims directives;

· changes in written adjusting guidelines;

· uniform limitations placed on categories of claims;

· common vendor instructions;

· compensation or performance metrics tied to claim outcomes;

· repeated deviations from established claims procedures;

· internal communications encouraging particular outcomes;

· statistical evidence showing unusual patterns across comparable claims; or

· management decisions affecting large groups of policyholders.

That is very different from assembling a large collection of disputed individual claims and assuming that volume alone demonstrates institutional misconduct.

The analytical question should be:

What common mechanism explains the alleged pattern?

Without that connecting mechanism, what looks like a systemic problem may instead be thousands of individual disagreements arising from an enormous catastrophe.

With that mechanism, however, individual claims can become evidence of something much larger.

This Is Where Market Conduct Regulation Matters

Insurance regulators have dealt with this distinction for decades.

Market conduct examinations are not simply collections of consumer complaints. Regulators typically examine patterns.

· They sample files.

· They review company procedures.

· They compare written standards with actual claim files.

· They examine training, supervision and management controls.

· They look for evidence that an insurer’s practices are producing outcomes inconsistent with insurance law or established claims standards.

The objective is not necessarily to determine whether every claim was adjusted incorrectly. It is to determine whether the system itself is producing unreasonable outcomes.

That difference is fundamental.

A regulator looking at 100 claims should not necessarily ask: “How many policyholders disagreed with the insurer?”

The more useful question is: “Do these files reveal a common claims-handling practice that explains the outcomes?”

Catastrophes Make Pattern Analysis Harder

Major catastrophes complicate this analysis considerably.

The Eaton and Palisades fires generated enormous claim volumes in a compressed period. According to the California Department of Insurance, approximately 11,300 State Farm policyholders filed homeowner claims arising from the fires.

No insurer maintains a permanent claims staff sized for events of that magnitude. Companies must rapidly deploy catastrophe adjusters, independent adjusters, engineers, remediation specialists and vendors. That creates operational risk. Adjusters can have different levels of experience. Policyholders can receive inconsistent explanations. Claim files can change hands. Vendor quality can vary.

Management must create temporary systems capable of processing enormous volumes while still complying with claims-handling obligations.

That is precisely when regulators should pay attention.

But it is also why inconsistency alone does not necessarily prove bad faith or an improper companywide policy.

A catastrophe may expose a defective claims philosophy. It may also expose an overwhelmed operating system. Those are not the same thing.

Claims Metrics Can Be Misleading

State Farm’s response illustrates another important issue.

The company points to more than $6.2 billion in payments and says most wildfire claims have been closed. Those numbers are relevant. But aggregate payments alone do not establish that individual claims were handled reasonably.

Likewise, large numbers of complaints do not establish that the company acted improperly.

Both sides can cite impressive statistics. The regulator’s job is harder.

It must look behind the aggregate numbers and understand the operating process producing them. For example:

How long did comparable claims remain open?

Were similarly situated policyholders treated consistently?

How often were estimates revised?

Were adjuster changes associated with meaningful delays?

Were smoke claims handled differently after particular internal guidance was issued?

Did remediation standards change?

Were complaints concentrated among particular vendors, offices or claim teams?

Those questions begin turning raw claim data into regulatory evidence.

The Expert Witness Problem

This distinction also matters enormously in litigation.

An insurance-practices expert may be asked to review dozens or hundreds of claim files and offer an opinion about whether an insurer engaged in unreasonable practices.

There is an analytical danger in both directions. An expert should not dismiss a pattern merely because every claim contains unique facts. But an expert should also be cautious about extrapolating companywide conclusions from a self-selected group of disputed files. Sampling matters. Comparability matters. Company procedures matter. The period being examined matters. The denominator matters.

If an expert reviews 75 problematic claims, for example, the analysis changes considerably depending upon whether those claims came from a population of 100 claims or 10,000 claims.

And even that does not answer the most important question:

Were the same institutional decisions influencing those files?

That is where claims analysis becomes something more than counting complaints.

Regulators Should Follow the Decision Process

The Los Angeles County lawsuit will generate understandable attention because State Farm is California’s largest private residential insurer and the fires were among the most consequential catastrophes in the state’s history.

But the regulatory lesson should extend beyond this dispute.

When allegations of systemic claims misconduct arise, regulators should follow the decision process.

Who established the claims standards?

What instructions were adjusters given?

What changed after the catastrophe?

How were vendors selected and supervised?

What metrics were management reviewing?

Were exceptions encouraged when circumstances warranted them?

Did complaints lead to operational changes?

And did similar claims produce similar outcomes?

Those questions reveal institutional behavior much more reliably than either isolated anecdotes or billion-dollar payment totals.

The Difference Between a Bad Claim and a Bad System

Insurance regulation is ultimately concerned with systems. A regulator cannot ensure that every claim decision is correct. Nor should every disagreement between a policyholder and insurer become evidence of institutional misconduct.

The regulator’s responsibility is to determine whether the insurer has established processes reasonably designed to produce fair, timely and consistent claim decisions—and whether those processes actually function in practice.

That is the more important question raised by the State Farm litigation.

Los Angeles County alleges that the problems were systemic.

State Farm says it handled claims individually and has paid billions of dollars to policyholders.

Discovery may eventually provide the evidence necessary to determine which characterization is better supported.

Until then, the most useful lesson is broader:

A pattern of disputed claims should trigger questions. It should not automatically answer them.

The regulatory task is to identify the common decision process connecting those claims.

Because the difference between a bad claim and a bad claims system may be the most important distinction in insurance regulation.