By Melanie Elias

Burns & Wilcox, Ltd.

Policy language is ultimate authority

           The tragic wallop that Hurricane Katrina put on the Gulf Coastand its lingering aftermathhas cast a fresh spotlight on the sometimes-touchy topic of claims settlement. Not that we fear the attention, but most of us specializing in claims will acknowledge that we aren't viewed as occupying or enjoying the insurance industry's glamour perches, or perks. Someone has to do it, as the saying goes. And, day in and day out, the majority of claims are settled equitably, efficiently and professionally by claims specialists for a broad range of coverage types, underwriters and insureds.

            However, it is also important to emphasize that, even when something may seem to be lacking in sizzleaside from cases that make it to the silver screen (a la Billy Wilder's Double Indemnity) or to Court TVit doesn't mean there isn't a lot at stake when it comes to claims processing. The insurance claim completes the full circle of the insurance contract; handling it with integrity and professionalism is essential to the industry's continuity.

            If insureds couldn't rely upon and enforce the policy language they pay forto be made whole when the unforeseen occursthey would go somewhere else. If we didn't follow policy language (i.e., if we paid out claims inconsistently or based on sympathy instead of merit), the industry would lose its financial underpinnings and attraction of investment capital. Moreover, the claims arena is the testing ground for policy language and conditions, the place where underwriters learn if policies are protecting insureds as intended. We are also an important guardian of the system's integrity in the form of subrogation activities and fraud detection.

Pressure, pressure, pressure.

            Recent events like natural disasters or 9/11 do highlight two important trends in claims management. First, claims, like our world and society, are becoming more complex. The evolution of risk management means that companies are looking at insurance from a strategic viewpoint, even a financial one when we consider areas like self-retention. Insureds expect underwriters to live up to policy language, while at the same time, agents must be sure that their clients know what is covered and what is excluded for any given policy. This hopefully leads to fewer misunderstandings, as well as more fiscal responsibility and certainty for insureds, agents, MGAs and underwriters.

            Second, the world hasn't gotten faster, it's gotten a lot faster. Faxes, e-mails, cell phone, and now Blackberrys and PDAs. Everyone expects everything immediately. There is no longer anything like "let's wait until morning."  These expectations have put tremendous pressure on adjusters, for we must still accurately and thoroughly assess the loss, review records, analyze the policy and so on before making a determination. We must be fair, ethical and thorough, able to defend our work product to insureds and underwriters. Which brings us tonot The Neverending Story but, "The Life of a Claim."

The report goes in.

           The insured submitted the application through his or her agent. An underwriter reviewed the risk, quoted, bound and issued the policy. What happens next?  Often, the answer is that a claim is reported to the retail agent and the claims process begins.

            As soon as the retail agent is notified of a first- or third-party claim, it is the retail agent's responsibility to promptly report the claim to the claims handling facility for that policy/contract, in accordance with its agency agreement. The claim handling facility, usually a third-party administrator or an insurance company claims department, begins its investigation of the loss.

            A key word in claim notification is "promptly."  First-party losses usually involve some type of damage to the insured, such as property damage. This property damage, for example, can create conditions that require the insured to close down the business and/or, in the case of a homeowner, create conditions that may affect daily living. It is important that an investigation of the loss take place as soon as possible after the loss occurs: the insured needs to resume their business or personal life, and the faster we get to the scene, the fresher and more reliable are the physical evidence and quality of any witness testimony.

            But we are never too hasty. Sometimes, upon receipt of a claim and prior to the commencement of the risk inspection and loss investigation, the company claims examiner may require that a non-waiver or reservation of rights letter be issued to the insured. This is done if we recognize, even in first report, conditions that may impact coverage. A late report often raises such an alarm bell in our minds.

The investigation.

              As it is important to physically examine first-party losses, third-party administrators and/or company claim handlers often retain the services of an independent adjuster. Subsequent to the risk inspection/investigation, the independent adjuster must provide recommendations as to the cause of the loss. To protect the interests of both the insured and underwriters, it is best that the independent adjuster see, touch and feel the first-party loss, in as close to its original state as possible. While on the scene of the loss, the adjuster will interview interested/involved parties, take measurements and photographs, review business and/or personal records and documents, and obtain public records such as police and/or fire department reports.

            The investigator must possess sympathy but maintain neutrality. This is one of the issues we had after Hurricane Katrina. The individual experiences were often terrible, heart-wrenching and there were many losses. But we had to instruct or remind adjusters to not get personally involved. Examine, return and report. It wasn't easy, but insureds and our industry are better served by professionalism, getting as many claims settled properly as quickly as possible.

Timing issues.

              In addition to our own business imperatives and ethics, most states have specific guidelines that address claim handling procedures. For example, California requires that the claim administrator acknowledge receipt of notice of claim within 15 days from receipt. Another California requirement is that any necessary investigation of the claim must begin immediately, but in no event more than 15 calendar days later.

            As soon as the risk/loss investigation is completed, the independent adjuster submits a written report of the loss to the company claims examiner. The independent adjuster's report includes an overview of the applicable insurance policy. This report will include: a detailed description of the loss, the apparent cause of the loss, identification of any responsible third party, the policy limits by lines of business, the applicable deductibles, whether the policy is replacement cost or actual cash value, and any co-insurance requirements. The adjuster may also recommend the use of experts (e.g., cause and origin expert or an accountant for calculation of the business income loss), as well as specific payment and/or other recommendations. Again, it is essential to be both fast and thorough.

            Moreover, if it looks like a responsible third party is involved and we will pursue subrogation procedures, the independent adjuster should make arrangements, in conjunction with the company claims examiner, to protect the claim evidence. House fires, alarms malfunctions or losses attributable to faulty furnaces are examples where securing physical evidence can come into play in determining responsibility for a loss and successfully collecting damages from that party.

Decision time.

               Back at "headquarters," so to speak, it is the responsibility of the company claims examiner to review the report of the independent adjuster and apply the policy terms and conditions, including proper application of the deductible and co-insurance provisions. If all is in accordance with the policy provisions, a payment determination is made. This determination can take one of three forms: a full payment, a partial payment and partial coverage denial, or a coverage denial. If a payment is issued, the settlement check is sent to the independent adjuster to exchange for a signed proof of loss, or it may be sent directly to the insured with a request to review/sign the proof of loss and return it for file.

            Most states require that first-party claims be paid, or rejected, within 30 days of receipt of a proof of loss. A proof of loss can include a repair estimate or an invoice submitted by the insured. Failure to respond timely may subject the insurer to allegations of unfair claim handling and/or allegations of bad faith. As most states mandate monetary penalties applicable to delayed claim handling, this brings us back to the need for promptness in claim reporting, claim investigation, and communication with agents and the insured.

Third-party losses

            Third-party losses are generally more complicated claimsthe cases in which we may bring out our detective's notebook in earnest, as third-party losses frequently involve a general liability claim and/or subrogation issue. In fact, our attention is often drawn to the third-party claim through a lawsuit or other claimant attorney contact. Prompt reporting, communications and file control are essentials in third-party claims, as they contribute to prompt claim resolution. In addition, lawsuits have specific timeframes and response deadlines.

            The investigation of a third-party claim often includes onsite inspection of the loss location, including witness statements (which may or may not be recorded), measurements, photographs and record review. Extra careful analysis of the policy terms and conditions goes with this claims review territory, as you might expect. Third-party claims sometime require immediate issuance of reservation of rights letters, excess letters and the retention of counsel. Many general liability policies include a provision for medical payments, and we find that, frequently, third-party claimants are only interested in being reimbursed for their out-of-pocket medical expenses. Thus, the medical payments provision in a policy can provide a method for claim resolution that balances well the interests of the third-party claimant and the policyholder, which also means the underwriter.

            Certainly, we are always on the lookout for irregular insurance-related behavior, all the way to outright fraud. In conjunction with the external claim investigation, the company claims examiner often reports the claim to a Web database called ISO ClaimsSearch. Available to companies by subscription only, the ISO database pools all reported losses from member carriers and companies. The goal: weed as many suspicious or fraudulent claims as possible. An example requiring further investigation would be a claimant filing duplicate bodily injury claims, for the same date of loss, with different carriers. The database also helps protect carriers against improper insurance applications. For example, we may find that an insured claiming fire damages had already reported fire losses for a given address, but those previous losses were hidden from the agent and underwriter during the application process. (Never insure a stranger.)

Communication is key. So is "professional empathy."

            It is important that the company claims examiner communicate with internal and external clients during the course of the claim investigation. Internal communication includes company underwriters, as well as internal departments (depending on chain of command) and/or the branch office that issued the involved policy. External communication includes the retail agent, insured, claimant, counsel, independent adjuster, expert, and/or external underwriters/companies (such as certain underwriters at Lloyd's of London).

            With so much going on and so many entities involved, even if all parties aren't on the same page (i.e., third-party claims), we at least must all be on the same playing field. Some third-party claims are resolved quickly; others continue through litigation and/or trial. In most cases, the internal claims examiner will continue to be responsible for the claim, from onset to resolution. However, some companies, once the initial claim investigation is completed, will move the claim to a litigation and resolution specialist.

            Regardless, the company claims examiner has an indispensable quarterbacking role in the investigation and resolution of any claim. This professional is the first line of contactand perhaps first line of defensefor the retail agent, insured, MGA and underwriter. After many years in this business, I still find that matters work best when the claim examiner puts oneself into the shoes of the insured who has suffered a loss. I always recommend asking the question, "If it were your claim, what would you expect and how would you expect to be treated?" As a consumer, a claims examiner would expect prompt, professional and courteous contact, along with fair and equitable claim handling.

            As we have seen, this prompt, professional and courteous manner begins with the first report of claim to the retail agent, continues with the independent adjuster and any experts, persists throughout the claim investigation, and results in the application of the policy terms and conditions, as applies to the specific facts of the claim.

            With emotions running high for the affected parties, the claim process is not easy. However, the claim process is predictable and controllable with respect to the nature and content of the investigation, the expected communication with the insured and affected parties, and in bringing about a prompt, professional and equitable result. When we keep it from taking on a life of its own, the life of a claim generally goes just fine.

            Melanie Elias serves as Director of Claims  for Burns & Wilcox, North America's largest independently owned managing general insurance agent. She can be reached at 800-521-1918 (ext. 6003) or via e-mail at mmelias@burns-wilcox.com.