Insurers and insureds with large self-insured retentions rely on third-party administrators (TPA) to investigate claims and resolve claim disputes in a professional manner. Similarly, insurers with a small presence in some states rely on TPAs and independent insurance adjusters to properly serve the claims needs of those they insure.
Insurers and self-insureds base their decisions on a belief in the utmost good faith of those with whom they deal and the tradition of trust. Sometimes the trust is well founded. Often it is not.
The prudent insurer needs to trust its claims vendors while simultaneously verifying that the vendors are performing as expected. It is best that insurers and self-insureds who rely on TPAs and independent insurance adjusters continue to trust the vendors but verify the quality of the service rendered them by vendors acting for their insureds, employees, and claimants. The danger of trusting such vendors without verification has been brought home with a vengeance by a recent decision of a trial court jury in Marin County, California.
In February 2008, a Napa, California, jury awarded the Marin School Insurance Authority $4.66 million stemming from a lawsuit against its long-term TPA, ESIS, Inc.
The Marin Schools Insurance Authority, a group of 21 agencies in Marin County, California, including 18 school districts, one community college, one county office of education, and one pupil transportation agency used ESIS as their TPA. ESIS, based in Philadelphia, is part of insurance company ACE USA, the U.S.-based retail division of the ACE Group of Companies. ESIS was long-owned by CIGNA until it was sold to ACE in 2000.
ESIS, for decades, served as the workers compensation claims administrator for the Marin risk pool's workers compensation claims. However, an independent audit commissioned by the school districts in 2004 revealed that Marin's claims, handled out of ESIS's Fremont, California claims office, were not properly administered. Some of the mishandling proved to the jury included failing to give timely notification of when claims could pierce the self-insured retention level, triggering excess liability coverage; failing to properly investigate new claims; and failing to object to unreasonable and excessive medical treatments.
After a 5-week trial, the jury took less than a half day of deliberation to return unanimous verdicts on the breach of contract and promissory estoppel causes of action. They ruled 11-1 in the plaintiff's favor on the negligence cause of action. Counsel for the plaintiff predicted that more scrutiny will now be given to third-party claims administrators, and he believes this case could propel similar suits around the country.
Every insurer and self-insured that uses TPAs or independent insurance adjusters to deal with their claims should, to avoid litigation like that involving The Marin Schools Insurance Authority, annually retain experts to conduct claims handling audits. Although the Marin Schools Insurance Authority was successful, the expense, trouble, and inconvenience of the suit could have been prevented and saved both the Authority and ESIS considerable expense and animosity. The auditor should visit the office of the TPA or independent insurance adjustor and randomly review claims and underwriting files to verify that the service promised is being provided. The insurer or the self-insured should demand a report from the auditor of the results of each file review, on the following subjects.
Compliance with the Fair Claims Settlement Practices Regulations
Whether coverage was promptly and adequately verified
Whether claims and underwriting personnel understand coverages used by the insurer
Whether the claims personnel made prompt contact with the insured
Whether the claims personnel promptly commenced the claims investigation
Whether the claims investigation was thorough and complete
The amount of time needed to complete the investigation
The ability of the vendor to recognize and deal with potential fraud
A subjective analysis of the quality of the claims investigation
The ability of the vendor to negotiate fair and reasonable settlements on behalf of the insurer
The ability of the vendor to recognize and deal with subrogation potential
The adequacy of the training of claims or underwriting personnel
The ability of underwriting personnel to follow the requirements of the insurer
There are many insurance consultants available to perform such an audit, and their services are well worth the time and effort in finding them.
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