AINS 21 Claims

Question 1

Insurer’s 1st Goal: Satisfaction and Promises

Answer 1

first goal of the claims function is to satisfy the insurer’s obligations to the policyholder as set forth in the insurance contract.
in a liability insurance policy, the insurer’s promise is to pay on behalf of the insured any damages for which they are legally liable because of BI, PD, or other specified types of injury caused by an accident up to the applicable limit.
insurer also agrees to defend the insured against claims or suits seeking damages covered by the policy.

keeps its promise by providing fair, prompt, equitable service when the loss involves a first-party claim or a third-party claim

Question 2

Insurer’s 2nd Goal: Profit

Answer 2

second goal of claims function is to support the insurer’s profit goal

generally the responsibility of the marketing and UW dept, however, the claims function serves a role in generating underwriting profit by controlling expenses and paying only legit claims

manages all claim function expenses, setting appropriate spending policies, and using appropriately priced providers and services to help maintain an insurer’s UW profit. can avoid overspending on costs and handling claims, claims operations,or other expenses. prevents any unnecessary increases in the cost of insurance and subsequent reduction in the insurer’s UW profit.

policyholders and other claimants are likely to accept an insurer’s settlement offer if they believe they are receiving fair treatment, or else they may seek to settle their differences with the insurer by filing lawsuits- this erodes goodwill between the parties and generates increased claim expenses, reducing the insurer’s profitability.

Also dissatisfied policyholders or claimants may complain to their state insurance dept and if found to be at fault may be subjected to penalties, thus reducing profits.

Question 3

Independent Adjuster

Answer 3

offers claim-handling services to insurance companies for a fee.

Question 4

Claims Dept: Home Office

Answer 4

usually, a senior claim officer heads the claims department and reports to the chief executive officer, the chief financial officer, or the chief underwriting officer. The senior claim officer may have a staff located int he same office. The staff is often called the home-office claims department. within the home-office claims dept, any number of technical and management specialists can provide advice and assistance to any remote claim offices and claim reps.

Question 5

Claims Dept: Branch Offices

Answer 5

senior claims officer may have several claim offices or branches countrywide or worldwide. staff from remote claim offices can all report directly to the home-office claims dept, or regional/divisional claims officers may oversee the territory. regional claims officers may have one or more branch offices reporting to them. each branch office may have a claims manager, one or more claims supervisors, and a staff of claim reps. similar dept structures are adopted by 3rd party admins (TPAs)

Question 6

Staff Claim Reps

Answer 6

employees of an insurer and handle most claims

may include inside claims reps- handles claims exclusively from the insurer’s office, and field claims preps who handles claims both inside and outside the office

field claims reps also called outside claim reps handle claims that require such tasks as investigating the scene of the loss, meeting with insureds, claimants, lawyers, and others involved, and inspecting damage

Staff claims reps usually work from branch or regional offices rather than at the insurer’s home office

Question 7

Independent Adjusters

Answer 7

certain insurers may not find it economically feasible to set up claim offices in every state in which insureds are located. they may instead contract with independent adjusters to handle claims in strategic locations.

independent adjusters handles claims for insurers for a fee

some insurers use independent adjusters for all field claims work. these insurers employ claims personnel in their home office or branch offices to monitor claims progress and settle claims but use independent adjusters to handle all the field work.

may hire independent adjusters when staff claims reps are too busy to handle all claims themselves for example after a disaster strikes.

may need independent adjusters for special skills needed or desired service levels. for example, some independent adjusters are experts in highly specialized fields such as investigating aircraft accidents.

some independent adjusters are self-employed, but many work for adjusting firms that range in size from one small office with a few adjusters to national firms with many offices employing hundreds of adjusters.

Question 8

Third-Party Administrators

Answer 8

business that choose to self-insure do not use UW, agents, or other typically insurer personnel. but do need personnel to handle losses that arise. will employ their own claims rep or contract with TPAs– they handle claims, keep claims records,and perform statistical analyses, often associated with large adjusting firms or with subsidiaries of insurance companies. many property-casualty insurers have established subsidiary companies that serve as TPAs.

Question 9

Producers

Answer 9

anyone who sells insurance
some insurers may give some producers the authority to pay claims up to a certain amount such as $2500. can issue claims payments, called drafts, directly to insureds for covered claims, thus reducing the time an insured waits for payment. in this capacity, producers function much like inside claims reps.

Question 10

Public Adjusters

Answer 10

if a claim is complex or if settlement negotiations are not progressing satisfactorily with the insurer, the insured may hire (for a fee which is usually a percentage of the settlement) a public adjuster to protect his or her interests. prepares the insured’s claim and negotiates the settlement with the staff claims rep or independent adjuster.

Question 11

Claims and Insurer Profits

Answer 11

Insurers are business and, as such, must make a profit to survive. Claims depts play a crucial role in insurer profitability by paying fair amounts of legitimate claims and by providing accurate, reliable, and consistent ratemaking data.

fair claims payment does not conflict with insurer profit goals, an insurer measures its claim and UW dept performance using a loss ratio, which is a profitability measure. The quality of a claims dept performance can be measured using best practices, claims audits, and customer satisfaction.

Question 12

Profitability Measures

Answer 12

loss ratio is one of the most commonly used measures for evaluating an insurer’s financial well-being

measures losses and loss adjustment expenses against earned premiums and reflects the % of premiums being consumed by losses.

an increasing loss ratio could indicate that the insurer is improperly performing the claims function

an increase in losses could also mean that UW failed to select above-average loss exposures or that the actuarial dept failed to price the insurer’s products correctly

claims dept along with other insurer functions is pressured to reduce expenses. can do this short term by offering the insureds and claimants the settlement demanded rather than the settlement deserved. long term- inflated settlements should be resisted, researched, negotiated, and if necessary litigated. loss adjustment expenses can also be reduced by following claims procedures.

Question 13

Quality Measures

Answer 13

1. Best Practices- refers to a system of identified internal practices that produce superior performance, studies its own performance or the performance of similar successful insurers, based on legal retirements specified by regulators, legislators, and courts
2. Claim Audits- performed by evaluating the info in a number of open and closed claim file, can be performed by the claims staff who work on the files (self-audit) or they can be performed by claims reps from other offices or by a team from the home office. usually evaluate both quantitative and qualitative factors.
3. Customer Satisfaction- quality of claims dept performance is also measured by customer satisfaction, complaints must be investigated by mangement and responded to in a timely manner.

Question 14

Claim Handling: Setting Reserves

Answer 14

Claim Reserve or Case (Loss) Reserve

an important part of the claim reps job, establishing and maintaining adequate reserves is important for the insurer’s financial stability because reserves affect the insurer’s ability to maintain and increase business.

Question 15

Claim Handling: Internal Reports

Answer 15

for parties within the insurance organization who have an interest in large losses or loss of a specific nature, such as death, disfigurement or dismemberment.

Question 16

Claim Handling: Preliminary Reports

Answer 16

acknowledge that the claims rep received the assignment, inform the insurer about initial activity on the claim, suggest reserves, note coverage issues, and request assistance, if needed

Question 17

Claim Handling: Status Reports

Answer 17

Periodically report the progress of the claim, recommend reserve changes, and request assistance and settlement authority when necessary

Question 18

Claim Handling: Summarized Reports

Answer 18

detailed narratives that follow an established format with captioned headings that give them structure, usually filed within thirty days of the assignment date

Question 19

Claim Handling: External Reports

Answer 19

containing info collected by claims reps, inform producers, some states’ advisory organization, and others who have an interest in the claim about details of the losses, such as the amount paid and the amount in outstanding reserve

Question 20

Claim Handling: Closing Reports

Answer 20

once a claim has been resolve, can include the claim reps recommendation on subrogation, advice to UW, and other suggestions. claim supervisors may use these reports to audit the claims reps performance.

Question 21

Mediation

Answer 21

an ADR (alternative dispute resolution) method, uses a neutral outside party to examine the issues and develop a MUTUALLY agreeable settlement

Question 22

Arbitration

Answer 22

an ADR, uses a neutral outside party to examine the issues and DEVELOP a settlement, which can be final and binding

Question 23

Appraisal

Answer 23

an ADR, method of resolving disputes between insurers and insureds over the amount owed on a covered loss

Question 24

Mini-trial

Answer 24

An ADR, a case undergoes an abbreviated version of a trial before a panel or an adviser who poses questions and offers opinions on the outcome of a trial, based on the evidence presented

Question 25

Summary Jury Trial

Answer 25

An ADR, disputing parties participate in an abbreviated trial, presenting the evidence of a few witnesses to a panel of mock jurors who can’t decide the case

Question 26

Reservation of Rights Letter

Answer 26

specifies coverage issues and informs the insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.

sent if it is apparent from the loss notice that coverage may not be available for the loss, must notify the insured of this concern through this letter

question of coverage existing

Question 27

Nonwaiver Agreement

Answer 27

a signed agreement indicating that during the course of investigation, neither the insurer nor the insured waives rights under the policy

sent if it is apparent from the loss notice that coverage may not be available for the loss, must notify the insured of this concern through this letter

Question 28

Property Insurance Claims

Answer 28

two parties are usually involved: the insured and the insurer
claim reps do not usually have to determine who is at fault (unless insured is suspected of intentional act)

Question 29

Property Insurance Verification

Answer 29

1. confirm that a valid policy was in effect
2. determine that the date of the loss falls within the policy period
3. establish whether the damaged property is insured under the policy

Question 30

Property Insurance Coverage: 4 questions a claims rep must ask

Answer 30

1. does the insured have an insurable interest in the property? (Owner is insured, easy, but if mortgage then they may have rights to collect under an insurance policy)
2. Is the damage property covered by the policy? (what if it’s a room air conditioner attached to a window frame, or a tool shed connected to a dwelling by a fence)
3. Is the cause of loss covered by the policy? (fire or lightening, for example is clearly covered, but in the case of a hurricane when damage may have been caused by either wind or flooding can cause disputes)
4. do any additional overages, endorsements, or coverage limitations apply? (the insured might have also purchased an additional coverage, selected one or more optional policy coverage, or modified coverage through an endorsement- such changes to the basic policy can eliminate or modify exclusions or limitations)

Question 31

Actual Cash Value

Answer 31

cost to replace the property minus an allowance for the property’s depreciation.
for example: a fire completely destroys a 1 week brand new television and a four year old sofa. The television replacement cost of $600 and the sofa $800. An ACV settlement includes $600 for the tv. The sofa however has to place a value on the used property. Must determine the extent of depreciation and estimating the property’s expected useful life. for example, the sofa might be used for ten years and it is now four years old, a good estimate of depreciation from normal wear and tear is 40%. Therefore, with a replacement cost of $800 and depreciation estimated at 40%, the ACV of the sofa is $480.

Question 32

Replacement Cost

Answer 32

Deduction for depreciation is not part of the valuation

Generally, a loss valued on a replacement cost basis is paid only after the property has been replaced.

The insurer may pay the claim first on an ACV basis, and the insured then has 180 days to provide notice of the replacement cost.

Question 33

Agreed Value

Answer 33

used to insure property that is difficult to value such as fine arts, antiques, and collections

often based on an appraisal, and that amount is stated in the policy declarations

if a total loss to the property occurs, the insurer will pay the agreed value, regardless of the property’s exact value at the time of the loss.

Question 34

Valuation Process

Answer 34

once claim rep has verified coverage and identified the valuation method, the valuation process beins. uses guidlines to determine both replacement cost and ACV.

if the exact style and brand of the damaged personal property are available for purchase, obtaining the replacement cost is simple. If no longer, then they identify the closest substitute in style and quality and uses that as the replacement cost.

For ACV, depreciation must be estimated. issue is what if a sofa has an expected life of 10 years, but it is 15 years old? is it considered worthless? it has some value as long as it is function, so the depreciation procedure must allow for that fact. The claim rep may have guidelines for property still being used is no more than 75% depreciated, no matter how old it is. It is impossible to anticipate every situation and therefore they must use good judgment to determine depreciation. Replacement cost can usually be determined using three factors:

1. sq ft of the property
2. type and quality of construction
3. construction cost per sq ft

Question 35

Salvage Rights

Answer 35

this is the insurer’s right to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss or a constructive total loss (exists when a vehicle or other property cannot be repaired for less than its ACV minus the anticipated salvage value).

Question 36

Liability Claims versus Property Claims

Answer 36

1- claimant is a third-party who has been injured or property damaged, they may be hostile or act in an unfriendly manner as they may perceive the claims rep as an adversary

2. a liability claim may involve bodily injury and it is often even more difficult and complex when the claim seeks damages for BI or death
3. in a claim for damage the insured has allegedly caused to the property of others, it’s similar to property claims but with the added difficultly of determining whether the insured is legally responsible for the property damage that has occurred.

Question 37

Compensatory Damages

Answer 37

intended to compensate a victim for harm suffered and include special damages and general damages

Question 38

Special damages

Answer 38

Specific, out of pocket expenses.

In BI- includes hospital expenses, dr, and miscellaneous medical expenses, ambulance charges, prescriptions, and lost wages. These are specific and identifiable, makes it easier to calculate than general damages.

Question 39

General Damages

Answer 39

do no have a specific economic value

includes pain and suffering, disfigurement, loss of limbs or sight or hearing, loss of ability to bear children

estimating their dollar value requires considerable expertise

best to analyze past cases that are similar
may use any of the following tools to estimate bodily injury valuation of specific damages: supervisor’s guidance, round table discussion with other claim reps, or computer software

claim reps must be aware of the awards for damages made in their jurisdiction because these awards provide a guideline for negotiating with the injured party.

Question 40

Punitive Damages

Answer 40

if the court finds the defendants conduct to be particular malicious or outrageous, it might award punitive damages. purpose is to punish the wrongdoer and to deter others from doing the same wrongs. in some states, the insurer’s payment of an award for punitive damages is not permitted since the insured is not being punished then. some policies expressly exclude the payment of punitive damages.

Question 41

Black’s Law Dictionary on “Bad Faith”

Answer 41

An insurance company’s unreasonable and unfounded (though not necessarily fraudulent) refusal to provide coverage in violation of the duties of good faith and fair dealing owed to an insured. Bad faith often involves an insurer’s failure to pay the insured’s claim or a claim brought by a third party.

Question 42

Good-Faith Claims Handling: Thorough, Timely, and Unbiased Investigation

Answer 42

To be Thorough: claims reps should collect all relevant and necessary evidence, develop the info, and doc necessary to determine liability and damages, and make decisions when they believe they have sufficient info to do so. the claims rep is alert for new info that may change the course of the claim.

To be Timely, claimants expect prompt contact from the claims rep. most insurers have guidelines about time period of contact such as 24-hours after claim has been submitted

To be Unbiased: should seek to discover the facts and consider all aspects of the claim to reach an impartial decision, should pursue all relevant evidence, without bias. must still be alert to indicators of possible fraud and investigate them thoroughly. must also make a good-faith effort to find experts who are reputable within their profession and who will provide unbiased evals.

Question 43

Good-Faith Claims Handling: Complete and Accurate Documentation

Answer 43

a claim file must provide a complete and accurate account of all the activities of and actions taken by the claim rep. many people with different purposes may read a claim file and they should provide complete info for all of their purposes. these people may be supervisors, a home-office examiner or an auditor, claims dept peers, an underwriter, and agent or broker, state insurance dept rep, etc.

Question 44

Good-Faith Claims Handling: Fair Evaluation

Answer 44

based on facts, not opinions.

for assistance in making evaluations, claim reps can consult with sources inside and outside the insurance company, including co-workers, supervisors, , managers, defense lawyers, people who represent a typical jury, and jury verdict research companies.

Fair eval is particularly important in liability claims, which may result in damages that exceed policy limits, by evaluating liability claims as if no coverage limited existed, claim reps can avoid the mistake of unfairly attempting to settle a claim for less than the policy limit when it may be worth more.

A crucial element of fair claim evaluation is promptness, compliance with statutory time limits for completion of evals of coverage and damages can help reduce the insurer’s exposure to bad-faith claims. also important in responding to the claimant, the insured, or their respective lawyers’ demands, particularly important when there is a demand for settlement that is at or near the policy limits

Question 45

Good-Faith Claims Handling: Negotiation

Answer 45

claim reps should respond to exaggerated demands from lawyers by offering and documenting a settlement that is consistent with the evidence and documentation in the claim file. An increasing number of bad-faith claims arise from insurers’ failure to settle liability claims against the insurer within policy limits. in many such cases, the insured has demanded that the insurer settle the case within policy limits and has made it clear that the insurer is expected to pay the entire amount of the damages if settlement doesn’t occur. . if a verdict in excess of policy limits is delivered and the insurer refuses to pay the insured, a bad-faith lawsuit ensues.

to resolve disputes over settlement amounts, claims reps should use policy provisions such as arbitration clauses, when applicable. an insurer that adheres to policy provisions and pays the amount determined through arbitration is in a better position to defend a bad-faith lawsuit. Claim reps should consider all possible forms of voluntary alternative dispute resolution (mediation, negotiations, etc)

Question 46

Good-Faith Claims Handling: Regular and Prompt Communication

Answer 46

keeping insured informed is important because they expect it as they are most likely to make a bad-faith claim

claim reps has a duty to inform the insured of policy provisions that apply to the claim, rights under the policy, and steps to be taken to get maximum benefits

duty to inform is required under many states’ unfair claims practices acts

Question 47

Good-Faith Claims Handling: Competent Legal Advice

Answer 47

claim reps should provide lawyers with all info and docs necessary to reach a complete and accurate opinion and should avoid any attempts to influence the lawyers independent judgement

should avoid conflicts of interest by using lawyers other than the defense layers hired to defend an insured

asking a lawyer who defends an insured a coverage question creates an ethical dilemma for that lawyer because the answer may not be in the insured’s best interest

Question 48

Good-Faith Claims Handling: Effective Claims Management

Answer 48

in this context, it’s how claims dept are managed by claim supervisors and claim managers

crucial to good-faith claims handling are consistent supervision, thorough training, and manageable caseloads.

Question 49

why do most bad-faith claims for breach of the implied good faith and fair dealing arise under insurance-related contracts rather than other contracts?

Answer 49

Because in insurance contracts, the insurer not only dictates the terms of the contract (the policy), but also usually controls the claims investigation, evaluation, negotiation, and settlement and therefore has more “bargaining power” than the insured. Because insurers control how claims are resolved, courts reason that insurers should be responsible for the outcome of their claims handling if they have acted in bad faith.