Regardless of the coverage involved, those analyzing claims files can take two different approaches—either quantitative or qualitative auditing. The best audit involves both, whereas inferior audits involve only one.
Too often, auditors, especially those who do not come from an adjusting background, may tend to look at claims files only quantitatively, and may therefore declare an excellently adjusted file “inferior,” simply based on quantitative factors. Let’s look at both types of analyses to determine what an auditor must consider when reviewing a claims file.
Of Vital Importance
Undoubtedly, many claims adjusters have been the victims of auditors who looked solely at quantitative factors. In one of the early Iconoclast columns, I cited the case of Jack. An adjuster for well over 10 years, Jack had expert knowledge of coverage, liability, and damage issues. Even so, he was somewhat lazy and often relied upon this ample knowledge to take shortcuts that often did not appear in his file notes.
There is an old adjuster’s motto, “If it isn’t in the file, it didn’t happen.” Well, there was much that did not appear in Jack’s file. Although annotations as to what Jack had done from minute to minute were lacking, he achieved superior results on virtually every file. Jack knew the policy language verbatim and therefore understood how the courts had interpreted every aspect of tort liability. He knew how to read and interpret any contracts that the case might involve. Moreover, Jack was an expert appraiser of damage. When he was negotiating with an insured or claimant, both sides felt that the results were exactly right and fair.
When Jack received several new claims at once, he often directed his attention to those he deemed most important to investigate and tended to procrastinate on the others—perhaps mailing a form or two, requesting some report or other, or setting an appointment for the following week. Then he concentrated on the big claims, ones that needed extra attention and would cost more.
As a result, the audits of Jack’s files always looked dismal. Even though his adjusting excellence was apparent to Jack’s boss, higher ups focused only on the quantitative audits. Jack did not make “three point contacts within 24 hours.” He did explain what he was doing. In addition, his reports and status updates were chronically late. So even though the files contained the correct documents, all of which were accurately completed, Jack nevertheless received poor employee reviews, with raises slow in coming. The vice president of claims constantly asked Jack’s boss why he had not fired Jack years earlier. One day the auditor, some guy from an accounting firm, was reading Jack’s files when Jack returned from a mediation during which he had successfully settled a big claim. Jack and the auditor began to argue. After telling the auditor exactly what he thought of quantitative audits—in less than complimentary words—Jack found himself out of work.
A Numbers Game
During several claims conferences, I have heard numerous speakers address “the perfect claims file” concept. It is all about the numbers. Was contact made with the insured, the claimants, the witnesses, the doctor, and others within 24 hours of the assignment? If not, then the file was deemed lousy. The fact that an insured might not have reported the loss until a week or two after it happened did not change the requirement of 24-hour contact.
Were the file notes detailed and kept current? Were any outside reports that might help “decorate” the file—such as a police report, a photo of the scene, a fire department or an EMT report, and so on—located in the file, and then discussed in the reports? Was there an acknowledgement of the assignment to the agent or (if the claim was on behalf of a self-funding entity) to the insured’s risk manager? Was the first report made within a week, and was a reserve set quickly? If not, then there had to be a good reason.
Certainly all of these things are important. In many cases, however, they represent time-wasters, serving only to clutter up the adjuster’s already busy day. They are easy to measure, which is why auditors—especially those hired to “isolate the problem” but who nevertheless have little, if any, personal claims experience—rely largely on them. None of these things reflect the true quality of a given claims adjustment. There is a police report in the file. So what? The cop was not there to investigate the insurance claim. He or she was there to see if there had been a traffic violation or to provide statistics for city, county, or state purposes. Such reports are helpful, but a savvy adjuster will conduct his or her own investigation.
Why is it imperative to contact a doctor within 24 hours? Sure, one might send a note stating the insurer has an interest in the file and will require a report eventually. During the first 24 hours, however, that doctor will simply not know enough to comment. The doctor may have only seen the patient for a moment and ordered other tests or x-rays, which likely will not be available for days or even weeks. All initiating contact at that point will achieve is clutter the doctor’s busy day.
On the other hand, contacting the claimant is crucial, especially when dealing with an injury claim. Keeping all of those TV ads for lawyers in mind, the claims adjuster must get there first, letting the claimant know that he or she is not only concerned but also intends to help. Just making a contact—which is mandatory to achieve that quantitative A-Plus—says nothing about the quality of the contact. If all the adjuster managed to do was introduce him or herself and anger the claimant by demanding documentation right off the bat, then the 24-hour contact may have done much more harm than good. During the initial contact, the claims adjuster may not know enough about the claim to discuss it correctly, as the coverage and liability investigation may be incomplete at that point. This is how serious errors, including promises to do this or that, get made.
Another relatively easy aspect to audit is the claims reserve. Did the adjuster set one when the file was created? This is something that auditors often want to know. Again, how much can the adjuster know about the claim at that point? If a reserve is set on the sole basis of the accident report or other report by an agent or an insured, then there is rarely sufficient data available to establish an accurate reserve, barring that the insured ran over and killed somebody, and the reserve is for the policy limits. A reserve that is set too quickly is apt to be wrong. All too often that incorrect reserve will remain on a file until further information indicates the file is a sleeper worth far more. However, nobody suspected that because the prompt first reserve was never updated. That can spell mayhem, for sure.
What makes a claim file reflect quality? Appearances can be deceptive. A quantitatively oriented auditor may view a cluttered file negatively. If the adjuster’s personal method of filing documents makes sense to the actual adjuster and does not impede proper handling, then clutter is a not a factor.
The adjuster’s job consists of investigation, evaluation, and negotiation or disposition of the claim. It must start with the coverage investigation and evaluation. A properly handled file will reflect that the adjuster has looked at every aspect of the claim and has determined whether it matches the coverage. For many claims, coverage may apply only in part. The alert adjuster will determine what is covered, and explain those factors to the insured, perhaps even issuing a Reservation of Rights (ROR) letter, or an Excess Loss letter. Coverage is the first thing the auditor needs to check. Did the adjuster investigate and correctly evaluate the coverage? Should issues arise, did the adjuster correctly address they should be handled?
The next item the auditor needs to find in the file is the liability investigation. Regardless of whether the claim is a first- or third-party loss, a correct evaluation of the legal aspects of the claim—one that takes all contractual, statutory, and tort factors into consideration—is crucially important. The file should reflect the adjuster’s thinking regarding liability. If the claim involves an auto accident, has the adjuster evaluated the percentages of fault of the insured and the other parties under whatever the state rules are regarding contributory or comparative negligence? If the loss is solely a first-party claim, has the adjuster considered any possible source of contribution or subrogation? If so, have any other tortfeasors been placed on notice, and has there been any follow-up?
Quality Loss Assessment
Finally, has the adjuster correctly evaluated the damages? If the claim involves injuries to a third party for which the insured is partially or totally liable, has the adjuster made the necessary contacts with the injured claimant or the claimant’s attorney, and ostensibly maintained control of the claim? Has the medical information been received and carefully reviewed? Or, is the claims adjuster “sitting” on the file, merely awaiting the attorney’s “package of specials”? The latter can be an indicator of no quality at all. The adjuster should be out there attempting to determine what the special damages are going to be so that a fair evaluation of the potential general damages can be reflected in the reserves when the file is ready for settlement.
If the loss involves damage to property, then has the adjuster correctly appraised the damage or obtained correct estimates of value of damage so the actual cash value (ACV) of the loss can be negotiated? Did the adjuster take all possible factors that may impact on the settlement—such as comparative negligence, depreciation, fair market value, deductibles, subrogation, and any legal factors such as diminished value—into consideration in the reserves and reports? Is each aspect of the damages involved documented?
If the file has ended up in some degree of dispute—such as a lawsuit, arbitration, or appraisal of disputed damages with each side obtaining an expert and those two selecting an umpire—then does the file reflect why the dispute arose? Does the file reflect why the adjuster was unable to resolve it? Unless the insurer is solidly in the right, litigation may represent a failure on the part of the adjuster to adequately negotiate and resolve issues. This failure usually stems from an inadequate investigation, thereby resulting in a lack of necessary information, or in an inappropriate examination of the information obtained. When facts are clearly documented, however, disputes can usually be avoided to potentially facilitate a smoother settlement process.
Multiple File Reviews
Assuming the auditor is looking at more than one of the adjuster’s files, a pattern of quality (or an overall lack of quality) should become evident. If an abnormal number of the adjuster’s claims result in litigation, for instance, the auditor must decide if there is a reason for that. Perhaps the claims manager assigns only disputed claims to that particular adjuster. The job therefore entails fully investigating, evaluating and managing the dispute or litigation. If so, then is all of that being done appropriately? On the other hand, the files could reflect disputes resulting from lowball offers or undue delays in trying to resolve the claim, or from frustrating the insured or the claimant to the point that a lawsuit is filed. In that case, the auditor must accurately determine whether the cause is quantitative (such as failure to act in a timely manner) or qualitative (such as an abusive approach to the claimant or the insured). Keep in mind that the claims adjuster’s attitude toward his or her vocation should be reflected in the files.
All of this underscores the fact that file auditing is a serious business. Audit forms can help; however, they often are geared more toward quantitative rather than qualitative factors. The auditor must know as much about the coverage, the law, contracts, and damage factors as the claims adjuster. Many auditors work in more than one state. What is applicable in one is rarely true in another, so the auditor must shift gears with the geography if a fair and informative audit is to be conducted. A good audit can enhance the claims department and the individual adjusters, whereas a bad one can ruin them. Next month we will examine litigation audits.