Insurance Company Pricing

Claims

An insurance policy is nothing more (or less) than a contract. Here, the contract is a promise by the insurance company to pay if an “event” occurs that is covered under the terms of the contract. The claims adjusters are the ones who interpret whether or not a claim that is presented is an event that is covered under the policy (contract) purchased.

The claims department consists of adjusters who may work strictly inside, or who may work strictly outside (in the field), or a combination of the two. Simply put, adjusters are the people who control the insurance company’s checkbook. Theirs is a difficult job because their company may criticize them for paying too much money on a claim, while their policyholders may criticize them for not paying enough!

Know this: Claims Adjusters have a fair amount of leeway in deciding how much money a policyholder or a claimant will ultimately be paid. The adjusters who excel in their positions are the ones who get claims closed while paying the least amount of money. Additional kudos is earned by keeping customers happy, but many times this is a secondary consideration.

An adjuster may, albeit infrequently, consult with an underwriter (refer to the Underwriting section for additional information about this position) for their “intent” concerning a specific insurance policy coverage provision, since underwriters are many times involved with drafting specific policy language. However, the ultimate decision whether or not to pay a claim lies with the adjuster. Most insurance companies follow ISO (Insurance Services Office), which promulgates the vast majority of insurance policy coverage language used by insurance companies today. Because of the wide use of specific insurance policy language, many insurance policy provisions are “court tested” and, as a result, case law exists for many coverage disputes. Adjusters use case law, internal insurance company claims handling guidelines, and other reference/resource materials when adjusting claims.

Adjusters become aware of case law from sources such as insurance company claims management, internal and external attorneys and from claims-focused magazines and periodicals. Reference materials that may be used by adjusters include items such as Fire, Casualty and Surety (FC&S) Bulletins; Insurance Services Office (ISO) ISOnet; National Council on Compensation Insurance (NCCI); the International Risk Management Institute (IRMI); National Underwriter; Rough Notes; the National Alliance For Insurance Education and Research; A.M. Best and a variety of other resources.

Insurance companies and their insurance adjusters do have specific duties they owe their policyholders. Many of these duties are contained in the NAIC (National Association of Insurance Commissioners) Unfair Claims Settlement Practices Act Model language. Provisions of this Act have been adopted as claims handling standards in legislation passed by several states.

The Unfair Claims Settlement Practices provisions provide standards that insurance companies should follow so that their insureds are treated fairly. The Act attempts to encourage insurance companies to handle claims promptly and to provide fair and equitable settlements between insurance companies and their claimants.

Examples of provisions that are contained in the Unfair Claims Settlement Practices Act Model include:

Insurance companies must fully disclose all benefits and coverages in their customer’s insurance policy.

Insurance companies cannot misrepresent their policies.

Insurance companies cannot deny a claim based on arbitrary time limits given to customers to prove their loss or property damage.

Insurance companies must acknowledge claims “promptly” after the claim is filed. Note that States may define the word “promptly” in different ways, or not at all.

Insurance companies must provide reasonable assistance during the claims process. This includes promptly supplying customers with appropriate forms and clear instructions.

All claim investigations must take place in a reasonable amount of time.

Insurance companies should not enter into settlement negotiations

with a claimant who is not represented by an attorney or who is not an attorney.

Insurance companies cannot send a settlement to a claimant that is less than the total cost of damages unless the customer agrees.

Insurance companies cannot force you to travel an unreasonable distance during your claims process.

If an insurance company denies or delays your claim, they must give you a reasonable explanation.

While many events are black-and-white concerning whether or not the policy should respond to a given claim, there are many gray areas where a company may elect to deny payment rather than pay a claim — because that decision is monetarily in their best interest. As stated earlier, in such situations, claims adjusters might question underwriters, or employees in the Policy Development Department that if the policy language is not clearly stated in the policy, the policyholder generally should prevail if the disagreement moves to the court system. Courts view the insurance contract as strictly enforceable because the insurance policy is a unilateral document (drafted by only one party — the insurance company) in which the policyholder has no input in the development of the contract (this is also known as a “contract of adhesion”). As a result, ambiguities are decided in favor of the insurance consumer. However, the problem ultimately becomes how long and how hard does a policyholder want to fight about coverage issues? Often, they give up too soon or forego use of an attorney, consultant, or a public adjuster, whereas the attorney, consultant or public adjuster may be able to resolve a claim in the policyholder’s favor.

An example from my own insurance company experience will drive this point home. One of the companies I worked for (which is no longer in business) offered a coverage called “voluntary property damage,” which was often purchased by contractors (landscape gardeners, carpenters, plumbers, electricians, etc.). The intent of the coverage endorsement was to delete an exclusion in the general liability portion of the insurance policy that pertained to property in the policyholder’s care, custody or control. For instance, if I am a painter and I go inside your house to paint a room, the entire room I will be painting is deemed to be in my care, custody or control. If I happen to poke a hole in the wall with my ladder, the hole in the wall is something that

will not be covered by my insurance policy. The voluntary property damage endorsement was meant to provide coverage for this type of situation.

However, the way my prior employer worded the endorsement, intended coverages were not actually provided by the endorsement in a great number of care, custody or control claims situations. While there was not a huge premium charge for the endorsement, it was sold for many years without technically providing coverage for several claims related to care, custody or control — which, again, was why the endorsement was developed to begin with.

It would have been relatively easy to add additional coverage by clarification of policy language intent, but this was never done. Why not? Due to the small premium charge, it wasn’t worth the insurance company’s time and effort to correct the problem. It would have taken considerable time for the people from the Information Technology Department to re-program the computers, time for people from the Policy Development Department to recommend new wording, time to re-file the policy wording with the Department of Insurance, time to provide updates and training to the Underwriting and Claims Departments advising of the new wording, and so forth. Clearly, this decision was not in the best interest of the policyholder, but it was deemed a good business decision by insurance company management on a purely “cost of change” basis.

Consumers remain confused about the insurance claims process for many different reasons. One reason is that a claim involves understanding policy language and things such as coverage provisions, limitations and exclusions. Another reason for consumer confusion is a lack of information about the process itself — and due to a great amount of misinformation that has been spread by friends, relatives, neighbors and others concerning insurance claims.

Common types of property claims include hail, wind, lightning, water and theft. And, while not frequent, fire is still one of the most catastrophic types of property claims that occur.

Other events that may result in significant claims include personal liability claims, at-fault automobile accidents, on-premises medical injuries, and other types of situations where policyholders are deemed legally liable (“negligent”) in some manner. It is interesting to note that according to industry statistics for homeowners insurance claims, property damage and theft claims account for nearly 80% of all claims payments, while liability

claims account for less than 10% of claims paid by insurance companies.

Please understand that there are very few hard and fast rules in the area of claims. There are several reasons for this. First, each claim must stand on its own merits. The facts surrounding each claim are all-important. For example, consider a hail storm that occurs. Two next door neighbors turn claims in to their respective insurance companies. One day soon after, the two neighbors are talking and discover that one of them got a claim check from their insurer for $4,500 to replace his roof and the other received no payment at all. In the course of investigating the facts, it was discovered that the neighbor who received a claim payment had a 25-year-old roof, and the other had his roof replaced just last year. This single fact highlights a logical explanation for this claims handling discrepancy: old roofs are easily damaged, while new roofs are very resilient against hail. Thus, each of these two claims was handled properly.

Second, there is some flexibility among insurance companies in the area of underwriting. One company may file their automobile insurance program with a rule that “forgives” the policyholder’s first automobile physical damage claim if the policyholder has been insured continuously for five or more years. Another company may not have filed this same rule and, instead, surcharges for any at-fault accident that exceeds a stated threshold dollar amount, such as $500.

Third, there are gray areas in the insurance policy. It is impossible for insurance policies to contemplate every single claim situation that might ever arise. Do you have a hard time believing this? As an expert witness in court for insurance-related cases, I assure you this is true. Courts are constantly addressing insurance policy coverage questions.

Some of the many questions that insurance consumers have concerning claims include:

Will my policy be cancelled if I turn in a claim? Will my insurance rates increase if I make a claim?

Am I better off paying small claims out-of-pocket, or should I turn in every possible claim to my insurance company?

Are claims that I make under my business insurance policy viewed in the same way as claims I make under my personal insurance policies?

What are my options if coverage for my claim is denied by my

insurance company?

For the reasons previously outlined, keep in mind that there may be different outcomes in the way that adjusters will handle two similar claims. Nevertheless, here are reasonable answers to the above questions.

Will my policy be cancelled if I turn in a claim?

Maybe — depending on the type of claim, the number of claims you have made in a specific time period and the underwriting criteria in place at your insurance company. You can ask your insurance agent what impact making a claim will have, but know this: insurance agents are required to inform insurance companies about what you tell them. Therefore, it is possible that your situation may be held against you even if you do not turn in the claim. For example, if you purchased a dangerous breed of dog (e.g. a pit bull), did not inform your insurance company and the dog bit a neighbor’s child.

While you may not realize it, insurers are interested in any significant changes that occur in the risks they are accepting. In insurance company terminology this is known as a “material change in risk.” So, if you had no animals when you first purchased your homeowners policy, the insurance company expects that will remain the case throughout the time that they provide your insurance. But if you buy a dog, this presents a different set of circumstances from the standpoint that the dog could cause damage (destroy property) or injure someone (jump on them or bite them).

Generally, the owner of a dog is held liable for damages or injury the dog causes, and the specific breed mentioned above is more prone to cause injuries than other breeds. The worst scenarios involve children under seven years of age. When a child is younger than seven, courts may feel they have not reached the “age of reason,” and since their judgment is not yet formed, they cannot be held liable for their actions — including things such as teasing a dog. If the child is not liable, you are. If you are liable for injuries, your insurance company may step in to pay damages you owe. If they didn’t know you have a dog, they definitely will not look favorably upon paying a claim involving a dog.

Will my insurance rates increase if I make a claim?

In the past, homeowner policies did not necessarily go up. However,

insurance company homeowner results have deteriorated significantly over the past few years due to factors such as natural catastrophes and more. Therefore, your homeowner policy may now very well cost you more if you make a claim against it. Concerning automobile policies, you are very likely to pay more (via a policy “surcharge”) for any at-fault accident. In addition, your auto policy price will likely increase if a household driver receives a ticket for any type of moving violation. Statistically speaking, nearly 1/3 of fatal accidents involve speeding or driving too fast for conditions. If you speed, insurers have proven that any accident you have in the future will be more severe than if you do not speed. Therefore, you are charged a higher rate now for the accident that may occur in the future.

Am I better off paying small claims out of pocket or turning in each claim?

It may benefit you not to turn in small claims. It does, however, depend on on the type of claim and the facts involved. For instance, if $520 of personal clothing is stolen out of your car, and if you carry a $500 deductible, it makes little sense to turn in the claim. However, if someone slips and falls in front of your house on an icy sidewalk that you did not shovel for three days and is injured, you should turn in the claim, even if the injured person says that they will not hold you liable. This type of claim may worsen over time and turn ugly for a variety of reasons, so it is important to provide your insurance company with information concerning the situation as soon as possible, so they can investigate and hire defense counsel should the need arise. In fact, if you do not turn in this type of claim, the insurance company has the right to reject payment for this very reason. This is known as prejudicing the insurance company’s rights by not giving them the opportunity to become involved at the time that the accident took place.

Are claims I turn in under my business insurance policy viewed the same way as claims I make under my personal insurance policies?

No, most business policies are underwritten on a “loss ratio” basis. This means that insurance company underwriters weigh the amount of premiums “paid in” against the amounts of claims dollars “paid out.” While different companies apply different profitability criteria, most insurance companies are content with a pure loss ratio of 50% or less. However, the higher the loss

ratio, the more likely that a higher renewal price increase will be applied.

Conversely, under homeowners and automobile policies, insurance companies typically take a long, hard look at the frequency of losses incurred. Since homeowners’ premiums are generally less than $1,000 annually, insurance companies cannot afford to pay out many claims and hope to remain profitable. While automobile insurance rates are somewhat higher, payments for liability and medical claims can involve significant payments. Again, insurance companies cannot pay many high automobile claims for one policyholder and remain profitable. What about a policyholder who has several very small claims? Underwriters adhere to the following rule: frequency breeds severity. In other words, if a policyholder has a history of small claims, a big claim is almost certain to follow at some point in the future.

What are my options if coverage for my claim is denied by my insurance company?

A good first step is to discuss the situation with your insurance claims adjuster. Make certain they understand the facts clearly. If they have denied your claim they should cite the specific policy language upon which they rely. If you continue to feel the insurance company has wrongly denied your claim, you should next discuss your claim with your insurance agent. Your agent has a legal, dual fiduciary responsibility to act not only in the insurance company’s best interest, but also in your best interest. Keep in mind, however, your agent likely has thousands or millions of dollars of written premiums with the insurance company compared to the couple of thousands of dollars that you pay for your insurance. Therefore, agents may have the inherent bias that works in the favor of the insurance company. After all, if they lose you as a client it may cost them $1,000 or so of insurance commission income, whereas if they lose their insurance company contract it may cost them $100,000 or more of income. Another factor may be that your insurance agent makes it a personal practice not to get involved with claims because of the feeling that adjusters are in the very best position to interpret claims.

After discussing your situation with your insurance adjuster and your insurance agent to no avail, you may next wish to discuss your claim denial with a public adjuster, an insurance consultant or an attorney. Also, you may

wish to involve the Commissioner of Insurance in your applicable state where coverages apply (typically in your “state of domicile”) by filing a complaint and asking that they review the circumstances of your claim denial.

Yes, it is possible that your insurance company made a mistake, or that your claim may involve a gray area under the insurance policy where the insurance company has taken the position that benefits them rather than you. However, it has been my experience that the vast majority of insurance claims are handled efficiently and correctly by insurance company adjusters. Therefore, if your insurance claim has been denied, it is quite possible that there truly is no coverage for your claim under your insurance policy.

Keep in mind that payment of claims is the reason insurance companies are in business. However, they must follow their policy (contract) wording during the claims adjustment process. If they pay claims that are not covered under the insurance policy then many other facets of the insurance coverage process are affected, such as:

Policy rates will go up since actuaries did not contemplate payment for uncovered claims

Courts may broaden the insurance company’s liability for other claims that were never intended to be covered. This can result from a plaintiff’s attorney asking the insurance company if they ever intentionally paid claims that were not covered by their insurance contract.

Claims adjusters, underwriters and the Marketing Department may become confused concerning coverages provided under insurance policies sold to the public.

One final comment is warranted in the area of claims. Some insurance companies use only their own inside insurance adjusters; some insurance companies use mainly “independent contractor” (third-party, or outside) adjusters, and other insurance companies use a combination of inside and outside adjusters. As a general statement, I have found that third-party adjusters do not handle claims as well as adjusters who are insurance company employees. My guess is that this is due to several factors such as lack of training; frequency of employee turnover in independent adjuster companies; performance based upon a different “customer” base (for inside adjusters, their customer is their policyholder; for third-party adjusters, their

customer is the insurance company itself). There may also be a possible lack of accountability, i.e., complaints against individual company adjusters go directly to insurance company claims supervisors; complaints against independent adjusters may never get back to appropriate insurance company personnel.

Are all third-party independent adjusters bad adjusters? Certainly not. However, during my career I have noticed that there generally is a difference between employee adjusters and third-party adjusters and that the balance tips in favor of inside adjusters doing a better job overall.