Common myths about insurer settlement practices – Lesson 1

Excerpted from Insurance Settlements by Kevin M. Quinley

Filing suit, 3 x specials, defense costs, and time limits

Behold the power of myth. The earth is flat. Lightning never strikes twice in the same place. Man will never fly. Warts come from handling toads. All these were once closely held myths, later revealed as fallacies.

Similarly, personal injury attorneys often get lulled into believing myths, misconceptions and half-truths about how insurance adjusters handle and settle claims. These misconceptions can interfere with a clear-eyed assessment of the insurance claims process. The writer has worked on the insurance company side of the claims process for nearly a quarter-century. Let us gore a half dozen sacred cows of negotiating and settlement wisdom, all of which are ready for the slaughterhouse. If you can shed these mental maps you will double your effectiveness as a negotiator.

§1501B     Myth #1: “Threatening to File Suit Will Soften Adjuster’s Position”

Common scenario: The personal injury attorney demands $100,000 to settle a claim. The claims adjuster counters with an offer of $30,000. The attorney says, “Fine – if that’s all you’re going to pay, I’ll file suit.” The attorney believes that this threat will “soften up” the adjuster to increase the settlement authority and the offer.

While this will work sometimes, other times it is a myth. A number of assumptions underlie this myth:

  • Filing a lawsuit increases a claim’s value

  • Adjusters dread the filing of suit

  • There is a penalty to the adjuster if suit is filed

All are incorrect. Usually, the suit threat rolls off the adjuster’s back like water off a duck. In fact, harried adjusters—burdened by Tower-of-Pisa caseloads—may not cringe at all but instead inwardly welcome the file going into suit, because then they may not have to deal with a claimant’s attorney any more.

Putting a claim into suit does not “punish” the insurance adjuster. Without this element of punishment, the threat to move the claim file into litigation is often a hollow threat, carrying very little sting. In fact, the transition of the claim file from pre-suit to litigation may be a blessing in disguise. Often, the adjuster can give the file to a defense attorney who they view as a more congenial soul-mate! Neophyte adjusters may be rattled by the litigation threat. At the beginning of their careers as adjusters, it is unnerving. With repetition, though, they become inured to it. They eventually realize that the world will not end just because a lawyer files a lawsuit. Very quickly, the threat to push the case into suit has minimal impact. The blunt truth is that, in today’s litigation climate, virtually no adjuster is sanctioned for having a case go into suit.

One reason is that bosses and adjusters understand that claims entering suit are an inevitable cost of doing business. If every file enters suit, the higher ups figure that something is awry. By contrast, though, if few cases enter suit, the claim bosses may be concerned that there is something even more gravely wrong: that the adjuster is throwing money at claims through generous settlements.

Another reason relates to the way that insurance companies make their money and earn a profit. Most insurance companies do not make a profit on their underwriting. In fact, many insurance companies consistently have loss ratios and expense ratios that exceed 100%. That is to say that, for each dollar they take in, they are paying out over a dollar. How can an insurer have expenses plus losses exceed 100% of its revenue stream yet still stay solvent and in business? The answer lies in the fact that most insurers earn their profits from their investment income, not from their underwriting acumen. The earnings from their investments offset their underwriting losses. The longer the insurer holds on to the money, the longer it can invest. Longer time horizons maximize investment yields, whether you are talking about a 401(k) plan for an individual or large security positions held by institutional investors (such as insurance companies). The longer insurers invest, the better their investment yields. Put differently, shorter investment time horizons often reduce investment yields. Prematurely liquidating investments to fund claim payments may dilute investment returns and even have negative capital gains implications for insurers. Hence, longer is better in terms of holding onto the money before paying it out in claims.

This is relevant when discussing the timing patterns of paying out claims versus paying out on lawsuits. Payments on claims tend to turn over more quickly than payments on lawsuits. The wheels of justice grind slowly. Once a claim enters suit, the pace of the case typically slows down. Adjusters realize that nothing bogs down a case for an attorney more than putting it into suit.

Go ahead and threaten to file suit, but do not expect that this will magically thaw deadlocked claim settlement negotiations. Adjusters are as likely to think that, if you really had confidence in your case, you would have filed suit long ago. You also risk losing your credibility if you do not file suit, a factor that could undercut your negotiating effectiveness in subsequent claims.

Terminology — Insurer Ratios

Loss ratio – The percentage of losses in relation to premiums. Put differently, for each dollar the insurer takes in, the portion that goes to pay claims and claim-related loss expenses.

Expense ratio – The percentage of expense costs in relation to premiums. Put differently, for each dollar in premium an insurer takes in, the portion that goes to cover expenses.

Combined ratio – The sum of an insurer’s loss ratio plus its expense ratio. A combined ratio above 100% reflects unprofitable underwriting (selection and pricing of risks). Nevertheless, many insurers survive quite well with triple-digit combined ratios due to investment yields.

§1502B     Myth #2: “Insurers and Adjusters Use ‘Three-Times-Specials’ Formula”

This may have been prevalent at one time, but it is not now. Admittedly, there are adjusters and insurers who use this or some other multiple. There is afoot within the insurance industry, however, a backlash and counter-revolution against the three-times rule. (No, it’s not replaced by the four or five times rule!)

Insurers woke up and realized that a “three-times” (or five or ten times) rule plays into the hands of personal injury attorneys and heightens incentives to goose up the specials. Adjusters realize that not all “specials” are created equal. For example, ones incurred for diagnostic treatment are not the same as those incurred for physical therapy.

In the thinking of the claims adjuster, daily chiropractic care for months on end or repeated treatments by a local Dr. Whiplash just do not cut it on the “three-times” rule. Perhaps they do not see why the cost of painkiller medications should be multiplied times three. Insurers are cracking down on the use of the three-times-the-specials formula. Any adjuster who uses the three times rule is probably a neophyte or will not last long in the claims business.

You may think you know that adjusters use the three times rule but, increasingly, they avoid formulaic approaches. Many of them utilize sophisticated valuation software such as Colossus, Jury Verdict Research databases, or other proprietary products. See Ch.9A.

§1503B     Myth #3: “It’ll Be More Expensive to Defend Than to Settle”

This may be true, unless money invested in defense — especially successful defense — will deter future claims in the long run, thereby creating a wise expenditure. This is a classic tradeoff between short-term versus long-term thinking. More and more defendants are looking long-term. Increasingly, insurers are willing to pick and choose spots where they say it is not more expensive to defend than settle, it is more costly to settle.

Further, more and more self-insured companies are getting feisty about taking their chances and defending, impatient with insurers’ penchant for settling out as a cost of doing business. As one self-insured client told me, “I know I may be spending two dollars in defense to save one dollar in settlement but, frankly, I’d rather put those dollars in my defense attorney’s pocket than in the plaintiff’s.” Whether you agree or disagree with this notion, it is becoming more common. Many corporations believe that spending more for defense deters frivolous claims. Hence, they view massive defense fees as an “investment” against a domino theory, fearing that early settlement represents a form of appeasement that only encourages more claims. This “precedent factor” prompts many insureds (even some insurers) to be philosophical about high legal fees. In turn, this makes them more impervious to the argument that “it will cost you more in legal fees in the long run.” Surveyed in the broader context of cultivating a corporate reputation as either “a tough nut to crack” or as an “easy mark,” many insurers are willing to front-load expenses in defending claims on the theory that it will deter claims down the road or add greater negotiating leverage.

Additionally, there is a trend toward in-house counsel, “captive” law firms and other novel billing arrangements. Clients are exploring alternative billing arrangements, such as flat fees, blended rates or “reverse auction” of legal work via Internet sites. This weakens the argument that it’s cheaper for the adjuster to settle than to defend. It may not be as expensive as you imagine.

Adjusters aren’t privy to the compensation arrangement between you and your client. If they presumed to know this, you might (rightfully) laugh them off. Thus, do not succumb to thinking that you know how defense attorneys are paid. More frequently, insurers and claim departments figure that it may be cheaper to defend than to settle, or at least they’ll take their chances. In some claim operations, a penchant for fighting cases – even amidst the occasional loss – may be viewed as a laudable quality and somewhat of a “badge of honor” within the Claims Department. Put differently, few adjusters are criticized for being too much of a fighter. Many more are criticized for being an “easy mark” in overpaying claims.

Another factor that the personal injury practitioner should consider is the reality of staffing a busy insurance claim office. A ploy of “pay me now or pay me more later” works best if you’re dealing with the same person both now and later. This rarely occurs in an insurance claim office, however. By the time down the road when the financial stuff hits the fan, the adjuster handling the case now may be long-gone. Turnover is so prevalent in many claim operations, that staffing is a revolving door phenomenon. This dilutes accountability, to a degree. Given this turnover reality, the argument that “you’ll pay more later” may lack any “sting” or credibility with the adjuster, who will be off working for another insurance company (or may have gone back to law school!) by the time your proverbial (and presumed) payday arrives.

This is not to say that you should avoid this argument. Just be aware that it may lack a lot of persuasive punch with the claims adjuster. If the adjuster fails to move substantially off his offer when faced with this threat, do not be surprised.

§1504B     Myth #4: “Time Limit Demands Usually Expedite Adjuster Responses”

Before you demand ten-day turnaround service from the adjuster, check to see what kind of “service” you have given the claims rep. Service and turn-around are a two-way streets. Consider the principle of reciprocity.

Did you sit on the case for ten months, ignoring repeated adjuster requests for specials and other information? If you take your sweet time in responding to adjuster requests, do not be surprised by reciprocal treatment from the adjuster. Put differently, do you have one time standard for yourself and another – more exacting one – for the adjuster?

Unilateral time limits may rattle inexperienced adjusters. Otherwise, they may fail to have an effect. The adjuster may ignore the deadline, reject it, object to it, request an extension, or request the same amount of time that you took to create a settlement brochure.

This is not to say that you should not give the adjuster a deadline. To the contrary, do so. Just make sure it is reasonable. Also, look at your own response times to the insurance adjuster. Make sure you have established a pattern of prompt responses and communication with the claims rep. Keep the ball moving and in their court, not yours. Adjusters will chafe if they feel that you have intentionally waited until the eleventh hour (just before the statute of limitations tolls) to convey a time-limit demand.

 


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