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Claims Management: An Important Part Of A Successful Insurance Program
CLAIMS MANAGEMENT: AN IMPORTANT PART OF A SUCCESSFUL INSURANCE PROGRAM by Elizabeth Shaw, CPCU This writing is based on one simple premise: The integration of claims management into a commercial insurance product during the early stages will improve the results of the insurance program. Just as a marketing plan defines the distribution process and an underwriting plan defines the risk selection and rating processes, a claims management plan to define the response process is the logical third piece, and is just as important to the success of the insurance program. To begin the discussion, let's interpret the insurance product from the perspective of an insured or affinity group of insureds. The insurance product is: a coverage contract providing protection from the financial results of accidental loss service and advice from an agent/broker and the carrier, at times critical to the insured Next let's analyze what an insured or a group of insureds expects from an insurance program. They expect: the coverage they need as defined by the law and/or the group or organization's risk philosophy, at a price that they believe is fair and in line with the organization's financial goals the service they want for maintaining the coverage they need. This service might include having all their questions answered, getting proactive advice as business conditions or market opportunities change, and getting professional assistance leading to prompt resolution when claims occur Traditionally, all parties involved with providing insurance have recognized the significant impact of claims considerations only after losses have occurred. The importance of proper reserving for the rating process and timely, accurate reports on actual losses for strategic decision-making and loss-control activities is undeniable. More directly, the claims process delivers the promises called for in the insurance contract, and therefore plays an integral part in the program. But what about before the fact? To be most effective, claims management should be discussed before the losses have occurred and even before the coverage has been decided upon and bound. As the continuing soft market for commercial casualty business attests, the days of the insurance market alone determining the availability of coverages and the rates charged for those coverages are gone, probably never to return. A commercial insured today insists on having more control over its own financial destiny. Accidental losses leading to claims are obviously an important part of that financial destiny. The commercial insured today is more sophisticated and has many more options for exercising control than ever before. Some of the control is achieved by implementing loss-control measures. Other options relate to risk financing, each of which may create important claims ramifications. The risk-financing options now available include: new and/or larger retentions through deductibles, self-insurance, and captive reinsurance increased bargaining power through association sponsorship of insurance programs, purchasing groups and risk retention groups, and specialty niche programs customized for particular affinity groups Most critical for this discussion is another important benefit that insureds are also coming to expect in their insurance programs: understanding how their claims will be handled and having some input into the process so as to address their insurance requirements and support their financial and business goals better. Doesn't it then seem logical to integrate a program or account-specific claims management understanding into the overall insurance program at the outset, rather than assuming that the claims will simply take care of themselves as long as there are adjusters handling them? Line claims people, including those in management positions, do operate under a claims management plan. Every insurance carrier with any kind of claims staff has documented general procedures and standards for its claims department that it uses for dealing with common, and even not so common, claims issues. These procedures and standards are applied across the board for all policies and all insureds, and they are needed for fairness, consistent contract compliance, and ease of internal management. Authority levels for loss reserves and settlements, geographical and organizational work distributions and adjuster caseloads, and philosophies for establishing reserves and providing a defense are among the issues usually addressed by these standards. Unfortunately, because of the carriers' size and organizational concerns and the carrier's own financial interests, these standards are generic and often fairly inflexible, especially when specific claims concerns are not considered during the account or program planning process. Individual account or program issues are not particularly weighed when the procedures are established, and often account and program issues are not considered when the procedures are practiced. Claims veterans are even heard to say that 'a claim is a claim is a claim is a claim.' Insureds, as they become more knowledgeable and more assertive in their efforts to control their financial destiny, are not likely to concur with this characterization, especially when the claim in question is theirs. Furthermore, when claims standards and philosophies are not discussed with insureds until losses have occurred, they are likely to come to light as apparent conflicts. Through market opportunities becoming available to them, insureds are able to participate to some degree in planning the coverage to be provided and the rates to be charged, and the way the coverage will be coordinated with the methods and levels they have chosen for retention and risk financing. Why should they not expect to have some initial understanding of who will handle their claims, how and by whom and within what legal and ethical parameters their claims will be defended, or some input into when and for how much their claims are settled? This is not to advocate that insurance carriers should abandon the claims discipline to their insureds, any more than they similarly abandon the underwriting discipline. However, as proper underwriting criteria for risk selection and rating differ under the circumstances of different programs or accounts, different market conditions, and different carrier appetites, the procedures and standards that dictate claims practices can also differ and still be proper legally and actuarially. For instance, good claims practice dictates that subrogation from a viable third party, once identified, should always be pursued because the policy provides the carrier that right. But what if the viable third party happens to be an important client of the insured and an attempt to recoup a claim expenditure could interfere with the insured's continuing relationship with that client in the long run? Especially when the insured participates in the ultimate financial exposure for the loss, whether to subrogate becomes not only a claim decision but also a business decision. As another example, cost-effective claims philosophy dictates that small claims even if somewhat questionable, usually be settled early at a nominal cost (commonly called nuisance value) to prevent the need for incurring further investigative and defense expenses. But what if the insured believes that such a settlement in a particular case will encourage more claims of the same type and feels that a stronger defense posture in that case, though not individually cost effective, could prevent a proliferation of similar claims? There is no definitive answer to these situations. But an early claims management discussion, inviting input from the insured, can provide additional guidance to the claims adjuster and acceptance from the insured before they act as general procedures dictate. But claims practices that are within the legal and actuarial requirements of the carrier AND that best meet the an individual account's expectations are unlikely to occur by chance. Moreover, the time after the loss or period of losses is clearly not the best time to discover general procedures conflicting with the insured's or group's expectations or needs. Unfortunately, that is when the discovery is most likely to take place. The best time is upfront, while the program is being designed and the deal negotiated. That is when the communication lines are uncluttered by losses that have already occurred and by the potential frustration of unmet expectations. In direct contrast to abandonment of the claims discipline, I recommend taking the time to explain and agree to a claims strategy that takes into account the insured's goals and the carrier's responsibilities. The specific advantages of having a program-focused claims management strategy include: Establishing communication lines to discuss routine and non-routine matters and to encourage a meaningful exchange to anticipate and provide for claims concerns Defining a role in the claims process for the insured or group that adds value to the claims-management process Determining useful measurement tools for the insurance program in relation to claims. Communication is the exchange of ideas and information. Effective communication is essential to a successful relationship and is the first step toward meeting the goals of all parties. Establishing and practicing meaningful, consistent communication procedures should occur from the outset of the relationship to prevent confusion or surprises later on. Exchanges regarding claims during the planning stages can encourage meaningful communication later on about claims matters. The successful use of such lines of communication for nonadversarial problem-solving and general reassurances could be as critical to an insured as premium cost. Part of the communication process is providing information, but the other part is receiving and understanding the information provided, including the attitudes and philosophies it reflects. Claims discussions should take into account the level of satisfaction of the insured's organization, with claim methods and results from the past and the reasons behind those opinions. Claims situations intrinsic to the particular type of business and to certain functions within the organizations should be considered. All concerns relating directly to claims handling should be identified and analyzed. But these claims issues cannot be meaningfully considered if they are not even mentioned during the planning process. If they are simply presumed to be addressed by generic claims practices designed to be consistent and meet the carrier's organizational management system, disappointment or conflict is likely to arise. The key is to establish the relationship in the earliest stages of the insurance program as a means for routine communication, not exchanges that take place only when a problem has developed or has escalated to potentially serious proportions. Meaningful communication requires an ongoing relationship between the parties, which is difficult to establish under the duress of frustration on both sides. Communication leads to smoother claims handling and a more satisfied insured. The second advantage of a claims management understanding is that it can specifically provide a means for the insured's input. The role of the insured or the group in the claims management process should be designed around the goal of advancing the appropriate and effective management of the losses under the program. Some of the obvious activities in that role are delineated in the Conditions sections of a standard insurance policy, such as reporting losses promptly to allow the investigation process to begin within the earliest possible time frame. Although especially important in Workers Compensation claims because of statutory time frames imposed on those responsible for paying benefits to injured employees, prompt reporting is important in every line of coverage. Another activity is to cooperate fully with the investigation efforts, including relaying all the facts as they are known, allowing access to knowledgeable personnel, and encouraging an open interchange of information as claim facts develop. An insured attempting to control the scope of the investigation by withholding pertinent information, regardless of the motivation, could limit the ability of the claims person to structure a competent defense. Claims people make their living investigating, evaluating, and resolving losses and complying with statutory requirements and court procedures. The insured person or group is rightfully concerned with the challenges, opportunities, and limitations for furthering the business purpose of their organization and the impact of claims on that business. Claims people welcome input and cooperation within areas of the insured's expertise. This vital contribution, based upon the insured's area of greatest knowledge and experience, adds value to the process and imparts an insight into the organization or business, the products or services, and the political and philosophical workings within the organization or profession. A subtle balance must be maintained between desirable input and inadvertent interference in the claims-management process. An agreement about the insured's involvement in the claims process, balanced with the available professional claims expertise, best promotes the basic purposes behind the insurance program of real savings in loss costs with long-term strategies (not short-term tactics). The third advantage of a focused claims-management strategy is to establish a set of claims ground rules and expectations against which actual results can be measured. As business and market conditions evolve, measurement tools are essential to enable the insured as well as the insurance professionals to evaluate the current insurance program and make necessary modifications over time. Taking the time during the planning stages to establish claims-measurement tools that are consistent with the goals of the insured and the insurer is well worth the effort. In conclusion, the basic premise of this piece was that integration of claims management in the commercial insurance product will contribute to improved results from the program. The insurance broker or agent achieves program success through binding the insurance program and expanding it over time. The insured or group achieves program success by promoting its own favorable financial results and having its insurance program meet its expectations. The insurer achieves program success through profitable underwriting results and retention of a profitable account. Encouraging discussions to anticipate and provide for claims concerns and establishing communication lines for nonadversarial problem-solving, defining a meaningful role for the insured or group in the claims-management process, and determining effective claims measurement tools, enhance the chances for success in all these areas....

Errors And Omissions Considerations
ERRORS AND OMISSIONS CONSIDERATIONS by Carol Hammes The old saying 'The cobbler’s children go unshod' could apply to many insurance agencies today. Thousands of agents don’t carry any E&O insurance at all, and many more might not have the right coverage. Although they analyze risks and review policy forms to give their prospects and clients the best and most comprehensive insurance plans, they often don’t give their own situations the same type of evaluation. With the expanded responsibilities that agents have taken on, such as fee-based consultative services or providing underwriting decision-making assistance for insurance companies, comes additional professional liability exposure. The available E&O coverage has been changing dramatically, too. There’s no standard policy anymore, and having the wrong coverage can literally bankrupt a firm. If a claim isn’t covered by the policy or is in dispute, the legal costs alone can be devastating — not to mention the settlement. Agents need to review their E&O policies 60-90 days prior to renewal for potential gaps in coverage and to see whether they can get better coverage and better pricing. A policy can and should be customized to fit your situation. Are you doing anything beyond the traditional agency’s scope, such as placing business in or having an ownership interest in a captive? Are you involved in reinsurance, TPA, or risk management consulting? Do you sell annuities, mutual funds, or other securities, particularly in situations that might involve ERISA? What about the joint venture that was just completed with the local bank — is it covered? In short, a full financial-service insurance agency is not traditional, so a normal E&O policy might not cover it. Rather than accept the standard policy provided by major insurers, you might consider finding a specialty broker with the background to address your specific exposures. Or perhaps your insurer can modify the standard policy. Some policies offer first-dollar defense, others do not. Some include EPL coverage for a much lower endorsement premium than the full premium on an EPL policy would be. What about exclusions for punitive damages or carrier insolvency? What are the cancellation provisions? Do your homework on your own risk in order to give your clients the best protection. If your agency gets into legal and financial difficulties, you won’t have time for your insureds’ needs. It’s important to have appropriate insurance in case of a loss, but it’s far better to make sure a loss doesn’t happen in the first place. More than two-thirds of all E&O claims are settled without payment, but the expenditure of valuable management and sales time to fight the battle can be very costly. The impact on employee morale and the agency’s reputation often can’t be measured, either. To avoid claims against your agency, instill your insureds with the confidence that the agency and its personnel can adequately meet their needs. Your personnel must also have the comfort of knowing that the situation was handled properly. A professional atmosphere, continuing education, and training are the keys to developing that confidence. Every employee, producer, and principal should have a formal training and education program that includes external and in-house activities. Discuss the training program as part of the performance review, and place a written confirmation in the personnel file. Traditional insurance product updates are important, but in this new environment, also include such subjects as effective use of automation and communication skills. In some cases, business writing, spelling, and grammar will also be a key part of the training. The first step in preventing E&O problems is to have well-trained employees who can service accounts and handle production and risk management. More important, however, is for agency principals to make sure the employes are managed effectively. Most E&O claims result from poor management rather than lack of knowledge. Owners who practice 'crisis management,' running to put out fires that shouldn’t have started in the first place, will tend to face E&O problems more often than those who run tight ships. Imposing rules and procedures designed to avoid problems will instill the kind of disciplined operation that will make for a better organized and eventually more profitable agency. And better organization will permit you to give even better service to the insureds, making claims less likely. One of the worst things agency principals and managers can do is to focus on the commissions salespeople produce rather than on the quality of the business they bring in. Producers who’ll promise anything to get an account, lie on applications, insist on doing things their own way, force service reps to bend the rules, constantly interrupt others, and continually create crisis situations because of their own poor time management can’t be allowed to continue to behave that way. Some owners think the top line is so important that they must tolerate such behavior to keep a high-volume, egocentric producer. Unfortunately, they’d rather raise their E&O coverage limits instead of disciplining the producer for fear of clipping their wings or losing the large book of business they’ve produced. Principals who are watching out for the agency’s profitability, productivity, and value know better. First of all, tolerating unprofessional behavior increases the chance of a successful lawsuit against the agency. Secondly, producers who don’t follow procedures and other control measures almost always create more work for the service and support personnel, hurting productivity, morale, and often the agency’s internal or external selling price. E&O CONSIDERATIONS AND GUIDELINES Legally, an insurance agent operates in a fiduciary capacity, so they’re held to the high standards demanded of a trustee. In other words, the law considers an agent to be more than a salesperson; the agent must act in good faith and candor. In most jurisdictions, an insurance agent is obligated to use reasonable care, diligence, and judgment to obtain adequate coverage for a client. The courts have held that an insurance agent must adhere to the professional standard of the industry and will be held responsible for any deviation from that standard. As insurance agents become more professional and are viewed as such, the standards to which they can be held will rise. Also, note that if a plaintiff can prove that most of the other agencies in your marketing area practice a certain procedure or do certain things for their insureds, you may be legally expected to do so, too, even if your agency has never done so. The number of E&O claims increased significantly in the late 1980s and early 1990s, then fell off. That’s no reason to be complacent, though: what with overextended insurance companies, a litigious society, and the number of attorneys hungry for work, plenty of claims — legitimate, questionable, and frivolous — will be filed. Most agencies can expect that at least one will be filed against them within the next five years, and some will have more. These are the most common types of E&O claims, in order of frequency: Plaintiff alleges that the agency failed to obtain proper or adequate coverage. Generally, a client may recover from the agent the loss they sustained because of inadequate or nonexistent coverage when the agency undertook to procure the insurance or failed to notify the customer/prospect properly if they were unable to obtain the requested coverage. At least half of the E&O claims filed during the past 20 years fall into this category. Plaintiff alleges that the agency misrepresented the coverage. In such cases, either the agency led the client to believe that coverage was in force or that the policy covered certain perils that it did not. Plaintiff alleges that either the agency or the company failed to properly notify them of a pending cancellation. It’s important to note that in direct billing, in which cancellation notification is the insurer’s responsibility, an agency may jeopardize itself by contacting the insured when they receive a lapse notice. The insurer holds the agency harmless unless the agency injects itself into the situation. Plaintiff alleges that the agency failed to promptly and appropriately renew coverage that was in force or failed to obtain a renewal policy with comparable coverages. This problem mostly arises when there hasn’t been sufficient communication about renewal options. The best way to protect your agency from E&O claims is to make sure your risk management and servicing procedures cover the important bases. A commitment to standardization starts with a quality-control program that: Outlines all procedures in writing Gives a designated E&O Coordinator the responsibility and authority to periodically audit accounts Builds accountability into the performance evaluation process In addition to handling the audits, the coordinator can also review the trade press and company bulletins for loss control suggestions and coverage changes and inform everyone of them. The coordinator should also maintain and update the procedures manual as new computer upgrades are installed and new positions are filled. Review all procedures thoroughly at least every two years and/or when the agency acquires another agency or book of business. After establishing your procedures, make sure everyone follows them at all times. Standardization is the key to preventing and defending lawsuits. Deviation from your procedures, no matter how minor, can lead to legal action and the possible loss of a lawsuit. Agency principals must set the example by following the rules themselves. Also, they must be willing to monitor the performance of the staff and, more importantly, the producers. In fact, the salespeople should be watched more closely than the other employees, because most successful E&O suits result from something a producer did or didn’t do. LOSS CONTROL PROCEDURES You can learn about quality-control systems, standardized procedures, and loss-control measures from the trade press and seminars. Any knowledge gained in an E&O seminar is important and should be incorporated into your agency operations. Principals and other employees who’ve been in the business for some time may stubbornly and shortsightedly dismiss new methods as impractical, unnecessary, or too time-consuming. However, following these procedures will result in better service to the insureds, less chance of successful litigation, a better working environment for the employees, more profits, and a higher agency value. Some of the most basic loss-control procedures, the ones all insurance professionals know they should follow, are often the ones that aren’t implemented. Or they may be in the agency guidelines, but management doesn’t mandate compliance with them. Here are some of the more crucial procedures to help you prevent and defend lawsuits. This list isn’t all-inclusive, but it will give your agency a starting point in developing an effective E&O loss control program. Have written procedures for every transaction and make sure all employees (including owners) follow them. Document every conversation with insureds and company personnel either in the computer or manually. Producer notes from client meetings that aren’t entered into a laptop at the time should immediately be clipped to the paper file or entered into the computer when the producer returns to the office. Use standardized checklists for every piece of new business and every renewal. Never 'renew as is.' Create standardized transmittal letters and proposal forms with pre-approved descriptions of all coverages, deductibles, coinsurance clauses, and so forth. Always obtain a signed written rejection when a prospect or insured turns down recommended coverages or limits and when they ask to have coverages removed or limits reduced. If you tell someone you’ll get coverage for them, you have an obligation to do so. If you tell them you’ll survey the market and see what you can find, your legal level of duty isn’t so high. Whatever you promise, follow up in writing as soon as possible after you get an answer, especially if the answer is negative. Maintain centralized expiration and suspense controls on the computer, and make sure all employees use them all the time. Learn the risk management needs of industries to which you’re niche marketing. If you pass your agency off as expert, you’ll be held to a higher standard. Never use 'all risk' or 'fully covered' in any communication, and be careful with the term 'replacement cost.' Review all agency accounts (including Personal Lines) annually. Watch for missing coverages, such as flood or business interruption, limits that are too low, and exclusions that might cause a problem. If you feel that an account is too small for such a review, get rid of it. You can’t afford the exposure. Use certified mail to issue all cancellations out of the agency. If the insurance company requests a cancellation, have them contact the insured in an appropriate manner. Don’t sign an application for an insured, and don’t make up missing information. It’ll come back to haunt you, and the commission just isn’t worth the risk. Report all claims promptly, and leave it up to the insurance company to accept or deny them. Make sure everyone in the agency knows your binding authority with each insurance company (this should be in the procedures manual) and that binders are numbered, recorded, and faxed/e-mailed to the company immediately. Have separate procedures for handling E&S, nonadmitted placements, and insurance companies with ratings lower than A-minus, and include a written sign-off from the insured acknowledging that they understand the placement risk. Never follow up on direct bill lapse notices. If you’ve done so in the past, stop and send a written notice to the insureds that you won’t do so in the future. Unless you have a specialty program or an MGA, don’t place risks for other agents and brokers. Avoid prospects and insureds who have poor loss experience, want the cheapest program, or don’t qualify for financing programs. Cutting corners just to get an account isn’t worth it. Give clients bad news immediately, and present them with a plan to solve the problem. These guidelines are only a starting point. In establishing an agency’s approach to E&O loss control, owners and managers have to decide how far to go in setting up duplicative procedures to prevent claims. It’s important to have proper documentation of conversations and written records of all coverage-sensitive issues, but at some point the people in the agency must have the freedom to sell and service insurance. If you want to be completely free of the risk of a lawsuit, you’ll need to shut your doors. If you stay in business, you take a certain amount of risk. Deciding how much risk is up to the agency principals. Set up procedures that will treat customers fairly and respect their intelligence and decision-making capabilities. Keep them informed of good news and bad in a timely manner. And meet their needs with courtesy and professionalism. A satisfied insured is less likely to call a lawyer if things don’t go their way. The late Carol Hammes, principal of the Middleton Group, was one of the Independent Agency System’s most widely respected management consultants. She will be sorely missed. Reproduced, with permission, from The Middleton Letter. ...