The Dilemma: An adjuster has established an honest opinion of a claim with the maximum indemnity value in the range of 80 percent of policy limits. An offer of settlement within that range has been rejected—with a lawsuit filed instead of a counteroffer. The adjuster believes defense costs, in addition to the highest value of the settlement range, will exceed policy limits. Ethically, should the adjuster offer policy limits to try to settle the claim without incurring projected defense costs?

The Industry Responds: Claims professionals immediately recognized additional information would be necessary for a final ethical decision. Among the information respondents wanted to know were: 1) Is this a first- or third-party claim? 2) Was the suit filed because of a statute of limitations or as a practice of the claimant's attorney? 3) How close was the offer to the upper end of the settlement range? 4) Is it a bodily injury or property-damage claim? 5) What are the potential “bad faith” implications of the claim?

Answers to these questions naturally affect the ethical response of the adjuster. For example, most states impose a higher duty on insurers when the insured is also the claimant. And filing a claim to meet a statute of limitations is a significantly different situation than a claimant filing to force a greater offer.

Therefore, if the settlement range was “wide” and the offer was at the low end of the range, the claimant may be signaling his or her belief the offer is low. Similarly, it would be typical for a settlement range to be wider in a bodily-injury claim, with its inherent subjectivity, than a property-damage claim that can be estimated with greater precision. Finally, the jurisdiction and reputation of the claimant's counsel for filing an amended complaint alleging “bad faith,” and its associated costs, are a factor.

Despite the noted need for more information, most respondents were willing to offer generalized opinions as to the ethical duties to consider defense costs. An Oregon adjuster writes, “Ethically the adjuster should pay what is owed on a claim.” A former risk manager notes, “The adjuster should make a fair and equitable offer based on the loss and not 'low ball' the other party.”

An Illinois producer comments, “The adjuster ethically must pay the claimant the correct amount due as a result of the loss. Policy limits have nothing to do with the 'correct amount.'” Another responder opines, “The adjuster should abide by the terms of the policy and adjust the claim in the same manner if the loss were 20 percent of the limit.”

A District of Columbia attorney believes, “In general, the adjuster should not consider any external costs in evaluating a claim. Legal fees should not be included in the settlement equation.” A Kentucky defense attorney adds, “I am not aware of any court decision, statue or ethical rule which would require an adjuster to include anticipated defense costs in the evaluation of a claim.”

From a Georgia adjuster: “In theory, the cost of litigation should not be considered when evaluating the merits and value of a claim. Doing so artificially increases the value of all similar claims.” A Florida consultant warns, “Care must be taken not to confuse ethics with money. Ethics is 'doing the right thing' and is not measured in dollars. Filing of a suit is not justification for departing from solid ethics in adjusting a claim.”

EXECUTIVE DECISIONS

Other comments note that the general answers above apply to the adjuster assigned to handle and value the claim. There may be a myriad of reasons why supervisors, managers or executives may decide to 'overpay' the claim that are outside the value of the claims.

In these cases, the majority of respondents stated “overpaying” is a business decision with no ethical implications. The D.C. attorney, for example, gives this down-to-earth consideration: “Pragmatically, defense costs are a consideration, but that is not the adjuster's job. Once a fair evaluation is made, it becomes the supervisor and attorney's job to assess the overall impact of the lawsuit on the claim.”

A noted insurance educator states, “I'm not convinced this question poses an ethical decision but rather a business decision.” A client executive for a large broker agrees: “It is a business decision. In third-party claims, these decisions are made all the time, and it should be no different in first-party claims. The indication of a range of value indicates imprecision in value.”

The former risk manager is concerned with overall claims costs that, one way or another, would be passed on to insureds: “A claim that gets settled and closed quickly costs far less than claims that drag on and stay open. In some circumstances, it may be ethical and good business to pay more than indemnity value.”

PROTECTING THE INSURED'S INTEREST

Many other ethical considerations were presented by those responding. A common ethical duty noted was to protect the insured in third-party claims.

The Oregon adjuster notes, “As always, it is important for the adjuster to protect the insured's interests in the claim.” An Indiana adjuster adds, “There is an ethical obligation so as to not expose the insured to a judgment in excess of the liability limit and to notify the insured of the potential for an excess judgment.”

The D.C. attorney agrees: “One external factor would be the insured's desire to settle within policy limits to avoid an excess judgment. It may also avoid a subsequent first-party bad-faith claim against the insurer.”

The Indiana adjuster identifies a duty to all policyholders: “Insurers have an ethical obligation to pay what is owed so that premiums for all policyholders are not artificially increased. Although the interests of the insured must be considered, I believe the greater ethical obligation is to all policyholders.”

Two other comments are worth noting. The well-known educator writes, “If the limits offer is made as a business decision to avoid trial, and the claimant does not accept the offer, the insurer may not be permitted to walk away from defense of the claim and would be required to continue to defend the insured. It may still incur significant defense costs.”

The Florida consultant suggests that when the original offer is rejected it may be a good idea to ask a colleague for a second opinion. “If the second opinion supports the original value, the adjuster's ethics have been maintained and management may then make its business decision.”

ETHICS SUMMARY

Overall the vast majority of those responding generally believe that, ethically, defense costs should not be included in any decision of an adjuster assigned to a claim. However, supervisors and management may ethically decide to include such costs.

The impact of paying more than an honestly determined indemnity value will have an impact on the individual and all insureds. This should be considered in any business decision.

Finally, the interests of the insured involved in any claims must be protected and, as noted by many respondents, the insurer's interests should never be considered more than the insured's interests.

Special Reports /

A Question Of Ethics: Add Defense Costs To Settle A Claim?

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