Well, it is the 21st century, and Supreme Court justices are still with us;
however, when I read insurance industry commentary and the advertising promises
made about the software offerings currently touted to insurers by various vendors,
I reflect on the professor's almost blind faith in technology. Propelled by
insurer interest in cost cutting, technological solutions are taking center
stage. I wonder if the industry's "Claims Professional of the Year" award will
go to some software program sometime during this decade.
It is not just the omnipresence of software solutions that arouses my concerns.
Where the software comes from is also troubling because most vendors promoting
outsourcing of claims have neither a current foothold in nor previous experience
in the insurance industry. Consequently, promoters of claims outsourcing most
likely are unaware that insurance policies are contracts of utmost good faith;
that old principles of caveat emptor are
inapplicable to insurance; that there are established principles of how claims
are to be managed; and that insurance is a business "affected by the public
interest."1
In addition to a likelihood that the business values of outside vendors are
those of their own trade or occupation, these vendors operate within a regulatory
no-man's-land. For example, the National Association of Insurance Commissioners
(NAIC) Market Conduct Examiners Handbook incorporates standards insurers are to follow in relationships between insurance
companies and certain regulated entities (third-party administrators and managing
general agents, for example). Yet, regulators are silent about how insurers
should control nonlicensed entities that provide software shaping insurer determinations
of how a key decision affecting policyholders' claim payments are made. This
is no minor regulatory oversight. To paraphrase the late Chief Justice Rehnquist,
for most policyholders, the claims process is what brings the insurance contract
to life.2
Regulatory laxity regarding software use in claims adjudication deserves
greater attention because of its expanding use, because the duty of an insurer
to handle claims is nondelegable, and because controversies involving software
are currently monopolized by the courts. This commentary addresses some of the
problems confronting insurers that rely on outside vendor software in resolving
claims. It also offers suggestions for new regulatory oversight of claims software.
How Insurers Get into Trouble
Perhaps the most obvious way for insurers to face difficulties from the errant
ways of selected software is the theory of agency.3 Under agency principles, personnel and companies retained to assist in claims
handling are agents of the insurance company (the principal). Since the insurance
company chooses agents and defines the scope of their work, an agency relationship
exists in much the same way as in the sales and marketing process, in which
insurers appoint producers to sell their products. In marketing and sales, whatever
representations are attributable to the agent usually become the company's representations.
The insurance landscape is littered with examples of how insurance producer
misconduct causes insurer problems with both regulatory agencies and plaintiffs'
attorneys.
Under agency law, the same types of issues confronting insurers in marketing
and sales may surface in the use of external claims aides. Just as insurance
producers must follow certain standards of conduct (examples include regulations
on replacements, sales and advertising, unfair trade practices, and fraud),
those to whom claims duties are outsourced must also comply with principles
governing the claims process. By way of example, some of these claims standards
include the following.
1. Claims adjusters should be competent to perform
the job they are assigned. Questions of competency may arise with computer
software if an adjuster is improperly trained to use or interpret the information
generated by software manipulations. This point is especially important if the
adjuster is unable to explain how the software operates when challenged. In Meier v. Aetna Life & Cas. Standard Fire Ins.,
500 N.E.2d 1096 (Ill. App. 1986), the plaintiff insured his 1962 vehicle for
a "stated amount" of $5,000. After the car was totaled, the adjuster entered
information about the vehicle into a computer program provided by Certified
Collateral. When the program returned a figure of $2,000, the adjuster followed
company procedure and offered to settle the claim for that amount. What the
computer told him was the sole basis of his decision. At trial, the adjuster
admitted that he had no idea how Certified Collateral arrived at the $2,000
figure. Although other issues were also before the court, the adjuster's inability
to explain this detail about the claims procedure did not help the company's
defense.
2. Fairness and impartiality are claims standards. Compliance with this standard is measurable by several indicators. For example,
if analysis of the insurer-vendor relationship shows that a major incentive
for vendor selection is the vendor's promise to cut claim costs, the relationship
is almost assuredly suspicious in nature. No claims standard in statute, rule,
or common law stipulates that claims settlement should be cheap or based on
the lowest possible number. Thus, a blatant objective of saving money casts
doubt on the fairness and impartiality of the investigative activities.
An example of how this kind of relationship can plague insurers appears in
a line of cases stemming from the use of software packages used in valuing uninsured/underinsured
motorist bodily injury claims. Perhaps the best known among the products offering
assistance with bodily injury claims is Computer Science Corporation's (CSC's)
software, "Colossus."
According to CSC's Web page, Colossus is a knowledge-based system for assimilating
and examining facts relevant to bodily injury claims. According to CSC, it includes
over 12,000 rules and more than 720 injuries to help adjusters assess the degree
of pain and suffering, degree of permanent impairment, and the effect of the
injury on a person's lifestyle. CSC contends that over 33,000 claims handlers
use Colossus worldwide. In the United States alone, over 19,000 adjusters use
Colossus in evaluating more than 50 percent of all bodily injury claims. During
its 12 years of existence, Colossus has attracted proponents but also a group
of critics as well.4
Because Colossus's marketing rests on a promise to cut bodily injury costs,
critics allege that insurers use Colossus and similar software programs:
- to reduce the amount of money paid on bodily injury claims and to withhold
from the insureds alleged faults with the software programs that led to
underpayment of bodily injury claims.
Hensley v. Computer Sciences Corporation,
U.S. District Court, Western District of Arkansas, Case No. 05-CV-4034 (2005).5
Colossus's own evaluations of its product indicate that it makes bodily injury
claim estimates more consistent. One can reasonably infer from the promotional
commentary that consistency is based on reduction of the variance from the average
claim settlement figure. Insurers, of course, like averages. The lower, the
better, and that is an opportunity offered by Colossus. Even statistical novices
know, however, that averages alone offer little meaning. As one authority on
the subject avers, the average American has one testicle and one ovary.
Another example of how cost-cutting imperatives can cause problems appears
in McGowan v. Progressive Preferred Ins., 637
S.E.2d 27 (Ga. 2006), a recent Georgia case. In McGowan,
plaintiffs alleged that insurance companies, including State Farm, Atlanta Casualty,
and Progressive Preferred Insurance, cut a deal with CCC Information Services
to intentionally undervalue automobile property damage claims on totaled vehicles.
CCC uses a computer program as a "data base" from which it derives a vehicle's
estimated value in the local market.
McGowan determined that insurers could not
rely upon the appraisal clause of an insurance contract as a defense against
allegations that they had used CCC to engage in a deceptive method of reducing
costs. The unanimous Georgia Supreme Court ruling tracks a similar case involving
CCC in Louisiana, Hayes v. Allstate Ins., 758
So.2d 900 (La. App. 2000), in which the court determined for several reasons
that the method used by CCC to value vehicles was "not reasonable." Louisiana's
Court of Appeal, Third Circuit, reiterated concerns about CCC in Clark v. McNabb and Shelter Mut. Ins., 878 So.
2d 677 (La. App. 2004).6
3. Proper claims procedures require an adjuster's
strict compliance with regulations governing the particular type of claim. Computers
are not exempt from the requirement. In Meier,
for example, the court determined that an Illinois rule in effect at the time
stated that if the value of a car is not published in a recognized source, the
insurer must secure at least two written dealer quotations assessing the retail
value of the vehicle upon which settlement can be based. Deviation from the
rule must be carefully detailed in claim records. Certified Collateral's computer
program apparently did not comply with this rule, to the detriment of the insurer.
Since other states may have similar rules, software programs that fail to incorporate
adjustments to these requirements foster noncompliance with mandatory claims
requirements.
4. Claim files should include all details of
how the claim was handled, a standard I characterize as "transparency." If software programs are relied on to arrive at a loss estimate, the claimant
should be informed about its use and what part it played in the adjuster's recommendations.
Since software creators may prefer to maintain secrecy about their product's
involvement in claim decisions, a claims file may not contain evidence of the
software's use or the numbers entered into the program while the adjuster was
evaluating the claim. Adherence to the outside vendor's protocols for secrecy
of software usage is inconsistent with the transparency principle. Any marketer
of software on which claims estimates are based should not be permitted to enforce
any contract prohibiting disclosure about the product's effect on claim determinations.
Alternatively, regulators should prohibit insurers from using unverifiable
estimating methods. To insist on anything less not only defies normal expectations
about what should be in a claims file but also forces a claimant into a game
of shadow boxing to challenge an insurer's decision. Vendors that object to
transparency disclosures have an easy option: Don't do business with insurers
unless you are willing to adhere to the principles applicable to the industry..
With regard to the regulatory no-man's-land, some form of regulatory oversight
of outside vendors is long overdue. The authority to develop the oversight is
readily available under licensure, unfair trade practices, unfair claims practices,
and form and rate filing provisions common to state insurance codes.