Commercial insurance is sometimes fraught with tension arising from the competing interests of corporate policyholders and insurance companies. In part two of this two-part essay, Jim Leonard, our guest columnist and former insurance company executive, further describes the dynamics of the insurance business from his inside-out perspective.
As noted in Part I of this article, insurance companies want to avoid close regulatory scrutiny. Of course, every insurance company is regulated by the insurance department of the state where the insurance company is domiciled. Typically, insurers undergo a triennial examination by the domiciliary insurance commissioner’s office. Auditors are sent to the claims office to examine individual claim files and inspect the insurance company’s books, and regulators often interview senior management. State insurance departments want to know who is in charge of their regulated insurers and thus require sworn questionnaires be filled out by all of the insurance company officers and directors, which is also the case when insurance companies seek to become admitted carriers in other states in addition to where they are domiciled.
For very large commercial insurers doing business in multiple states, the underwriting department (which is typically responsible for regulatory compliance along with the finance department) tries to maintain excellent relationships with the insurance regulators who are responsible for its well-being. In fact, the primary job of insurance regulators is to review and confirm that insurance companies are solvent. This is the overarching goal of insurance commissioners around the country, and many of the NAIC rules and model regulations revolve around financial solvency.
The reality is that most insurance commissioners care less about how an insurance company is treating its insureds than about how solvent the insurance company is. In rare instances, the claims handling is so bad and the number of state insurance department complaints so high that the regulators will become involved. Typically, though, the state insurance departments will take a light hand when it comes to second-guessing insurance company claims decisions. This often leaves the policyholder to fend for itself when a claim is wrongfully denied by an insurance company since the regulators are essentially rooting for insurance companies to succeed financially. This delicate balance between financial oversight and claims management can put the state insurance commissioners in a difficult position because they are usually elected officials who must answer to their policyholder constituents as well as their regulated insurance companies.
One aspect of claims handling is carefully reviewed by insurance regulators: claims reserving. Insurance companies are required to post a financial reserve for every open claim within six months of the date of report (this can vary somewhat but is fairly standard within the industry). The insurer is required to evaluate its exposure on any given claim and set aside a financial reserve to cover the amount it believes represents its likely exposure on the claim. Because some claims are not developed at all within six months, this can become a guessing game based on the experience level of the individual claims representative handling the matter.
However, claims department management (typically a claims director or claims vice president) will review all recommended reserves and finalize or accept those reserve recommendations in the claims system. If a claims representative’s reserves are consistently inadequate (or excessive), that claims representative will be counseled and often terminated if not following the claims department procedures for setting reserves. Because this is one of the most important functions that the claims department carries out for the organization – and relates directly to financial solvency – insurance regulators will carefully review claims department reserving methodologies, history and sufficiency when reviewing the insurance company’s performance at the triennial examination.
How is the Claims Department Organized?
While there is no single answer to this question, most claims departments are organized as follows: claims vice president, claims director, claims manager(s) and claims representatives. There are also claims technicians who are the individuals receiving initial notices of claims and who manually set up a claim file in hard copy form (if still utilized by an insurance company) and in their computer systems. Most insurance companies have a dedicated claims system that is used for recording claims activity, as well as for documenting decisions about coverage and defense, reserve information and background information on the claim. This is the system that insurance regulators typically review to obtain the necessary information for their purposes. However, claims departments also use email to convey information and may have a third system called claim notes on a different server that captures routine claims activity as well.
Thus, when litigating against an insurance company, it is vital to recognize all of the different systems that might be in place at any given insurance company and demand production of all such information (which some carriers can sometimes “forget” to produce). The insurer may omit the internal claim file notes required by regulators from its production of claim documents. Pressing for these notes can help demonstrate contradictions between the claims representative’s candid views of the claim entered in the system and the insurer’s formal coverage position addressed to the insured and to the court. In order to discover the information found under the claims department rocks, one must first know what the rocks look like.
Knowing and understanding the minds of the claims department employees (from junior claims representative to senior vice president) and recognizing how those personalities can clash with the underwriting and marketing departments provides an avenue for the policyholder to exploit the weaknesses in the organization. Claims department senior managers have multiple forces pulling at them at all times – from regulatory to senior management of the company demanding lower claims expense and loss payments, to marketing management demanding payment of claims for good insureds, to the internal dynamics of a large claims department and the personality clashes that can ensue. Scrutiny of financial, underwriting, marketing and claims files can yield useful information in coverage litigation under a trained eye.