Preventing Penny-Pinching Labels

How to Defend Against Allegations That an Insurer Underpays Claims

November 20, 2018 Photo

Occasionally, counsel who defend insurance companies must address allegations that their client underpays claims. Allegations may assert evidence of a systemic or pattern and practice of underpayments and improper denials. Let’s highlight some of the pertinent documented areas an insurer’s defense counsel may wish to consider in this context because, in many instances, it is beneficial to probe and assess certain issues prior to discovery.

The first category of documents to be aware of is written claims-handling guidelines. Responsible insurance companies aspire to pay what they owe. Written instructions and guidelines for claims professionals generally are supportive of this notion. Modern-day insurance companies generally do not have “claims manuals” that consist of thousands of pages, but rather have other written statements guiding staff for the daily handling of claims. This is an obvious area of interest in most if not all cases alleging “pattern and practice.”

Additionally, business plans of the claims department can be important. Often, senior leadership of the claims department will have business plans with goals/objectives supporting broader company plans/goals with claims operations specifics. Usually, such goals are set by the top claims officer and cascade down to other claims personnel.

Performance plans for and reviews of claims staff also can be important. Common measured items include customer satisfaction, cycle times, quality/adherence to internal (claims guidelines/procedures) and external (state-mandated) standards, and audit scoring. It can be important for counsel to understand both the goals for and performance results of subject personnel. For example, if a claims professional is not meeting performance expectations, but handled a claim at the center of the lawsuit, counsel will need to understand the situation well. If HR files are expected to be subject to production, counsel will want to understand the import of that content.

Training programs for claims personnel usually are documented. Counsel may want to understand how the training materials promote good-faith claims handling, excellence in customer service, and technically correct claims handling.

Claims audit programs could be an area of interest, too. Many insurers conduct routine audits of claims files. If applicable, counsel may want to become familiar with the structure, scoring, and results. If the audit program lauds claims professionals for providing fast, fair, and compliant adjusting, then that is favorable for the defense. If plaintiff’s allegations include assertions the subject insurer systemically underpays or over-denies claims, then a sound, industry-standard audit program can help diffuse those allegations (e.g., “How can ABC Insurance Company really have a program to underpay/over-deny when the audit program and goals/objectives for the claims staff point the other way?”).

Most companies track and evaluate customer service results, complaints, Department of Insurance (DOI) exams/audits, and the like. Surveying claimants is elective. States require complaints to be logged and analyzed. Departments of insurance conduct audits and market conduct examinations. Counsel may want to review these areas early on to gain a sense of how the claims department fares. For counsel to best understand these data sets, conversing with someone at a senior level in claims could be beneficial. If the claims department overall appears to be in a good place per these “scorecards,” then it may still be important to isolate a claims professional or team alleged to be improperly focused toward underpaying/over-denying.

Compensation structures for claims staff could be an area that the plaintiff’s counsel will want to explore in discovery. Defense counsel should expect all aspects of the applicable compensation structure for claims personnel to exist harmoniously with a philosophy of paying claims quickly, fairly, and accurately, but it can be prudent to become familiar with the program proactively and not defensively. Some plaintiff’s attorneys may focus on variable compensation pieces, like bonus programs. It can become important to articulate why a bonus program exists and why it does not incent claims personnel to underpay or over-deny.

If defense counsel expects discovery into areas such as these, then it can be advantageous—and appreciated by insurers who prefer a proactive, early-assessing defense counsel—to inquire sooner rather than later. It can also help defense counsel to have an effective liaison within the company to obtain pertinent source documents and facilitate any conferences necessary for deep understanding. Typical liaisons would be someone at a senior level within the claims department or perhaps an attorney within the legal department.

During this journey, defense counsel could learn of a phrase “save money.” Do not be alarmed. In claims departments, it is commonplace to have plans to save money. Claims departments generally are expected to control delivery costs, which are the costs of operating and handling claims. More automation frequently means lower operating costs and can also mean better customer service. For example, many insurers are setting up more self-service options for claimants. Apps and web-based access to claims progress can be a win-win. Customers have more options for reporting claims and staying apprised, and insurers achieve lower operating costs with these technologies.

It could help defense counsel to deeply understand and be prepared to articulate why insurers are motivated to pay proper amounts and affirm or deny coverage appropriately. Starting with their top claims officers, claims personnel realize that they have contractual and state law responsibilities to determine coverages and pay claims appropriately.

Any misguided notion in pursuit of “the company saves money by not paying claims” would be a monumental mistake and would not win out. Ultimately, the company would pay dearly and want to rid itself of offenders in the claims department. Their careers in the claims business would suffer. Very importantly, most insurers compete based on their brands and reputations. They cannot tolerate claims personnel undermining the brand/reputation by treating customers unfairly.

Lastly, counsel may want to consider retaining an expert to consult or to opine and testify. Experts who are familiar with best industry practices and helmsmanship of claims staff can speak with authority regarding what they expect within your insurer client.

About The Authors
Stephen D. Johnson

Stephen Johnson is an insurance industry standards expert with more than 35 years of experience in the insurance industry, including top claims officer roles. He is also a licensed attorney. He can be reached at

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CLM’s Insurance Fraud Committee identifies, analyzes, and offers education on emerging fraud schemes and tactics; monitors and reports on developments in case law, state fraud statutes and applicable regulations; collaborates with other anti-fraud industry organizations and associations; and seeks to provide amicus support in matters of importance in the fight against insurance fraud.

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