Stupid is Forever
© 2017, Barry Zalma
It is a certainty that the business of insurance will act in cycles. Premiums go up. Premiums go down. Catastrophes happen regularly and in some years there are no catastrophes. Insurers pay any claim presented to avoid litigation and investigation expenses. Insurers change and refuse to pay any case where they believe there is fraud.
Sometimes insurers are intelligent and conclude that the best way to make a profit is to maintain a staff of professional claims personnel who are dedicated to fulfilling the promises made by the insurance policy issued by the insurer, promptly, efficiently and in absolute good faith. To do so they maintain professional continuing education for the staff and insist that all claims be investigated thoroughly and all insureds be treated fairly and in good faith.
The expense incurred in keeping a professional claim staff becomes unbearable, human resources directors are instructed to eliminate expense and stop the training programs, fire the expensive and experienced claim staff, and hire in their place recent college graduates who are asked to deal with claims without training or experience.
The decimation of the professional claims staff is either due to corporate ignorance – that can be cured – or corporate stupidity which will remain until the corporation becomes insolvent.
Historic Basic Claims Training
In 1967 I was a young insurance claims trainee with a major insurance company. In my first month as an employee management sat me down at a desk and told me to read a classic insurance claims handling book written by Paul Thomas. Since I knew absolutely nothing about insurance reading the book gave me a basic understanding of insurance and insurance claims handling. I was then sent out to ride with experienced adjusters in every field of insurance written by the company from fire, casualty, comprehensive general liability, personal liability, all types of third-party liability, workman’s compensation (now renamed worker’s compensation), surety, fidelity, inland marine and motion picture insurance.
I was then allowed, under close supervision, to adjust minor claims over the telephone, for small injuries and minor theft claims. After three months of study, on the job training with experienced adjusters, and adjusting minor claims I was sent, at the insurer’s expense, to their Home Office Training School where I spent 30 days with other trainees for 9 to 5 classroom training on every aspect of insurance, insurance law, insurance policy interpretation, repairing damaged structures, medicine and evaluation of traumatic injuries, insurance contract interpretation, repairing of damaged automobiles, repair of damaged structures, and claims investigations techniques.
Since I had spent three years in the military as an Army Intelligence agent I had experience and skill as an investigator and was able to convert my experience and training as an investigator to become an effective claims investigator.
After I completed the Home Office training course I was sent back to the office in Los Angeles and allowed to deal with multiple insurance claims over the telephone with less strict supervision. After a year I was promoted to field adjuster and allowed to meet with the public because I had proved to management that I understood insurance, insurance claims, the duty of good faith and fair dealing, and could be trusted with the insurer’s assets.
I was admitted to the California Bar in 1972 and stopped being an adjuster. I did not, however, give up on insurance. Rather, I directed my law practice to nothing but insurance and insurance claims handling.
The Majority of Claims Training Today
Experienced adjusters who were trained as I was have been fired or laid off with regularity to cut down on the expenses of their relatively high salary and the low salary for which a novice adjuster can be paid.
Today, a new adjuster, recently graduated from a community college or four year college is given little or no training. Rather the new adjuster is given a check book, a cellular smart telephone with a digital camera, a digital recorder, and a company car. He or she is given discretionary authority to pay any claim up to $2500 without approval of management. As a result, if the adjuster is assigned 100 to 1000 claims a year he or she, knowing little or nothing about insurance and insurance claims handling, has the right to spend, without approval, as much as $250,000 to $2,500,000 – more than his supervisor or the company president. He or she is told they are adjusters and should resolve the claims provided to them by their supervisor. Only if they have problems with a claim are they to seek the advice of their supervisor who may only have two years of experience as an adjuster. Neither the new adjuster nor the supervisor had any formal training.
Insurance management, finding that the expense side of the ledger has moved downward, and the quarterly profit increased, believe that they are wise and have helped the insurer’s profit margin. They are wrong. They are, by forgetting that insurance profitability is determined over a quarter of a century, not a quarter of a year. They are destroying the insurer and depriving the insurer of the ability to keep the promises made by the insurance policies issued by the insurer.
The short term expense savings is penny wise and dollar foolish. Because of their lack of education and experience a young and untrained adjuster has created litigation against the insurer who employed them by:
- Writing in his file that the insured was obviously a fraud because (of any one of dozens of ethnic minorities).
- Accusing an insured of arson-for-profit without evidence of any kind.
- Denying a fire claim because it was set by a homeless person.
- Denying a claim based on an exclusion and concealing from the insured the exception to the exclusion that made the loss one that was covered.
- Denying a claim in writing by quoting only a portion of the policy wording and refusing to quote the language of the policy that made coverage clear.
- Denying a claim because the damage was done by the insured’s negligence.
- Accusing an insured of fraud because there were no receipts for stolen personal property.
- Denying a claim for failure to submit a sworn proof of loss without first providing the form to the insured.
- Deciding to pay the new owner of a property who was not named on the policy because he had an insurable interest.
- Refusing to pay the named insured because he had sold the dwelling even though he kept an insurable interest by taking back a loan from the buyer.
- Refusing to pay more than $1500 for a fire damaged Persian Rug when the limitation only applied to theft claims.
- Refusing to defend an insured because a claim of defamation is an intentional tort.
- Refusing to defend an insured because he did not like the insured.
- Refusing to pay an independent lawyer because he charged too much.
- Refusing to investigate a claim because it was reported a year after the loss occurred.
- Refusing to return telephone calls from an insured because the adjuster was “too busy.”
- Refusing to personally inspect the loss site because the adjuster was “too busy.”
- Refusing to pay a claimant because he was not injured but had a disease only a horse could suffer.
- Refusing to pay a claimant because of his or her race.
All of these, and many more, resulted in a suit against the insurer alleging breach of contract, breach of the covenant of good faith and fair dealing and resulted in verdicts providing the insured contract damages, tort damages, and punitive damages that far overshadowed the annual savings obtained as a result firing the insurer’s experienced claims staff. One judgment against an insurer for bad faith assessing tort and punitive damage can far exceed the annual payroll of the claims department.
This ignorance is not limited to insurance adjusters. Lawyers who should know better, who should understand how to analyze the wording of an insurance policy, do not. Insurance company lawyers are often referred to by lawyers working in large law firms, as “discount lawyers” who they believe deserve less than the respect that union leaders have for Walmart. That is because insurance companies, agreeing to provide regular business to a law firm, can negotiate low hourly rates from the law firms they retain to defend insureds and to advise the insurer. Of course, the law firms working to maximize profits, assign insurance claims to their least experienced and knowledgeable young associates who will be assigned to ghost write pleadings, discovery and opinion letters for a partner who will at most review the documents and usually simply sign them.
The young lawyers, although they charge low hourly fees, spend dozens – if not hundreds – of hours reinventing the wheel and learning their trade. The experienced lawyers and partners do little to help. When I was a young lawyer the law firm for which I worked gave me 250 litigation files and told me to start work explaining that if I had any questions the answers were in the firm’s law library (before computers, let alone computer aided research). I learned the hard way because no one would help me. Some clients paid the cost of my learning how to properly represent their interests.
Today I see even less from young lawyers whose advice caused an insurer to be sued. Their errors are too broad to list in detail but are as bad as the list of errors made by the adjusters. In fact, wanting to please their client, the young lawyers will adopt the adjuster’s opinions because they believe the adjuster – probably accurately – knows more about the subject than the lawyer. They will, rather, file a standard answer to the complaint they are asked to defend, serve multiple statutory forms of interrogatories, send custom draw interrogatories and requests for admission, and notice depositions of every person involved in the claim.
The ignorance that resulted in claimed savings by dismissing experienced claims people and refusing to pay the fees of experienced and knowledgeable claims counsel, can be cured. The stupidity that believes that the savings are appropriate and add to the insurer’s profits can never be cured.
If insurers wish to make a reasonable profit and actually keep the promises made by the policies they issue in good faith and deal with their insureds fairly and good faith they must give up on the short term savings on the expense side of the ledger. Rather, insurers need to create a program requiring excellence in claims handling. Insureds will be pleased, claims people will be confident, and litigation against the insurer will be rare and easily defended. If not they will continue to be an easy victim of fraud and they will be sued for bad faith regularly. Profits will dissipate and those who refuse to learn will become insolvent.
An Excellence In Claims Handling Program
To avoid claims of bad faith, punitive damages, and losses, and to make a profit, insurers must maintain a claims staff dedicated to excellence in claims handling. That means they recognize that they are obligated to assist the policyholder and the insurer to fulfill all the promises made by the insurer in the wording of the policy. The insurer that wants to create a claims staff dedicated to excellence in claims handling must, at least:
- Hire insurance claims professionals.
- If professionals are not available, the insurer must use the services of professional independent adjusters.
- If professionals are not available the insurer must establish a system to train all members of the existing, and new members of the claims staff, to be insurance claims professionals.
- Requiring each member of the claims staff to be trained annually on the local fair claims settlement practices regulations and SIU Regulations.
- Employ insurance professionals who can intelligently supervise the work of each claims handler.
- Supervise each claims handler closely to confirm all claims are handled professionally and in good faith.
- Train, regularly, each member of the claims staff on the meaning of the covenant of good faith and fair dealing.
- Require that the claims staff treat every insured with good faith and fair dealing.
- Demand excellence in claims handling from the claims staff.
- Let the claims staff know that failure to provide excellence in claims handling to those insured will result in immediate dismissal of any claims handler.
- Be ready to have an executive of the insurer meet with an insured who was not treated professionally, apologize for the failure, advise that the offending claims person has been dismissed, and provide a means to fulfill the promise of good faith and fair dealing.
If any experienced claims professionals exist on the insurer’s staff, the insurer must cherish and nurture them and use their experience and professionalism to train new claims people. If none are available, the insurer has no option but to train its people from scratch. Those claims people who treat all insureds and claimants with good faith and fair dealing and provide excellence in claims handling must be honored with increases in earnings and perquisites. Similarly, those who do not treat all insureds and claimants with good faith and fair dealing should be counseled and given detailed training. If they continue with less than professional conduct they must be fired. The insurer must make clear to all employees that it is committed to immediately eliminating staff members who do not provide excellence in claims handling.
An excellence in claims handling program can include a series of lectures supported by text materials. It must be supplemented by meetings between supervisors and claims staff on a regular basis to reinforce the information learned in the lectures. The insurer also must institute a regular program of auditing claims files to establish compliance with the subjects studied. The insurer’s management must support the training and repeat it regularly. There is no quick and easy solution. The training takes time; learning takes longer. If the insurer does not have the ability to train its staff it should use outside vendors who can do so.
The excellence in claims handling program requires thorough training providing each member of the claims staff with a minimum of the following:
The insurer seeking to create an excellence in claims handling program should institute regular training of its claims staff in all or more of the following subjects:
- How to read and understand the contract that is the basis of every adjustment, including but not limited to:
- The formation of the insurance policy.
- The rules of interpretation.
- Tort law including negligence, strict liability in tort, and intentional torts.
- Contract law including the insurance contract, the lease agreement, the bill of lading, nonwaiver agreements, proofs of loss, releases and other claims related contracts.
- The duties and obligations of the insured in a personal injury claim.
- The duties and obligations of the insurer in a personal injury claim.
- The duties and obligations of the insured in a first party property claim.
- The duties and obligations of the insurer in a first party property claim.
- The Fair Claims Practices Act and the regulations that enforce it.
- The thorough investigation:
- Basic investigation of an auto accident claim.
- Investigation of a construction defect claim.
- Investigation of a non-auto negligence claim.
- Investigation of a strict liability claim.
- Investigation of the first party property claim.
- The recorded statement of the first party property claimant.
- The recorded statement or interview of a third party claimant.
- The recorded statement of the insured.
- The red flags of fraud.
- he SIU and the obligation of the claims representative when fraud is suspected.
This training can be accomplished in several ways. The claims person may be required to read a chapter every week of “Insurance Claims: A Comprehensive Guide” available from National Underwriter Company at http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html. In addition, the claims person can be required to view a three to four minute video training session by starting at volume 1 and going through all videos, one or more a day, at Zalma Insurance 101.
Claims Report Writing
The new adjuster and new insurance lawyer must understand that an insurer needs information to evaluate the risks it is asked to take. To fulfill the needs of the insurer the claims person must recognize that report writing is essential to the duty imposed on the adjuster and insurance lawyer. The reports must include:
- The name and address of each person insured.
- The identity of the insurer.
- The policy number.
- The persons named as insured.
- All persons who are insured or additional insureds by means of the policy wording.
- The date of the loss.
- The cause of the loss.
- The risks of loss insured against by the policy.
- The limits of liability available to the insured.
- Whether the cause of the loss is due to a peril insured against.
- Whether there are any exclusions in the policy that might apply to the situation.
- The estimated exposure face by the insured so that appropriate reserves can be set.
- The evaluation and settlement of the personal injury claim.
- Whether there is a need to retain defense counsel to represent the insured.
- Whether there is a need to retain coverage counsel to aid the insurer when a coverage issue is detected.
- The need to control coverage counsel and defense counsel.
- The need to evaluate the charges presented by defense and coverage counsel.
- An evaluation of the plaintiff’s lawyer whose client is suing the insured or the insurer.
- Dealing with personal injury defense counsel.
- The evaluation of the injuries claimed by a plaintiff suing an insured.
- The evaluation and settlement of the property damage claim.
- The need for arbitration or mediation.
- The estimated jury value of the case.
- The estimated settlement value of the case.
Why an Excellence in Claims Handling Program?
The answer is simple: an ability to keep all the promises made by the policy and an ability to make a profit by performing better than all other insurers.
You can become an expert in liability insurance claims by taking the course at https://www.illumeo.com/curriculum/certified-expert-corporate-liability-insurance or property insurance claims by taking the course at https://www.illumeo.com/curriculum/certified-expert-corporate-property-insurance