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Underwriting and Claims: Time to Become Friends?

Tim Ryles | October 1, 2009

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Typing at a coffee shop

In a flashback to my professorial days, the acronym POSDCORB came to mind recently while reading yet another commentary on administrative shortcomings of insurance companies' claims processes. In the article, 1 Kevin Quinley writes about the importance of fostering collaboration between underwriting and claims divisions, which, it turns out, is generally not very good.

The writer uses such terms as "tension," "professional enmity," and "boneheaded" in describing how these "conflicting fiefdoms" (his characterization) relate to and perceive each other.


POSDCORB is the acronym developed in 1937 by Luther Gulick and Lyndell Urwick, two important intellectual ancestors of administrative thought. 2 It still stands as a good treatise on executive functions in organizational settings. Simply stated, here is what the acronym represents.

Planning—Identifying the how and what of achieving organizational goals.

Organizing—Developing the formal structure of authority to achieve organizational objectives.

Staffing—Conducting the overall personnel function of getting the right people in the right positions in sufficient numbers.

Directing—Making decisions, and figuring out means of carrying them out.

Coordinating—Bringing together the functions of the organization's units and processes.

Reporting—Managing the up, down, and lateral flow of information.

Budgeting—Securing, monitoring, accounting, and controlling financial resources.

Since Kevin Quinley's critique centered on failures to coordinate the work of underwriting and claims, primarily within property and casualty companies, 3 his observations raised two questions in my mind:

  1. Does the literature in insurer-promoted designation programs, such as Associate in Claims, have anything to say about the importance of coordination?
  2. Are there any legal developments that might serve as the basis for contending that failure to coordinate the two functions significantly increases the risk to the insurance company?

Claims Designation Publications Have Little to Say about Coordination

In pursuing the first question, I reviewed at least a dozen standard texts used in either designation programs or continuing education classes. While I found very good, thorough descriptions of what both claims and underwriting departments do functionally, there is little emphasis on the importance of coordinating the two functions. Doris Hoopes offers perhaps the best expression of how each is a source of information for the other but stops short of recommending formal coordination as an organizational imperative:

The claim department's interaction with the underwriting department is not limited to providing loss information. Underwriters can provide insight into the coverage interpretation for individual risks because of their involvement in providing coverage initially. Underwriters can provide firsthand knowledge of the intentions of the insured and insurer in forming the policy. Underwriters are also interested in how policies are being interpreted so they can reassess coverage forms and endorsements as necessary. Thus, underwriters are a valuable source of information to claim representatives when analyzing and interpreting policy language.

Doris Hoopes, The Claims Environment, 2nd ed. (Malvern, Pa.: AICPCU 2000), 1.13.

Legal Developments Speak Loudly

I found a more fertile field in researching the second question. The Gulick-Urwick prescriptive acronym is aimed at the internal management function of an enterprise. (Yes, increasingly, insurers are no longer mere companies, they are "enterprises.") However, organizations do not operate in a vacuum—they must deal with their external environment. And, for insurers, the external legal environment looms large. A 2008 Alabama Supreme court decision illustrates the point.

The case of Harold Jones and Pam Jones v. Alfa Mut. Ins. Co., No. 1060179 (Ala. June 13, 2008), began during the summer of 1995 in south Alabama when Alfa's insurance agent, Wendell Sanders, went to the Coffee County home of Harold and Pam Jones for a rewrite inspection. At the time, Alfa insured the property under a farm owners policy. Mr. Sanders walked around the house and took photographs.

On October 4, 1995, Hurricane Opal ravaged the area. According to the Joneses, Opal caused damage to the roof (by a falling tree), ceiling drywall, and walls of the house. An initial Alfa inspection determined that the company needed an engineering report, so on November 11, 1995, an Alfa retained engineer (Ralph Jones, presumably unrelated to the insureds) conducted an inspection. His December 4, 1995, engineer report, apparently accepted without question by Alfa, determined that the cracks and related damage to walls was due to settlement of the foundation instead of from Hurricane Opal.

By letter on December 29, 1995, Alfa notified Bruce McLean, an attorney who it thought represented the Joneses, 4 of the claims' status. The letter enclosed an estimate for replacement of the Joneses shingle roof and a draft check representing payment, including the deductible. The two-paragraph letter, signed by Alfa adjuster Gary Bradshaw, also contained the following:

I also understand that you are in possession of a copy of the engineer's report which indicates that shifting and settlement of the insured house was not related to the hurricane winds. Should you have any questions concerning that report or any aspect of the insured's claim or policy, please feel free to give me a call. Also if there is any other damage that the insured has found as a result of the hurricane that we have not already addressed, please have him submit itemized estimates for those to be considered. I thank you for your help and cooperation and look forward to hearing from you.

The Alabama Supreme Court would later note that the:

two-paragraph letter to McLean does not quote applicable policy language or explicitly state whether Alfa agreed with Ralph Jones's [engineer] report. Nor does it explicitly state that the claim has been denied as claim denial letters typically do.

(One possible inference of this wording is that if a company relies on an expert report, it needs to demonstrate how and why of its reliance.)

A lawsuit, including a claim for bad faith, followed Alfa's failure to pay for the damage it attributed to shifting and settling. At trial, the Joneses argued that Alfa had done an incomplete investigation of their claim by failing to do a "before-after" analysis; that is, Alfa adjusters did not compare the underwriting file records, which should contain pre-Opal photographs, to the home's conditions after Opal. Agreeing with the Joneses, thereby remanding the case for trial under Alabama's abnormal bad faith doctrine, the court asserted:

… Alfa never investigated any records it had of the condition of the Joneses' house before the hurricane … Alfa never contacted a realtor who visited the Joneses' house three days before Hurricane Opal made landfall, even though … Bradshaw [an Alfa adjuster] had inquired about purchasing the Jones residence. Alfa never inquired of the Joneses as to who would have seen their house before Hurricane Opal and never attempted to interview anyone who may have visited the Joneses' house before Hurricane Opal. Alfa never considered its own "rewrite" inspection of the Joneses' house, including photographs of the exterior of the house and never inquired of Sanders, its own employee, as to the condition of the Joneses' house when he conducted the "rewrite inspection," even though Sanders testified that he did not recall seeing any cracks in the interior or exterior walls of the Joneses' house when he conducted the "rewrite inspection"….

The court accepted expert testimony that "any investigation by Alfa that did not include the above-described activities would not satisfy proper claims handling practice." In addition to acceptance of expert testimony on industry standards, citing earlier case law, the court seemed to base much of its reasoning on the duties of an insurer to marshal all facts necessary to make a determination as to coverage before refusing to pay a claim.

Thus, an investigation is incomplete unless all facts are included in a cognitive review of evidence prior to final determination of coverage, and a before-after analysis dictates inclusion of the underwriting file as an essential element of a claims investigation.

Additional Implications of Jones v. Alfa

In Alabama and some other jurisdictions, Jones v. Alfa delivers a double whammy for insurers. For example, Alabama has also established that an insurer must accept the risk assumed, irrespective of a property's physical condition at the time underwriters approved coverage. (See Great Am. Ins. Co. v. Railroad Furniture Salvage of Mobile, Inc. et al., 162 So. 2d 488 (1964).) Stated differently, if property is of poor, substandard construction or has been maintained improperly at the time a policy is issued, an insurer's invoking poor construction, wear and tear, and related exclusions, even when accompanied with supporting "expert" engineer reports, will not defeat coverage. As the Mississippi Supreme Court opined in a similar case, the insurer:

… had the right to examine these buildings before they wrote the insurance and accepted the premium on the policies, and if they had examined the buildings and found they were not substantial, they could have declined to write the insurance and have avoided the consequence of this loss.

New Hampshire Fire Ins. Co. v. Kochton Plywood & Veneer Co., 242 Miss. 169 (1961).

From a management perspective, coordination between underwriting and claims may extend to other organizational situations as well. For example, in holding company arrangements in which primary coverage is written in one company and umbrella or excess coverage is written in another, Jones suggests that the right hand better know what the left is doing, to state it in the vernacular.

Companies that write primary and umbrella policies in separate companies, when asked for policy limits in third-party claims, may find themselves in difficulty if they fail to disclose both policies. No matter how elaborate the insurer's argument that nondisclosure resulted from computer problems or managerial snafus, an insurer will find it increasingly difficult to rebut contentions that the company is engaged in deliberate concealment or, at best, "studied bungling." (See, for example, Merritt v. State Farm Mut. Ins. Co., 247 Ga App. 442, 544 S.E. 2d 180 (2000).)


After Jones, perhaps insurers will get the message that information technology and computer pizzazz may be entertaining, but controlling overall enterprise risks through better management may be a more prudent strategy. At least, management may now find it necessary to insist that underwriting and claims accept each other as friends on Facebook.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.


1 Kevin Quinley, "Spanning Silos: Collaboration Between Underwriting and Claims," Claims Magazine (July 2009), pp. 12–14.
2 Luther Gulick and Lyndall Urwick, Papers on the Science of Administration (New York: Institute of Public Administration, 1937).
3 My experience is that life and health companies routinely consult underwriter records when reviewing claims. The practice is called post-claim underwriting and is not universally revered.
4 Harold Jones testified that Mr. McLean "was, I guess, advising or helping me … to make sure that I wasn't—that I didn't sign off on anything, you know … But now, so far as engaging him or hiring him as an attorney, there had not been any such thing as far as saying I want to hire you to represent me in this matter." Curiously, Alfa makes no mention of any letter of representation in the claims file.