Deny, Delay, and Defend: That’s Not How it’s Supposed to Work

Deny, delay, defend:  These insurance company tactics have become so commonplace that it’s easy to lose sight of what an insurance adjuster’s actual obligations are under the law. 

Individuals seeking to become adjusters must undergo classroom training, to become certified.  A book called The Claims Environment has long been the standard textbook for those seeking an Associate in Claims.  It serves as guidance as to the ethical and appropriate handling of claims, and as the basis for any tests adjusters must pass. 

Adjusters may not intentionally underpay claims

The most important takeaway from the book is that adjusters are explicitly instructed not to intentionally underpay claims.  After establishing that the adjuster’s “primary function” is to “pay promptly and fairly,” the book’s authors acknowledge that:

Some overzealous claims representatives, in trying to reach a ‘good settlement,’ have been guilty of taking advantage of uninformed claimants.  Insurers have denied coverage to insureds simply because claim managers did not believe that the insureds would fight the decision in court.

Adjusters are explicitly cautioned:

A claim representative may be tempted to approach an insured or claimant with a settlement offer that is just a fraction of what the claim is worth.  This type of action is a blatant violation of the letter and spirit of the [law].

Handling first-party claims

When dealing with a first-party claimant, such as a homeowner or health insurance claim, adjusters are instructed:

• They “should focus…on serving the insured…the insured is the primary customer of the claim representative.”         

• The insured should be able to trust the adjuster, and the adjuster must follow through with promises and be completely honest with the insured.

• When a covered loss occurs, the insurance company’s obligation under its promise to pay is triggered.  The adjuster should ensure prompt, fair, and efficient delivery of this promise. 

• Adjusters should promptly pay all amounts they know the insurer owes and should negotiate in a forthright, honest, and flexible manner over any amounts that are in dispute. 

Handling third-party claims

When dealing with a claimant that is not a policyholder (a third-party claimant), such as the victim of a car accident, adjusters are instructed to do the following:

• While not a party to the insurance contract, the third-party claimant should be afforded “customer” status;

• “…if the insured’s liability is clear and the insured’s coverage is in order, the third-party claimant should be dealt with as any other party who must be indemnified.” 

• An insurance company handling third-party liability suits against its insured owes that insured special consideration.

Timely communication, thorough investigation, and prompt and fair payment

Regardless of the type of claim, adjusters are instructed that competent claims handling requires the following:

• Prompt and professional communication with the claimant;
• A thorough and timely investigation into the circumstances of the occurrence;
• Establishing the amount of the loss;
• Taking the initiative to arrive at the appropriate settlement amount;
• Paying properly, and accurately documenting the file. 

Many common insurance company tactics include deliberately underpaying claims, dissuading claimants from hiring attorneys, and delaying the adjustment process. Their goal is to frustrate claimants into quitting. These actions directly contradict the way adjusters are instructed to ethically handle claims. 

As the book’s authors note:

It might appear on the surface that the claim department could contribute to insurer profitability by deliberately delaying and paying claims.  However, all honest and reputable insurers recognize that claims are an expected part of the business and are to be paid fully and fairly.  No honest and reputable insurer has either explicit or implicit “standing orders” to its claim department to delay or underpay claims. 

The book’s authors reiterate, “[h]onest and reputable insurance companies do not regard the prompt, fair payment of claims as being in conflict with their profit objectives.”

Insurers embrace a new claims handling model

A little over a decade ago, a series of presentation slides prepared created by the world-renowned consulting firm, McKinsey and Company, came to light.  The documents were created for Allstate in the mid-1990s. They described a new business model for increasing profit through systematically decreasing amounts paid out in claims. 

In one slide, McKinsey referred to the claims handling process as a “zero-sum game,” in which for the insurer to win, “others must lose.” 

In addition to Allstate, McKinsey has consulted for nearly every major property-casualty insurer, including State Farm and Farmers. It is easy to see how these tactics swept through the insurance industry. 

However, this new industry standard goes against all of the basic ethical principles on which insurers are instructed.  In stark contrast to the concepts employed by insurers every day, the authors of The Claims Environment explicitly state, “[t]he adjustment process is not a contest in which either the company or the insured wins and the other loses.” 

About the Author

One of the most interesting things about The Claims Environment is that one of its authors is Layne Thompson, a former claims superintendent for State Farm, one of the leading adopters of the underpayment-to-profit business model. 

If only State Farm had practiced what Mr. Thompson preaches before it was sanctioned for fraudulently altering engineering reports to avoid paying claims after hurricane Katrina; being found to have systematically undervalued claims; acting “recklessly and with malice,” in relation to a series of tornado claims in Oklahoma; or being fined over $3 billion after employee testimony revealed it forged signatures on earthquake waivers in the wake of the devastating Northridge, California earthquake.