WHEN CLAIMS PRACTICES FAIL
By Roy Phillips
When one of your carriers handles a claim poorly, everyone suffers — particularly you, the agent.
From a product and service standpoint, independent agents and companies are joined at the hip in their responsibilities to policyholders. A few years ago, I co-authored an article in Agent & Broker magazine on the duties of an agent in meeting our professions “standard of care” test. If agents are held to this benchmark in treating their insureds and their insurers, the claims community must also shoulder its responsibilities to policyholders.
This article will review claims-handling “standard of care” regulations in one state as the basis for recommendations and principles that can benefit insurers and agents/brokers throughout North America.
During my tenure as a lobbyist for the Texas insurance industry, state lawmakers passed a bill to correct claims-handling abuses. The Department of Insurance codified this legislation into three components of Chapter 21 of the Texas Insurance Code. Here’s how these regulations operate:
21.21 SECTION 4 (10)
The first is encoded in Article 21.21, Unfair Competition and Unfair Practices, which regulates trade practices in insuring by defining unfair methods of competition or unfair or deceptive acts or practices. For the most part, this article mirrors the prohibitions of the Texas Deceptive Trade Practices Act in the Business and Commerce Code.
Section 4 (10) deals specifically with Unfair Claims Settlement Practices, setting 10 ground rules for those entrusted with the welfare of policyholders who assert claims under insurance contracts. In my experience, the most frequently violated practices include:
(i) “Misrepresenting to a claimant a material fact or policy provision relating to coverage at issue.” These examples come to mind:
- Telling the policyholder that their claim isn’t covered
- Warning the policyholder that reporting a claim might enhance their chances of a premium increase or even termination of coverage
- Informing a policyholder of limitations or restrictions that might hinder or prevent payment of the claim
- Advising a policyholder to pursue their claim against a third party, when the coverage allows the carrier subrogation rights to recover from that party after it has paid the claim.
(ii) “Failing to attempt in good faith to effectuate a prompt, fair and equitable settlement of a claim with respect to which the insurer’s liability has become reasonably clear.” This provision, which places time constraints on the carrier, will be discussed later.
(iv) “Failing to provide promptly to a policyholder a reasonable explanation of the basis in the policy, in relation to the facts or applicable law, for the insurer’s denial of a claim or for the offer of a compromise settlement of a claim.” This means that the specific exclusion, policy condition, insuring agreement limitation, policyholder duty, or any applicable law must be specifically stated in the denial of a claim.
(v) “failing within a reasonable time to:
(A) affirm or deny coverage of a claim to a policyholder: or
(B) submit a reservation of right to a policyholder.”
In fairness to an insurer, if the policyholder is required to provide additional information or take some other action before receiving a claims payment, the insurer has the right to delay payment until these requirements are met. For example, an insurer may withhold payment of a theft claim until the policyholder submits an inventory and/or bills of the loss.
(viii) “Refusing to pay a claim without conducting a reasonable investigation with respect to the claim.” This requirement has long been a basic tenet of claims policies and procedures. Insurers must recruit, train, and monitor claims personnel to assure that they follow investigatory policies and procedures. For example, an adjuster’s investigation of a claim that fails to meet the insurer’s documentation reporting requirements would leave the company with no proof that it had met the standard of care set by the code.
21.21-2 UNFAIR CLAIMS SETTLEMENT PRACTICES
The second article that enforces timely and consistent claims handling is found in
Article 21.21-2 Unfair Claims Settlement Practices. Section 2 of the Article states that “no insurer doing business in this state under the authority, rules, and regulations of this code shall engage in unfair claims settlement practices.” It goes on to identify these practices as:
(i) “Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue.” Although this sounds much like the previous section of Article 21.21.4, it differs in language and the specific mention of “claims settlement practices.”
(ii) “Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies.” Failure to communicate with claimants and/or to document those communications is the Achilles heel of the claims community. Policyholder complaints that they must send estimates, bills, and other proof of loss to the claims department over and over again remains a major concern, especially if the department fails to notify policyholders that it has received this vital documentation.
(iii) “Failure to adopt and implement reasonable standards for prompt investigation of claims arising under its policies.” I see this as the responsibility of claims management. When policies and procedures are reduced to instructions, forms, and report requirements by an insurer the point of most allegations is derived from claims processing that deviates from the established process. The field capability of data processing makes it difficult to defend the lack of establishing claims procedures as required by the insurer.
(iv) “Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims submitted in which liability has become reasonably clear.” The key phrase here is “good faith,” which focuses on whether or not an insurer was “knowingly” aware of the falsity, unfairness, or deception of the act or practice that made the basis for a claim. The statute defines “actual awareness” as that which might be inferred from objective manifestations. This section seeks to level the playing field between insurers, who know the policy’s claims implementation clauses inside and out, and policyholders who lack this expertise.
(v) “Compelling policyholders to institute suits to recover amounts due under its policies by offering substantially less then the amounts ultimately recovered in suits brought by them.” This can become a worst-case scenario for an insurer. When a policyholder must file suit to collect their just due, and the facts back them up, a jury can easily vent its wrath on the insurer.
(vi) “Failure of any insurer to maintain a complete record of all complaints which it has received during the preceding three years or since the date of its last examination by the commissioner.” Rest assured that plaintiffs’ attorneys keep a close eye on policyholder allegations, especially when these complaints are severe or often involve the same claims-related issues.
21.55 PROMPT PAYMENT OF CLAIMS
The final article, codified in Article 21.55 Prompt Payment of Claims, sets the rules for timetables for claims personnel in communicating with the claimant. Section 3 (a) stipulates that “except as provided in subsection (b) and (d) of this section, an insurer shall notify a claimant in writing of the acceptance or rejection of the claim not later than the 15th working day after the date the insurer receives all items, statements, and forms required by the insurer, in order to secure final proof of loss.” Although an additional 15 days are allowed if the insurer has a reasonable belief that the loss resulted from arson, the company is still required to notify the claimant whether it has accepted or rejected the claim no later then the 30th day after it receives the required information from the claimant.
Subsection (c) states that “if the insurer rejects the claim, the notice required by subsections (a) and (b) of this section must state the reasons for the rejection”. One of my adjuster friends calls this “the hammer clause.” The language requires that the “reasons” be stated in written form. Unless claims personnel specifically state which policy provisions they relied on for a rejection, I don’t believe that the insurer has met the standard of care under this subsection. I’ve read a number of policy provisions whose ambiguous exclusionary language might easily not apply to rejecting a claim. Many insurers require their claims staff to deliver denial documents to the policyholder and explain the reasons for the rejection.
Under Subsection (d), “If the insurer is unable to accept or reject the claim within the period specified by Subsection (a) or (b) of this Section, the insurer shall notify the claimant, not later than the date specified in Subsection (a) or (b) as applicable. The notice provided under this subsection must give the reasons the insurer needs more time.” Note that these timeframes are mandatory; companies that ignore or abuse them are asking for trouble when they go to court.
Subsection (e) provides that “Not later than the 45th day after the date an insurer notifies a claimant under Subsection (d) of this section, the insurer shall accept or reject the claim.” This section caps the notification timetable. The insurer’s only defense would be to prove that missing the deadline was due to circumstances beyond its control (such as a policyholder’s failure to provide required documentation for a claim).
(Subsection (f) states that “Except as otherwise provided, if an insurer delays payment of a claim following its receipt of all items, statements and forms reasonably requested and required, as provided in Section 2 (Notice of Claim), of this article, for a period exceeding the period specified in other applicable statutes or, in the absence of any other specified period, for more then 60 days, the insurer shall pay the damages and other items as provided for in Section 6 of this article.”
Section 6. In addition to damages, the insurer is liable for paying both 18% annual interest on the amount of the unpaid claim, as well as “reasonable” attorney fees incurred by the plaintiff.
A WORD OF WARNING
I’ve provided this overview for both company claims staff and independent agent/brokers. It’s imperative for agents to communicate all claims and additional claims information to their insurers ASAP! Here’s why: Let’s say a policyholder calls their agent to report a small claim and the agency advises them to pay the claim themselves because reporting it would “look bad on their record” and increase their premiums. In the real world such a “small claim” might easily turn into a Stephen King scenario. Delay or failure to report the claim would come across to a jury as the insurer’s failure to give a policyholder their just due. Chances are that the company would pay the claim to avoid legal or regulatory penalties — then turn right around and subrogate against the agent’s E&O insurer. Consider the impact of this litigation on the company-agent relationship.
So what’s a body to do? If you’re in the claims-processing end of the business, read and understand your state or provincial regulations on treating claimants. If you’re a claims manager, train your people and monitor their workflow based on your company’s policies and procedures.
If you’re an agent, make your staff aware of what these regulations require of both you and the adjusting community.
Last, but far from least, follow these three rules from E&O expert David Surles, CPCU: Document, document, and document again!
Roy Phillips, CPIA, CIC can be reached at Dan R. King & Associates, 4888 Loop Central Dr., Ste. 100A, Houston, TX 77081, (713) 667-0333, fax (713) 667-1560, e-mail [email protected], or visit www.kingphillips.com.