IRMI Update—Issue #60
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
March 4, 2003
In This Issue
Colleague,
In this issue I am sorry to report the passing of a friend, George Keller,
who died unexpectedly the end of last year. George was most recently director
of international programs for XL Winterthur International (now part of the XL
Capital Group) and held many important positions with Winterthur, such as CEO
Americas and Asia-Pacific, over the past 17 years. George was also an IRMI.com
Expert Commentator.
As I grew to know George over the last decade or so, he impressed me greatly.
He had an enviable depth of knowledge about the insurance business and had gone
far in his career, yet he was always approachable and down to earth. He was
an all-round great guy, and we miss him. His passing made me realize how fortunate
we are to have so many great friends and supporters in the industry. Thank you
for being one of them.
Have a great day.
Jack
Jack P. Gibson
President
IRMI
Conduct Periodic Meetings with Adjusters—Insurance
company claims adjusters perform a critical, highly visible function and typically
are extremely overworked. For this reason, it is wise to periodically (quarterly,
semiannually, or annually) hold meetings at the insurance company with the administrator
in charge of your claims. Discuss your largest open claims, including reserve
amounts, what action has been taken by the adjuster, future activity, and potential
settlement strategies for difficult claims. In workers compensation, pay particular
attention to reserves for open claims since they will be used in the experience
rating process.
Source: Derived from one of the recommendations in
101 Ways To Cut Your
Business Insurance Costs.
Suggest a Risk Tip. Future issues of IRMI Update will include more risk tips from our readers. Send
us a practical tip (less than 300 words) for identifying and managing risks,
buying insurance, managing claims, or filling gaps in insurance coverages. We'll
give you credit for your contribution.
There are now 390 articles on IRMI.com, and many more are in production.
Below you'll find summaries of some recent additions with links to the articles.
Peter Vigue to Keynote
IRMI Construction Risk Conference—The president and CEO of Cianbro
Corporation, Peter Vigue, will deliver one of two keynote addresses at the 23rd
IRMI Construction Risk Conference in Chicago. A sought-after speaker, Mr. Vigue
will share the story of his organization’s journey to a safety culture, the
implementation challenges they faced from top management all the way down to
field workers, and current challenges in maintaining the focus. Plan to join
us on November 17-20 in Chicago. For more information about the Conference,
see the Conference agenda.
In IRMI Update #59, Jack Gibson asked readers
whether they thought insurers have become too easy and quick to settle claims
that could be considered frivolous, just to save money and get rid of nuisance
claims. Additionally, he asked if insureds should be directly involved in the
claims process. Jack hit a nerve, which resulted in the greatest response we've
ever received from readers, with most answers leaning toward the affirmative,
but varying as to degree. Below are some reader responses, edited for length.
Thanks to all who took the time to comment.
- The horses left the barn 50 years ago when the insurance companies collectively
took the stance that it is financially more beneficial to settle certain
claims almost immediately. Friends of mine at large and medium size law
firms have carrier lists that detail which carriers cave in at certain dollar
levels. It's just that simple! IF the insurance companies now try to regain
this lost ground it will be very, very expensive for them to reestablish
who is willing to play hard-ball and who is a push over. In the long term,
I personally believe the industry's 50-year-old position was disastrous
for every carrier and insurance buyer.
—Thomas W.Davis, CIC, Davis American, Ltd.
- I have a different perspective. I work for a national law firm that
does plaintiff and defense work. What I see is that insurers and particularly
self-insureds end up paying a lot more by making unreasonable decisions
and failing to realistically evaluate their position early on. This seems
to be a trend.
I recently had a case against a large manufacturer with a large SIR.
At mediation they failed to offer anything. We took them to trial and got
a large judgment. Now they want to talk and we are not interested. They
could have settled the case for a reasonable amount if they hadn't been
so arrogant and unreasonable. Instead, they incurred several million dollars
in attorneys' fees, and they have to pay the judgment.
I had another case recently of clear liability—the only issue was which
of three defendants would pay (they all had some responsibility). The defendants'
insurers all took hard-line positions that it was the other guy's fault.
The case dragged on for 3 years before it settled and ultimately the defendants
spent more on defense costs than they would have spent to settle the case
early on. Not to mention the time and resources of the companies that were
devoted to the litigation.
I have a client (usually a defendant) who I think has the right approach.
They evaluate things realistically, including jury testing if warranted,
up-front. If they think they will lose, they settle early. But if they think
they have a winner, they fight until the end. They are not considered "easy
marks" because everyone knows if they have determined something is a case
of little or no liability, they will fight it to the end and through the
appellate courts. But counsel has to be completely honest with their clients
up-front even if it means foregoing some defense fees.
The views above are solely my own and not those of the firm.
—Thomas H. Cook, Jr., Zelle, Hofmann, Voelbel, Mason
& Gette, L.L.P., Dallas
- Of course the insurance carriers are too quick to pay claims. For the
most part, they have inexperienced front line adjusters with settlement
authority. Since these adjusters are being evaluated on closed claims versus
open, they look to pay as quickly as possible to get rid of the nuisance
items. I feel that insureds should most certainly be part of the claims
adjusting process. They are the ones who can tell if a claim is fraudulent,
provided they are not the perpetrators. Further, with an insureds' involvement,
there is more attention paid since they may be aware of the fact that increased
claims equate to increased premiums.
—Alan Doloboff, Director, Frank Crystal & Co., Inc.,
New York
- Are insurers too easy on the plaintiff's bar? This is conventional wisdom.
The problem is, if an insurer guesses wrong, it's their own $5 or $10 million
policy on the firing line. If the insured guesses wrong, well there goes
its deductible or SIR, maybe.
When the insured stands on the sidelines and urges insurers to trial,
they're really playing with the house's money. This inspires a different
degree of risk taking than when it's all your own ass(ets) on the proverbial
line. It's like the guys in the bleachers yelling at the football coach
to "Go for it" on fourth and one. If the play fails, the fans go back to
their cars; the coach gets fired.
Financial accountabilities produce their own differing sets of perspectives
on the decision to "defend versus settle."
—Kevin M. Quinley CPCU, ARM, AIC, AIM, ARe, Senior Vice
President, Risk Services, Medmarc, Fairfax, Virginia
- Based on my experience here at Six Continents Hotels, I do not think
that we pay too quickly or easily on the little matters. But as a self-insured
for several thousand dollars of retention, we have other resources besides
money we can use to help get rid of a case but not give out hard cold cash.
One of those is our guest cards for free nights' stay at our various hotels
throughout the world. We also use medical payments coverage extensively
to help people with their out of pocket expenses. While the guest is still
at the hotel, the hotel oftentimes uses small things like a free fruit bowl
or meal or a minor reduction in room rate. We have found all of these resources
work well in resolving matters before they become big issues. Treat someone
with kindness and courtesy and they respond favorably in most instances.
I know that if you use an insurance company or TPA to handle your claims
that some of these resources are not available. In situations like that,
I have found that per claim costs rise.
—Gail G. Copelan, Claims Manager, Six Continents Hotels,
Atlanta
- I have helped numerous clients develop operating practices for retained
claims over the past 20 years. I have seen both the "argue everything" and
"pay everything" strategies employed. The overriding goal remains to be
the efficient management and elimination of liabilities at the lowest possible
cost. This involves a balanced approach of investigating all, paying the
legitimate fairly, and prosecuting the fraud. No one should choose to become
an open checkbook as this will breed a moral hazard, yet an overly argumentative
position increases the legal costs and final settlement amounts in direct
conflict to our cost goal.
Many insurance companies could learn a lot from these sophisticated self-insurers.
They often practice a false economy of overloading adjusters, paying needless
claims to meet their quota, and hiring low quality legal counsel because
of the allure of a low hourly rate. Common sense, communication, and a balanced
approach could make a world of difference in the final results.
—Jim Chambers, CPCU ARM, Redmond General Insurance Agency,
Redmond, Washington
- I understand carriers' incentives to settle claims, even those that
are not worthy, because of the costs involved and the demand for profits.
But what is right should also be considered. Industry has taught tort attorneys
the easy-prey attitude, until laws are changed that the side that brings
the lawsuit has to pay both sides' bills if they lose, I do not see much
changing.
I think carriers should bring clients into decision process on claims
settlement simply to understand why; the carriers still should have last
word. However, if the claim is paid over client's extreme objection, then
some type of discount of loss experience should apply to help offset the
bad loss ratio, similar to W/C excess loss calculation.
—Bill Oglesby, CIC, President, Brown Insurance Group,
Inc.
- As long as the insurance companies are running scared of taking things
to court and facing an ever-changing jury of their peers, it will continue.
The companies continue to settle claims with total disregard of the facts
of the case and are costing the insured money by not taking thing to court.
The big cost of any litigation is always the discovery phase and the
next step is going to trial. Why stop after spending all the money for discovery
phase?
—Darrell Teague, Corporate Risk Manager
- We are very involved in the claims process with our insurer. We do not
believe that we nor our insurer should be a "target" for the plaintiff's
bar. We have a combined workers compensation and general liability retrospective
rating plan, so each general liability claim is very important.
We also believe that the defense attorneys hired by the insurance companies
must be managed. A defense attorney once said, "It's just insurance." We
don't believe that. I think that if more insureds would be proactive in
the handling of their claims with their carriers, the plaintiff's bar would
quickly see that their "targets" are no longer "easy marks."
—Becky Walker, Risk Manager, David E. Harvey Builders,
Inc., Houston
- The insurance industry should fight claims that look like they have
been filed to extort money out of the insurance company. I attended a claims
seminar 2 years ago. The attorney for an insurance company said: If I know
I can settle a claim between $5-10,000, I come with the checkbook under
my arm." The insurance companies need an attitude adjustment.
—Harry Spatz, President, California Associated Ins. Brokers
Inc., San Francisco
- Being on the claims side of the business, I do agree that too often
a decision to settle is based on the economics. But, that being stated,
I also think a settlement is often in the best interest of our insured.
I cannot speak as to how underwriters currently evaluate a potential insured
for new business or as a renewal, but a carrier I worked for previously
told me that they look at a total amount paid on behalf of an insured, and
do not look deeper into whether the payments made were loss or expense payments.
If that is still the case, then the economic settlements are in the best
interest of our insured, even though it sends all of the wrong messages.
With the oftentimes ridiculous and unsubstantiated verdicts we all hear
about, who wants to take the risk of having to report one of those runaway
verdicts that also sends the wrong message to potential plaintiffs? Then
there is the issue of protecting an insured's assets. Settlements resolve
the potential risk of exposing the insured to a verdict in excess of the
policy limit and depending on the state, the potential of a bad faith lawsuit
against the insurer.
There are a lot of factors taken into consideration when cases are settled
rather than tried. The claims department walks a very fine line in attempting
to protect not only the insured but the company, also.
—Karen S. R. Musto, Claims Program Manager, GE, ERC,
Overland Park, Kansas
- Everyone in the industry knows the reason insurers settle: it's cheaper
to pay them off. That's nothing new, and there is a certain degree of logic
involved. The insured usually has little say in the matter, and again as
we all know, the payments appear on the insured's claims history. You cannot
tell a new carrier that a claim was paid for its nuisance value—all they
see is a claim history. Solving the problem isn't more involvement from
the insured, or fighting the frivolous claims. The solution is tort reform.
Tell the Trial Lawyers Association they're only going to get paid if they
win the trial and watch the court's calendar clear up overnight.
—Larry R. Peterson, CPCU, AFSB, Wood Special Risk Brokers,
LLC, Alpharetta, Georgia
- I had a large grocery store insured with a carrier who paid med-pay
without any investigation. Word spread among the stores customers and we
had an “epidemic” of small med-pay claims which had a significant impact
on the insureds loss ratio. The client did an excellent job investigating
claims and had video cameras throughout the store. When we moved the business
at expiration, we added the following language at the bottom of our incident
report we sent the carrier:
Insured’s disposition.
- Pay med-pay only
- Liability
- No med-pay or liability
Contractually, the carrier still had the right to settle the claim. But
they agreed if the insured entered #3 on the incident report, they would
have to contact the client before making any payment. You would be amazed
how that simple step curbed the settlement of nuisance claims for my client.
—Steve Heinen, President, Risk Management Inc.
- I have the great privilege and good fortune to work for ProAssurance
Group. They are a highly successful regional insurer that insures doctors
and in a few states, dentists, attorneys, and some hospitals.
Our claims philosophy is very simple. Defend everything! We do. The good
news is our aggressive defense philosophy enables us to rescue physicians
from losses that would have marred their record undeservedly, and a physician's
reputation is all-important. The bad news is the cost to defend has increased
astronomically the last 10 years, and the number of incidents requiring
defense has also increased exponentially.
My favorite saying has a germ of truth. If they discount the premium,
they must discount the claim.
-
—Bill Ford, CPCU, CLU, CIC, ARM, AAI, JD, Regional
Manager Alternative Risk, ProAssurance, Birmingham, Alabama
- It has been my experience that some insurers do seem to settle small
third-party claims with a minimum of investigation and seemingly with little
interest in defending such claims in which there may be any hint of liability
on the part of their insured.
In defense of the insurers, they are very aware of not only the cost
of litigation but also the “role of the dice” outcome they seem to believe
is likely in the civil justice system. Clearly, there is more than a little
truth in insurers’ belief regarding the cost and uncertain nature of litigation.
However, some insurers seem to exaggerate such issues or use these factors
more as an excuse to fail to investigate and properly contend liability
claims. This may be in part because claim departments are understaffed and
are so swamped with claims that it is more expedient to simply cut a check
then to look into it further.
Admittedly, most liability policies grant insurers the sole discretion
to settle third-party claims. However, economic decisions as the only or
prime consideration in settling small third-party claims is poor policy,
both private and public policy, that hurts their policyholders and has far
reaching implications for the cost of risk and insurance.
In this marketplace, payment of claims which have not been properly investigated
or contended are now very much working against policyholders; 3 years ago
such claims seemed to have little effect on future premiums.
I suggest that if an insurer wishes to make decisions to pay small third-party
claims based solely on the cost of fighting the claim and not the potential
liability of the insured, such claims should be specifically noted by the
insurer and not be held against the policyholder in deductibles or future
premium calculations.
—Craig F. Stanovich, CPCU, CIC, AU, Principal & Consultant,
Austin & Stanovich Risk Managers, LLC , Douglas, Massachusetts
- I agree. ALL insureds should be involved in the claims process, even
if involved in a guaranteed cost program. It has always been my argument
that the claims are the EXPERIENCE of the client, and such claims follow
the insured from renewal to renewal. I have never accepted the argument
from the carrier that it's "our dollars" being paid out on the claim for
the aforementioned reason.
—Gregory C. Vann, AIC, Assistant Director—Claims, Aon
Risk Services, Inc.
- I think what we have here is the classic conflict between what is right
(or moral) and what is practical. The interesting question is whether, by
being hard-nosed and strict regarding settlements, the moral result can
be achieved by a circuitous route through the back door. Thirty years ago,
a particular carrier was noted for their insistence that they would not
pay claims easily—they would bring them "to the courthouse steps," if necessary,
before settling or going to trial. While that attitude no doubt wreaked
havoc on some deserving (but poor) plaintiffs, there was no question that
the plaintiffs' bar became well aware of this company's position and refused
to prosecute many "nuisance" or outright bogus claims. They were not about
to invest the time and money required unless they had a deserving (and larger)
case.
By contrast, another carrier of note went out of their way to contact
every potential claimant within 48 hours, ask them how they were doing,
and consequently did much to create litigants where none may have existed.
Settlements were quick and routine, and loss ratios suffered. So the hard-nosed
carrier may have (unwittingly?) created a preferred result: saving the court
system for truly deserving and significant cases, leaving the nuisance claims
to quietly fade away.
Who said, "There ain't no justice"?
—Philip Lieberman, Lieberman Consulting Services, Caldwell,
New Jersey
- I think your comments are right on. I can tell you that as a risk manager,
by being deeply involved in every claim, even though it may be less than
deductibles or a workers comp claim, my 19 clients' loss ratios and frequency
are about 23% less than their peers who do not have risk managers, as well
as those with risk managers who do not interest themselves in claims.
—Marvin Sahl, Risk Manager, Specified Master Franchises
of Jani-King, Palm Springs, California
- While I think it unlikely that we alone will change the foundation of
our legal system, we can and do pursue a thorough execution of the process.
Among them are:
(1) We inquire at deposition if the plaintiff is receiving any public
assistance either on a federal or state basis. If they are, and we settle
or loose resulting in a payment, we send a copy of the settlement agreement
and the canceled check to the Social Security Disability Income and State
Social Worker—by registered mail, return receipt requested of course. As
we have learned, most settlements are tax exempt, and the issuance of the
appropriate tax notifications are assumed by the plaintiff attorneys. In
most cases, the reporting of eligible income (the definition of income is
different depending on the agency) is the responsibility of the recipient
and therefore would have a influence on future benefits and often goes unreported
resulting in a situation where a plaintiff can collect on a settlement while
continuing to receive state and/or federal benefits.
(2) In addition, we have modified our claim handling procedures to include
reporting to state and federal agencies for possible insurance fraud. The
state agencies are usually the Attorney General and in some states, there
is a separate fraud department, we send eligible claims to both. The corresponding
federal agency is the Social Security Disability Income, presuming the plaintiff
is receiving SSDI.
(3) A lot of attention is given to the selection of our insurance defense
counsel which in turn we require be "accepted" by our insurance carrier
prior to accepting coverage. We do not blindly accept the carrier appointed
defense counsel.
(4) Part of the requirement for defense requested depositions are a minimum
of four hours for "slip and falls" and will always require a break for lunch
and return for an early afternoon conclusion.
Surprisingly enough, we have had some positive feedback from our carrier
while receiving some verbal complaints from plaintiff counsel. We have seen
our liability claims fall by over 35%.
—David S. Hershey, Director of Risk Management, The DePaul
Companies, Blue Bell, Pennsylvania
- I couldn't agree with you more. At Alpharma we stay extremely involved
in our claims and rarely exceed our SIR. Our philosophy is that we don't
pay claims unless we were wrong (e.g., manufactured a bad product). Otherwise,
we will offer a refund but that is it. With respect to lawsuits, we try
to make ourselves as unattractive as possible to plaintiff's attorneys (make
it expensive for them) and strive to get out on summary judgment motions
(usually successful). There have been exceptions but they are few.
I have been preaching this to insurers and to others in our industry
and hope that you will do the same.
—Mary B. Andrews, CPCU, Director of Risk Management,
Alpharma Inc., Ft. Lee, New Jersey
- I like to think of the early economic claim settlement argument as setting
an "Economic Precedent" (E.P.). If your threshold for bringing a case to
trial is $5,000, then you are willing to spend $5k to avoid a trial regardless
of the nature of the injury. The person gets more money just for holding
out longer—the oldest negotiation trick in the book.
Take for example the common whiplash case. Years ago in Canada, you could
settle a nuisance claim for around a $1,000 with little or no medical backup.
This nuisance claim is now approaching $5,000 and in some cases, with experienced
claimants, $10,000. What is driving this increase? In my opinion, we have
many drivers:
- Lawyer advertising and contingent fees (no risk for the claimant)
- Friends and neighbors telling their stories of winning the insurance
lottery based on previous E.P.
- Judgment summary finding its way to press, while the details of
the extent of injury are not listed
- U.S. settlement information working its way north to Canada.
Our population is being educated on how to present a claim for easy money.
And it is easy! To the insurers in the group, we need to change the population's
opinion about how easy it is to get money. Have each of your staff take
the best 5 small claims to court each year. Argue that there was not enough
speed to cause an auto injury in a healthy North American male/female. Set
up surveillance right away, and come to court prepared. Then start doing
the same with represented claimants.
The unrepresented claimants will find it is too time-consuming (not easy)
to present their case or they will present a poor unprepared case. You have
a good chance of winning the unprepared cases, thereby setting an E.P. The
unrepresented claimant tries to get a lawyer. Some lawyers would prefer
not to enter the courtroom and will try to settle the claim without going
to court. It is more economical for the lawyer to enter into a settlement
than to try and prepare for court. Stand firm behind your employee and change
the E.P.
After a while, the lawyers learn which insurers play hardball. They in
turn take a closer look at the details of the claimant's injury. If the
balance of probability is not with them, they may decide not to take on
the claimant. Once they are dropped by one lawyer, they try to find another.
The insurer starts to get a reputation as not handing out easy money. You
have to work for it. Work is the last thing somebody wants to do for EASY
money.
Some insurer will argue that they do not want to get a bad reputation.
A bad reputation with whom—claimants? You have a duty to your contracted
insured, to protect them in the best possible manner. The reputation that
you want is with your own insureds. Settle their property and auto claims
fairly and quickly. Protect their interests when somebody wants to take
money out of their liability policy. Remember, their interests are also
yours. I would prefer to pay less premium with a company that has a tough
reputation with third-party claimants than have to pay more money for insurance
from a company that does not protect my interest.
—Darius Delon, CCIB, FCIP, CRM, Insurance & Risk Coordinator,
University of Lethbridge
- The risk management community has led the charge in driving down loss
adjustment expense as a percentage of paid indemnity. Adjusters walking
around with checkbooks are not highly compensated, nor do they walk around
much. Rather, they are tied to a desk. Few face-to-face meetings take place
anymore. Low hourly rates have led to a fall off in talent levels. The low
price TPA invariably gets the contract. Thus the industry can be said to
get exactly what it pays for.
—William A. Brauer CPCU, ARe, AIC, SCLA
- Did you hit a raw nerve with your question about whether insurance companies
pay too freely at times! It's a rampage I've been on for about 15 years
whenever I get to speak with anyone in an insurance company's claim department
with any authority. I worked for a while in a small underwriting branch
office of the Travelers, so small that along with the claim adjusters and
loss control specialists, we were all in the same room.
The claim department made more work for itself by paying small slip and
fall claims for the national retailers we handled. Word would get out in
the community that a certain store paid off these claims easily. When it
came time to buy Christmas presents, the number of incidents went through
the ceiling. What struck home, though, was when the claim department would
pay these claims for smaller stores in rural localities, it didn't take
long for the word to spread, and a store became "uninsurable" because of
the number of claims.
Shortly after leaving Travelers and joining a large agency, I was on
a Travelers-sponsored junket for their larger, more profitable agents. I
had breakfast one morning with a claims vice-president and discussed it
with him. His basic answer was in the larger scheme, paying off smaller
claims to get rid of them was more profitable for the company, even if they
became a target for this sort of occurrence.
In Louisiana, when the work comp market was lower than low (as was true
in much of the country in the early 1990s), the legislature chartered an
insurance company to handle Louisiana work comp business as both a competitive
enterprise and as the market of last resort. Fortunately, the management
that was hired did it right. Besides paying attention to the details of
correct classifications and accurate payroll reporting, they took the stand
that they would work to eliminate attorneys from the process by refusing
to "settle" claims. By taking the incentive for the attorneys out of the
process, they took the attorneys out of the process.
The same philosophy should be taken by the industry as a whole. When
the lawyers can't make money on something, they'll look somewhere else.
Let them look at somewhere other than the insurance industry.
—Dick Speyrer, CPCU, ARM, Wright & Percy Insurance
- I am disgusted at the quick settlement of some claims and then the insurance
carriers' quick denial of legitimate claims in the hope they will go away.
Over the years, I have seen insurance carriers quickly deny small claims
and want to settle larger claims for small amounts even if they know that
they are bogus claims. It has to stop!
I would like to have some type of sign off by insureds for all claims.
Often, insureds are the last to know that a claim was even submitted or
that the insurance company is paying the loss. With the insurance market
extremely hard, the insurance carrier is playing with the insured's dollars,
and insureds should have a right to know what the carrier is doing.
Insurance carriers need to start to fight all claims that they feel are
bogus. They cannot continue to settle them because it is "cheaper." That
just doesn't work any longer. The insurance carriers created this mess we
are in by letting attorneys feel that if they submit a claim, they will
get something. Insurance carriers need to fight claims in court.
Until attorneys feel that they will have a fight on their hands for bogus
claims, they will continue their easy pickings. If insurance companies were
willing to fight bogus claims and pay the insured legitimate claims, our
industry would begin to recover and be viewed favorably by others.
—Louis S. Pingtella, Executive VP, Niagara Insurance
Group, Williamsville, New York
- Thinking it is cheaper to settle rather than pay the cost of investigation
and defense is a perfect example of backward thinking. When a person buys
insurance to protect against third-party liability, he or she wants to be
protected. The insurance policy promises to defend and indemnify, even if
the suit is false and fraudulent. It doesn't promise to defend until it
gets expensive and then pay off the fraud perpetrator.
People who present fraudulent claims know about this strange attitude
of insurers and make claims equal to the amount their research proves an
insurer will pay rather than fight. It is time that the insurers go back
to providing the service they are selling.
—Barry Zalma, Esq., CFE, Author
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