Growing up in the 1950s in a family where many members worked in the insurance industry, I considered insurance to be something quite different from business or finance or a job. Insurance was, well, something like religion — everyone had it, needed it, and seemed proud to be part of it. There was brand loyalty.
Mutual companies were big. As an insured in a mutual company, the policyholder was a part of that company and this identity meant something. Insurers with the name farm or farmers in it reflected remnants of the agrarian nation America had been, while other company names reflected other industries: Lumbermen's, Hardware, Grain Dealers, Bankers, Millers, Manufacturers, or associations such as Farm Bureau, Grange, Auto Clubs, or well-known retailers like Sears Roebuck & Co.'s Allstate. Some insurers were named for cities such as Hartford, New York, Chicago, or St. Paul. Some reflected their historic aspects, insurers that had been around for decades, or a century, such as Fireman's Fund, Travelers, INA, Aetna, or Liberty.
Policyholders 50 years ago were loyal to their insurers — it was their money that insurers were dealing with, after all — and loyal to their agents, often a neighbor, friend, or relative. In our parents' day, insurance wasn't sold over a 1-800 phone number by a lizard or over the Internet, or in response to a "save tons of money" mass mailing.
A survey taken in the 1960s determined that better than 65 percent of the nation respected not only their own insurance companies but all of the industry in general. Periodically, Consumers Reports publishes insurer satisfaction articles. I've not seen one recently, but in reviewing my columns, I found I had cited one in December of 1985 in which the best auto insurer had garnered only a 93 percent satisfaction rating, while the worst on the list had a 71 percent satisfactory listing — and those were top companies whose names everyone knew. How many insurers would get a 93 percent satisfactory rating today?
Perhaps the attitude toward fraud is a good reflection of how the public regards our industry. According to the Insurance Information Institute, fraud costs the property/casualty insurance industry $29 billion in 2003. The I.I.I. reports that losses incurred by the industry in 2003 were $239.7 billion. Thus, slightly more than 12 percent of the loss dollar is consumed by fraud. Incurred loss-adjusting expenses, says the I.I.I., were $50.1 billion that year, but they don't explain whether that figure includes only allocated expenses or both allocated and unallocated expenses. If that figure is only the allocated expenses (allocated to individual claims, such as defense, outside investigations, experts, and rehab), then it does not include the cost of paying company or independent adjusters to go out and actually adjust the claims. Those are unallocated expenses, which are part of the cost of running an insurance company.
A Profitable Year
It would seem that in a year when catastrophe losses such as the Gulf Coast and Florida hurricanes peaked, the insurance industry would have lost money. Best's Review reported in March of 2006 that insured catastrophic losses were $56.8 billion in 2006. Wow! The industry must have taken a wallop! But, to quote George Gershwin's song from Porgy and Bess, "It ain't necessarily so!" National Underwriter reported March 27, 2006, that the 2005 year-end results for the top 25 insurance groups resulted in a net income of $35 billion, an amount almost 24 percent higher than in 2004 (at $28.3 billion).
For all insurance companies, the average increase in 2005 over the previous year was close to 19 percent, based on an increase of only 0.7 percent in net written premiums, and a combined loss ratio (CLR) of 100.8 compared to 98.3 in 2004. (A 100.8 CLR means that the insurer paid out $100.80 for every $100 it received in premium.) Perhaps we're all due a raise! Surely the industry will reward those in the claims department who made it all possible, won't it?
Reinsurers, on the other hand, did not fare as well. Overall, they had a CLR of 129.4, a 23-point increase from the 106.2 figure in 2004. Some of that loss, I suppose, was borne by European insurers, but don't cry too loudly for them — one insurer, Allianz AG, is reporting a 38 percent profit for 2006.
Making Money on Loss
How do they do it? Year after year the losses increase, but so do insurer profits. Part of the CLR secret is investment income. As the economy improves so does the income on money that insurers are required by law to keep as surplus, thus making up the minor differences between premiums and payouts. Loss is also factored into the premium figures. Large losses in 2005 will be reflected in the premium calculations in future years.
Undoubtedly there also are a number of accounting procedures used by insurers to massage the figures. While state regulators are supposed to go over insurance company finances with their fine-toothed combs, there are undoubtedly some states where a few teeth in the comb might be missing. I recall one notorious case — I've told it here before — where the regulator approved as an insurer's asset uncollected retrospective premiums from insureds who were near bankruptcy. That particular insurer soon joined its insureds in that good court of finality. Some insurers, similarly to their insureds, do go belly up.
One can often tell when an insurer is squeezing old Abe's penny for every last drop of income. It's reflected in the way their claims are handled. In writing two textbooks that cover a variety of subjects, including bad-faith claims, I come across such examples more often than I should. Consider, for example, a case decided in 2005 by the Oregon Court of Appeals. The claim involved two of the insurer's policyholders. One was the driver, who had a vehicle of his own insured with the company, and the other was the owner of the vehicle, a pick-up truck. Both had policies with limits of $100,000. The driver was intoxicated the night he made a left turn into a saloon directly in front of the claimant vehicle. The claimant driver was killed. His estate brought a wrongful-death claim, and the drunk driver was later convicted of negligent homicide.
It's a typical claim. In 2003, for example, 40 percent of the more than 26,000 auto fatalities resulted from drivers with a blood-alcohol content of 0.08 or higher. Adjusters see these claims all of the time. Unless there are very unusual circumstances, most such innocent third-party claims are typically reserved and settled at or close to policy limits. Why risk a trial where the insured drunk driver and his insurer will be handed their heads by the jury?
Playing Hardball, Lowball, and Stonewall
But some folks in the claims department, along with their superiors, never learn, as in this Oregon case. First, the insurer decided to argue coverage. It wasn't clear, they said, whether the driver was a permissive user of the pick-up truck. (There also was an allegation of negligent entrustment by the owner. That negligence count against the owner eventually received a defense verdict.) Further, argued the insurer, the driver's own policy did not apply to the claim as the pick-up truck was "regularly furnished" for his use. No coverage, the insurer argued.
When the claims department had first received the claim back in 1987, the adjuster reported to his superiors that liability was clear and that there was an exposure under both policies for a total of $200,000. He suggested making an offer, or at least obtaining some information about the deceased claimant. His supervisor replied that there wasn't enough information yet and suggested that they "let things ripen a bit." Two months later, that supervisor suggested a $30,000 claim reserve, after which he was promoted. Two months after that, the estate's counsel made a $200,000, three-week-limit demand. Six weeks later, the adjuster spoke with the attorney and told him that the company's opinion was that the case was worth $50,000, and that his [new] supervisor had told him the insurer was not going to offer policy limits.
Another two weeks after that, the local supervisor wrote to the regional office confirming that the insured driver had not used his turn signal, and that the claimant vehicle's lights were on at the time of the accident. Authority for $50,000 was requested, although he also advised that there still was not enough information to evaluate the case; he needed details about the deceased claimant's probation revocation hearing at the time of the accident. (Perhaps he thought the deceased was a worthless crook?)
In June of 1988, the estate brought suit and again extended a 30-day offer to settle for the combined policy limits of $200,000. Instead of settling, the insurer chose to defend and, months later, the insurer and defense counsel evaluated the claim at no more than $100,000. They finally offered $30,000 and raised it to $50,000 on the day of trial, against the estate's reduced demand for $100,000.
"Here's Your Head!"
The jury awarded the estate a total of $863,274 against the insured driver. This included $188,274 in economic damages, $425,000 in non-economic damages, and $250,000 in exemplary damages. The insurer coughed up its $100,000 policy limits (on the owner's policy) plus $75,960 in interest. The driver owed the rest. He assigned his rights against the insurer to the estate, who then sued the insurance company. In that trial, the jury awarded the estate the $863,274 in underlying damages and punitive damages of $20,718,576. The insurer appealed. The appellate court recalculated the interest and found that compensatory damages were actually $1,280,000; hence the punitive damages were sixteen times the compensatory damages. That amount, it agreed, was excessive, citing the Supreme Court decision in State Farm v. Campbell, [538 U.S. 408 {2003}], and ordered a remitter to three times the compensatory amount, $3.84 million.
The Court also had taken into consideration part of the complaint against the insurer, which had a pooling arrangement with other insurers in its group regarding losses, including punitive damage awards. This meant that the actual insurer of record had less than a five percent share of the loss. The Court found the issue not relevant. What the Court did find relevant was the way the insurer had handled the claim. It said that from the evidence presented, a rational juror could have determined the following:
"(1) Defendant, in calculated fashion, engaged in a protracted course of conduct — from its initial 'stonewalling' and 'low-balling' tactics through its fraudulent manipulation of the claim-evaluation process and its refusal to settle even at trial — that exposed its insured to the virtual certainty of a devastating excess verdict in a 'no defense' case. (2) Defendant willfully engaged in such conduct, heedless of its insured's interests and in cynical violation of its obligations to its insured, for its own selfish purposes of building and maintaining a reputation for 'toughness' in claim adjustment and settlement. (3) Defendant's conduct toward [the insured driver] was intentional, deceitful, and malicious. (4) Defendant's hardball tactics in this case were typical, not merely an isolated instance: '[My supervisor] doesn't pay policy limits.'"
It doesn't take much imagination to see in this case the attitude of many in the insurance and self-insured claim industry around the nation. We can be a hard-nosed bunch! But this case is neither unique to Oregon, nor is it isolated. The nation's courts are jammed with similar cases on a weekly basis.
The problem is that too many claim professionals are getting away with such nonsense. Some try to be defensive by arguing that it's done to fight fraud. After all, look at that 12 percent of loss that's allegedly stolen! (I'll bet somebody counted the $3.8 million in punitives paid in this case as "fraud" as well.) When insurers don't investigate, both before they agree to underwrite a coverage and after a claim is filed, they think they have to squeeze somewhere to make that profitable penny. There has to be a better way to gain the respect and loyalty of customers for our industry, as was the case in our parents' day.
Ken Brownlee, CPCU, is a former adjuster and risk manager, based in Atlanta. He now authors and edits claim-adjusting textbooks.
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