Insurance Claims – The Problems and Some Solutions
Claims are where the rubber is supposed to meet the road in the insurance world. Claims are where an insured might find out if their cheap policy was too cheap. Claims are where reputations are made. Claims are where a disdain for insurance is developed, or people discover that insurance is a lifesaver.
Currently, from what I hear from clients of my agency and personal friends across the country, claims handling in the insurance industry is not going so well. The industry develops more enemies than net promoters.
Part of the problem is that carriers are taking shortcuts. I know we’re not supposed to say that so boldly in the industry. It’s been talked about everywhere and when state conventions reopen for live events, it’ll be a hot topic at the bar, but no one is talking openly about the wedge cut. A fantastic primer on wedge cutting was published several years ago in Bloomberg Markets. It was their cover story about how a famous consulting firm taught famous insurance companies how to save money on claims. The article is 15 pages long and describes innovative (then, not so much now) methods by which companies could save money. I suspect many companies have hired the same consulting firm to teach them the same tactics that would have gone so deep in a process that it consisted of 150,000 pages and slides.
About two years ago, a plaintiff law firm updated the article. I’m generally not a fan of plaintiffs’ rights articles and to me this was biased, as usual. However, the updates are worth reading for those of you who care about fair and simple claims settlements.
The pressure to improve reputational claims will only increase. The industry has almost completely failed to offer coverage for the largest business enterprise loss in 100 years due to COVID and a large portion of people believe the denial of coverage was the result of greed. I don’t agree with this perspective, but this perspective is seen as reality. Combine that with bad claims and regulators will make life harder. They may start inventing coverage as some insurance companies and agents believe this happened in the aftermath of the 2021 hurricanes.
An example of bad claims behavior that is unethical even though it is legal is what happened to a friend. He was driving down the freeway recently and the driver next to him decided he wanted my friend’s space. He literally transformed into himself even though they were side by side – it was like swapping paint in a stock car race. Establishing accountability was not a problem. The other driver and his insurance company admitted liability. However, the carrier (interestingly – one of the carriers listed in the Bloomberg Markets report) said they would not pay for a rental car for my friend. Instead, they would pay him back.
It was a horrible and unethical decision from my point of view. Their insured was liable. The purpose of the insurance is to restore the party to the same financial position it was in just before the loss. If the innocent party has to use its own cash, to be repaid later, this results in a working capital exchange. The innocent party must use its working capital, rather than the responsible party using its own working capital.
Working capital costs money. The carrier saves money by imposing conditions on the third party that is not a party to its insurance contract. (Also worth noting is that this carrier – although highly rated – has much less investment income than normal compared to its peer group, which means it must be performing better underwriting results due its lack of investment income subsidy.)
Also, the carrier saves money when the innocent party doesn’t have the working capital to afford an upfront rental car, which is probably its biggest savings, and is wrong.
I recently reviewed a cyber claim where an intentional misreading of the contract was literally the only possible reason to deny the claim. The wording of the policy read as follows: “…including, but not limited to…”. The expert interpreted this to mean only “limited to”. This means, according to his interpretation, that the coverage was limited to three elements. That’s one hell of a silent sublimit if his interpretation was correct. However, “including but not limited to” means “not limited to”, which is not difficult political language to understand.
Another form of shortcut is not using enough claims resources when disaster strikes. Of course, deploying enough claims resources when disaster strikes is materially easier to recommend than to do, but the severe shortcomings resulting from the 2021 hurricanes are rather problematic, from what agents share with me. Not hiring enough experts, especially quality experts, or preparing an adequate disaster response plan saves money.
Cut too close?
Carriers are under intense pressure to reduce their loss settlement costs and perhaps they are cutting too close to the bone.
What are the solutions in addition to having a more ethical behavior?
If you’re employed by an insurer that really cares about you, assess how your claims department actually works, then work hard to improve it. If you already have a good score, advertise. Two years ago, I saw an awesome ad from a major regional carrier documenting the testimony of someone who lost their home – twice.
Better yet, show your performance with documented evidence. I know the carriers are afraid to do this because of the applicant ban, but if you’re good, advertise you’re good and then work to improve.
Focus on forcing adjusters to return calls in a timely manner. Force your experts to actually read the policy they are adjusting rather than assuming the policy reads like another policy they are more familiar with. Go ahead and pay the undisputed part of the claim rather than delaying payment of the entire amount because part, often a small part, is disputed. Use common sense and good training with a strong focus on ethics and many of your claims issues will go away while your reputation is polished. This process is not rocket science for ethical carriers.
For agencies, you know which carriers have a good claims department and which don’t. Carefully let your customers know which is which. You are not, however, allowed to disparage a carrier, even if he is as guilty as h—.
Educate your staff on how to notify customers when they need to submit a claim. Inform the insured of what to do and ask him to keep in touch with you to find out if the adjusters are returning their calls. If the adjuster is incompetent, work behind the scenes to guide the adjuster, word by word, through the language of the policy.
Also inform your policyholders. Adjusters cannot return calls if insureds do not answer their phones or if insureds’ voicemail messages are full. Inform policyholders that it is important to have someone present when the adjuster arrives, and although scheduling is a major issue, the policyholder should be proactively involved. Educate policyholders on what to expect in the event of a claim. In the event of a disaster, inform policyholders that adjusters will be slower to respond.
Educate policyholders that in the event of a loss, people won’t just take their word for lost property, quality of construction, etc. Documentation is important for a quick and fair settlement.
Everyone can play their part in improving claims outcomes. If a carrier is unethical or just plain stupid, the onus is on the agent to help the insured, because the only other party willing to help the insured is the plaintiff’s bar association.