As discussed in previous posts, an insurance company violates the duty of good faith and fair dealing when it attempts to alter the terms of its policy bargain with the policyholder by attempting to use its claim department as a profit center.
How does an insurance company get its claim personnel to buy in to the idea they should do everything they can to pay as little as possible on every claim, even where it means underpaying if necessary? In my experience, the answer is: by using both the “carrot” and the “stick.”
The delivery system for both the carrot and the stick is the employee performance review systems most every insurance company has in place. I have reviewed hundreds of claim handlers’ personnel files over the years in bad faith cases I’ve handled. The various insurance companies give their employee performance review systems different names, but clear patterns emerge. Typically, every employee has a regular evaluation by their supervisor. During these evaluations, the supervisor rates the performance of the employee as compared to goals that were set for the employee in the previous period. The ratings are usually expressed on scale of “1” to “5”. Goals for the coming period are also set.
Let’s start with the “stick” part of the equation. Insurance companies often rate the performance of their adjusters who pay more on claims lower than those who pay less. Performance ratings lead to pay raises, bonuses and advancement up the food chain of management in the company. So, adjusters who pay more on claims are often shown the “stick” by not receiving the same positive treatment in their employment than stingier claim people. As I’ll address in a later post, insurance companies often keep close track of an adjuster’s claim payment history, sometimes by way of a “quality assurance” file-auditing program. Then, if that history is inconsistent with the company’s profit-making goals, it is used against the claim handler.
Now for the “carrot” aspect of the equation.
Insurance companies are sometimes quite creative in the way they reward their claim personnel for restrictive claim payment practices. I’ve seen many manifestations of the same basic idea, in which the insurance company pays claim people more money based on the claim people helping the company make profits.
Some have “profit-sharing” plans for claim handlers, while others pay bonuses based on the results of contests in which adjusters compete to see who can save the company the most money on claims. I will address some of these “carrots” in more detail in a later post.
Suffice to say, if the upper management of an insurance company encourages claim delays, denials or underpayments by the use of policies and procedures (like employee evaluation systems, illicit bonus programs or contests, etc.), the duty of good faith and fair dealing has gotten lost in the pursuit of the almighty profit.