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 discover whether their cheap policy was too cheap. Claims are where reputations are made. Claims are where a disdain for insurance is developed, or people discover insurance is a savior.

Currently, from what I hear from my agency clients and personal friends from around the country, claims processing in the insurance industry is not going so well. The industry is developing more enemies than net promoters.

Part of the issue is that carriers are cutting corners. I know we are not supposed to say this so boldly within the industry. It is talked about everywhere and when state conventions open again to live events, it will be a hot topic at the bar, but no one talks openly about the corner cutting. A fantastic primer on corner cutting was published several years ago in Bloomberg Markets. It was their cover story regarding how a famous consulting company taught famous insurance companies how to save money on claims. The article is 15 pages and describes the innovative (at that time, 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 was reportedly so thorough of a process that it consisted of 150,000 pages and slides.

About two years ago a plaintiff law firm updated the article. I am not usually a fan of plaintiff law articles and to me this was biased as usual. However, the updates are worth reading for those of you who care about fair and straight forward claim settlements.

Pressure on Claims

The pressure to improve claims from a reputational perspective is only going to increase. The industry almost completely failed to offer coverage for the most important commercial business loss in 100 years due to COVID and a large proportion of people feel the coverage denial was the result of greed. I don’t agree with that perspective, but that perspective is seen as reality. Combine that with poor claims and the regulators will make life harder. They may begin inventing coverage as some insurance companies and agents believe happened as a result of the 2021 hurricanes.

An example of bad claims behavior, unethical even if legal, is what happened to a friend. He was driving down the highway recently and the driver next to him decided he wanted my friend’s space. He literally turned into him even though they were side-by-side — it was like trading paint in a stock car race. Establishing liability was not an issue. The other driver and his insurance company accepted liability. However, the carrier (interestingly enough — 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 reimburse him.

That was an awful and unethical decision from my perspective. Their insured was liable. The point of insurance is to reinstate the party to the same financial position they were in immediately preceding the loss. If the innocent party must use their own cash, only to be reimbursed later, an exchange of working capital results. The innocent party must use their working capital, rather the liable party using their own working capital.

Working capital costs money. The carrier saves money by forcing terms onto the third-party who is not a party to their insurance contract. (Interestingly, too, this carrier – while highly rated — has far less investment income than normal relative to its peer group, meaning they must achieve better underwriting results due to their lack of investment income subsidy.)

Furthermore, the carrier saves money when the innocent party does not have the working capital to afford a rental car upfront, which is likely their larger savings, and is wrong.

I recently reviewed a cyber claim where an intentional misreading of the contract was literally the only possible reason for denying the claim. The policy language read, “…including but not limited to….” The adjuster interpreted this to mean only “limited to.” This means, in her interpretation, that coverage was limited to three items. That is one heck of a silent sublimit if her interpretation was correct. However, “including but not limited to” means “not limited to,” which is not difficult policy language to understand.

A different form of a shortcut is to not employ enough claims resources when a catastrophe hits. Obviously deploying enough claims resources when a catastrophe occurs is materially easier to recommend than to do, but the serious shortcomings arising from the hurricanes in 2021 is rather problematic, based on what agents are sharing with me. Not hiring enough adjusters, especially quality adjusters, or preparing an adequate catastrophe response plan saves money.

Cutting Too Close?

Carriers are under intense pressure to reduce their loss adjustment expenses and maybe they are cutting too close to the bone.

What are some solutions besides behaving more ethically?

If you are employed by a carrier that actually cares, measure how well your claims service really functions and then work hard to improve it. If you already score well, advertise. Two years ago I saw an awesome advertisement from a large regional carrier documenting a testimonial from a person who lost her home — twice.

Better yet, show how well you perform using documented proof. I know carriers are afraid to do this because of the plaintiff bar, but if you are good, advertise you are good and then work to get better.

Focus on forcing adjusters to return calls in a timely manner. Force your adjusters to actually read the policy they are adjusting rather than assuming the policy reads like some other policy with which they are more familiar. Go ahead and pay the uncontested portion of the claim rather than delaying payment of the entire amount because some portion, often a small portion, is contested. Use common sense and good training with a strong focus on ethics and many of your claims problems will go away while your reputation will be polished. This process is not rocket science for ethical carriers.

For agencies, you know which carriers have good claims service and which ones do not. Carefully let your customers know which is which. You are not, however, allowed to disparage a carrier, even if they are as guilty as h—.

Educate your staff on how to advise clients when they need to submit a claim. Advise the insured what they should be doing and have them stay in touch with you regarding whether adjusters are returning their calls. If the adjuster is incompetent, work behind the scenes to walk the adjuster, word-by-word, through the policy language.

Also, educate your insureds. Adjusters can’t return calls if insureds do not answer their phones or if insureds’ voicemails are full. Educate insureds that it is important for someone to be present when the adjuster arrives, and while arranging schedules is a major hassle, the insured needs to proactively participate. Educate insureds on what to expect when a claim happens. In a catastrophe, let insureds know adjusters will be slower to respond.

Educate insureds that when a claim happens, people are not just going to take their word about what possessions they lost and the quality of construction and so forth. Documentation is important for quick and fair settlement.

Everyone can play their part to improve claims results. If a carrier is being unethical or just 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.