In parts one and two of our auditing series, we focused on workers' compensation and property losses, respectively. For the third installation, we will cover another animal entirely: liability claims.

Of the many types of liability claims—professional, construction defect, directors' and officers' (D&O) and many others—we will examine the two most frequent: auto liability claims and general liability claims. We'll also focus on third-party auto claims rather than first-party, such as collision, comprehensive, and medical payments claims. 

Liability claims, especially when pertaining to automotive, may exhibit "split personalities." Therefore, adjusters must handle them very differently when compared to the workers' compensation and property claims we previously discussed. Keep in mind that:  

  • Property damage claims that a less experienced adjuster should handle in a "fast track" process that should involve a minimum of fuss for the claimant, and,
  • Bodily injury (BI) claims, which sometimes involve serious injuries or death.  Some of these claims may be open for many months or even years, requiring the service of a more experienced adjuster to manage the significant case reserves and payments.

The real issues arise in the event of an accident, such as a motor vehicle collision that causes both property damage and BI claims, meaning the claims administrator must manage one or several features. Does one adjuster typically handle the entire claim, or are the various features assigned to different adjusters? Clearly there is not just one right answer to this question. Rather, the carrier must coordinate the adjusting responsibilities so that both property damage and BI features for one claimant are managed cohesively to ensure an optimal outcome. 

Know Your Claims Administrator

It is essential that the claims auditor gain an understanding of the claims program structure prior to starting the audit. There are several different ways claims administrators structure their organizations to handle the various types of claims, depending on a numerous factors and philosophies about claims management. 

The claims auditor should first understand how the claims administrator refers to different parts of a claim. A claim or an occurrence may feature one or more parts of a claim, which may be referred to as claimants, sub files, exposures, elements, features, and other names. For the purposes of this article, let's refer to them as "features." A general liability or auto liability claim, for example, may have multiple third-party features, as illustrated below:

PARTY

CLAIMS TYPE

Third

Property damage to claimant vehicles, buildings, and other property. If multiple vehicles were involved in a motor vehicle accident, then there may be many claimants or features under one claim. A general liability incident may cause damages to many types of property, some of which may require various types of evaluations or involve significantly different values. 

Third

Bodily injury to claimant(s). If multiple parties were injured in the incident, then multiple claimants or BI features may fall under one claim. 

Simply put, the auditor and the claims administrator must understand each other's terminology. For example, there is a huge difference in determining appropriate adjuster workloads when referring to features instead of claims.

Organizational Structure and Assignment Practices

Moreover, the claims auditor must understand the overall structure of the liability claims program, as different structures will necessarily require the auditor to adjust the work plan to some extent. Here are some questions to ask when evaluating the administrator's structure or procedures:  

  • Does the claims administrator handle claims/features from a central location, regardless of where the incidents occurred, or are claims handled regionally or even locally?
  • Does the claims administrator rely primarily on corporate claims personnel, or are the claims/features managed in whole or in part by independent adjusters or other vendors?
  • Does one adjuster handle all features associated with a claim, or are different features handled by different adjusters depending on the type of claim/feature and the adjusters' expertise, experience, training, and past performance?
  • Are claims/features handed off from one adjuster to another if the claim/feature becomes more complex or costly, or does the initial adjuster remain responsible for the claim/feature until it is resolved?
  • If claims/features become litigated, then are they referred to a designated "litigation adjuster," who will then work with defense attorneys to whom the claims/features are assigned for defense?

All structures can be found in today's claims administration world. The advantages and disadvantages of these structures are beyond the scope of this article but may be reserved for a future article. The auditor must understand the overall structure in which claims/features are managed to provide an accurate assessment of the claims handling quality. This will enable the auditor to provide a more accurate roadmap for the future and to set a goal for controlled or reduced claims costs and allocated loss adjustment expenses. 

The claims auditor must also analyze the handling of complete claims, connected features, and related processes.  The claims administrator must remember that poor handling of a property damage feature will likely result in a less favorable resolution to a bodily injury feature arising out of the same incident.  Therefore any split duties must be handled well to ensure a seamless process for the claimant that is clear, consistent, and coordinated.

Evaluating Liability

In the previous portions of this claims auditing series, we provided a list of claims management components the claims auditor should evaluate. Many of the components are the same regardless of the claim type. There are, however, some liability claim characteristics that obviously do not apply to workers' compensation or property losses. Although the claims auditor will evaluate many more claims management steps and activities during a given liability claims audit, the list on the next page contains some of the primary items.

TOPIC
  		 CHARACTERISTICS
  

Documentation
  • Did the adjusters, supervisors, and vendors fully document their actions and plans so that anyone reading the file could understand the status and plans? 
  • Does the file show diaries, action plans, and supervisory oversight requirements that document a consistent and organized approach to managing the claim?

Setup & Assignment
  • Was the file promptly set up so that the action steps required to manage the claim could be accomplished as soon as practicable?
  • Was the file promptly assigned to the adjuster with the appropriate level of experience and expertise, considering the claim type, the severity of any damage or injury, and the complexity of the claim?

Coverage Analysis /   Confirmation
  •  Was the coverage fully analyzed and properly applied to the loss? 
  •  Were policy limits monitored throughout the life of the claim (and its respective features)?

Contact (Initial and Ongoing)
  • Was there prompt and meaningful contact with the insured and the claimant(s) within one workday of receipt of the claim?
  • Were witnesses contacted within one workday of receipt of the witnesses' contact information?
  • Was contact maintained with the insured and claimant(s) throughout the life of the claim?

Investigation

  • Was the investigation initiated at the time of initial contact?
  • Did the adjusters' work include a thorough investigation and consideration of other avenues to investigate (potential recoveries, contribution, fraud, prior injuries or conditions)?
  • If on-site investigation was needed, did the adjuster promptly assign the claim to a field adjuster or independent adjuster so a liability decision could be made promptly?
  • Did the primary adjuster properly manage the field adjuster or independent adjuster?

Liability  Determination
  • Was the insured responsible for the loss? 
  • Does comparable or contributory negligence apply?  
  • Are there aggravating or mitigating factors that will ultimately affect the value of the claim?
  • If the third party was found to be responsible for the loss, was the information obtained, documented, and saved to successfully deny the claim and file a subrogation claim?

Damages Documentation
  • Did the adjuster gather objective proof and/or documentation of alleged damages, including, but not limited to: property damage, medical bills (past and future), wage loss (past and future), periods of disability (past, future, partial, full), or permanent impairment?

Reserving
  • Was the reserving process appropriate and followed?
  • Were reserves estimated reasonably, and were the reserves reviewed and possibly revised at proper intervals and/or at times when conditions changed?
  • Did supervisors and managers review the reserves at periodic intervals and/or when case reserves reached threshold values?
  • Did the case reserves reflect the estimated ultimate value throughout the life of the claim?
  • Were claims or features closed promptly when the case was resolved to reduce outstanding reserves to zero?

Potential Recoveries

  • Were potential recovery opportunities identified and investigated (subrogation, contribution,   reinsurance/excess)? 
  • Was the investigation done promptly to obtain needed information?
  • Were tort feasors promptly placed on notice?
  • Was the recovery actively pursued?

Fraud / Referral to Special   Investigation Unit (SIU)
  • Were red flags identified during the investigation that led to the need for a deeper investigation?
  • Was the claim promptly referred to the SIU if applicable?
  • Were findings used in negotiations and settlements?

Negotiation and Settlement
  • Was a proposed settlement range calculated based on the facts of the case and case law, and did the range appear to be realistic?
  • Were proposed settlements approved by supervisors or managers with the appropriate authority?
  • If the claimant was represented, then did the adjuster continue to negotiate with the claimant's attorney to try to resolve the case, even after suit was filed?

 Payment

  • Were the required payments made promptly and accurately?
  • Were the appropriate signed releases received prior to payment issuance? 

Litigation Management
  • Was litigation avoided when possible through assertive claims management?
  • If litigation could not be avoided, did the adjuster and approved defense attorney work as a team to reduce legal expenses while reaching the outcome? 

Vendor Management

Did the adjuster assign claims or features to vendors only if they could provide useful and value-added services? Some of the vendors include:

  • Appraisers for property damage claims
  • Independent adjusters for field investigations
  • Defense counsel for litigated claims (only if the adjuster cannot resolve the claim or feature)
  • Structured settlement firms
  • Surveillance specialists
  • Engineers for expert examinations
  • Independent medical evaluations (IMEs)
  • Were necessary vendors managed so they could provide prompt and accurate services?   

Planning for Resolution
  • Were the claims or features  actively moved toward resolution at all times, based on documentation in the claim file?
  • Were claims or features closed promptly when the case was resolved to reduce outstanding reserves to zero?

As you can see, many of the same auditing principles for workers' compensation claims hold true for liability claims. An effective auditor should periodically examine claims management practices of the claims administrator, whether it is an insurer, a third-party administrator (TPA), or a self-administered program.

These periodic examinations are absolutely crucial to confirm that claims are being managed in a timely, consistent, and assertive manner to achieve the most favorable outcomes under the circumstances. Such audits can also identify processes, practices, and other issues that should be addressed to ultimately save the insurance carrier both loss costs and expenses.  

NOT FOR REPRINT

© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.