Insurance has been described as a public trust and insurance is essential to the way we live our lives both personally and in our businesses. With insurance, the product actually being sold it the promise that the insurer will conduct a through and unbiased investigation and pay to its policyholders the benefits they are promised. As one court has stated, it is the “duty of an insurer to assess claims as a result of an appropriate and careful investigation and that its conclusions should be the result of the weighing of probabilities in a fair and honest way.” Anderson v. Continental Ins. Co., 271 N.W.2d 368, 375 (Wis. 1978). The National Association of Insurance Commissioners, in its Model Unfair Settlement Practices Act, requires insurers to “adopt and implement reasonable standards for the prompt investigation and settlement of claims.”
State Farm is the nation’s largest personal lines insurer and “State Farm provides insurance and financial services products across over 94 million policies and accounts.” In addition, State Farm is a mutual company, which means it is owned by its policyholders. Since it is so important to our nation’s economy and its policyholders, it is appropriate that we make sure State Farm is conducting its claims investigations fairly and honestly. In fact, State Farm in its own document entitled “Our Commitment to Our Policyholders” State Farm promises to “listen, be fair, be open, and carry out our part of the bargain in good faith” and to “make an objective evaluation of the facts and circumstances favoring our policyholders claims.” State Farm admits that doing so helps make sure that “Our policyholders obtain all benefits available provided by the insurance policy.”
Unfortunately, in court filing after court filing, State Farm seeks to prevent the discovery and disclosure of many of its standards for deciding claims. Fortunately, many of these have become public and provide insight. However, many more still remain clouded in secrecy.
History has shown that, when allowed to hide in secrecy, insurance companies, like anyone else, can become motivated by selfishness and greed. While selfishness and greed may be championed in some areas of business, they have no place in the insurance claim process because of the duty of good faith, which prevents an insurer from putting its interests ahead of its insureds in the claim process. One example occurred in the early 2000’s when UNUM/Provident was caught in a massive scheme to underpay individual long term disability claims, resulting in insurance department settlements and fines, lawsuits and a 60 minutes special.
One court found that Paul Revere, one of the UNUM/Provident companies, “set targets and goals for claim terminations to obtain financial gain and without respect to claim merit.” Merrick v. Paul Revere Life Ins. Co. , 594 F.Supp. 2d 1158 (D. Nev. 2008). These goals and targets included claim closing percentage targets, goal amounts that claims units were request to obtain in closed claims (which they called recoveries), and company-wide financial targets.
In a State Farm case, another court observed that the policyholder had introduced evidence that “State Farm engaged in a deliberate practice of underpaying claims nationwide. The evidence suggested State Farm set arbitrary claim payment goals for its claims personnel in order to reach the company goal of having the most profitable claims service in the industry. Promotions and salary increases for State Farm claims personnel were based on reaching these goals.” Zilisch v. State Farm, 995 P.2d 276, 279, 283 (Ariz. 2000)
Requiring a company to have fair claims guidelines in place can lessen bad faith. Preventing companies from adopting bonus structures that reward claims people for denied or underpaid claims can also help prevent bad faith. I believe that State Farm should make its claims processes and incentive structures an open book. Doing so will help ensure that it has appropriate guidelines and that they are being followed. What do you think?