As a
no-fault insurance lawyer in Michigan, I write frequently about the issues and challenges that my own clients face when they’re injured in auto accidents and claims are regularly denied or ignored by insurance companies.
One interesting thing about Professor Feinman’s excellent book is that as bad as things are, they are likely far worse for
auto accident victims in Michigan. Michigan is one of only a few states without bad faith laws, punitive damages, or a state consumer protection act that insurance lawyers can use against insurance companies when they wrongfully deny claims. That effectively takes away any “big stick” that Michigan insurance lawyers can use to deter bad behavior by insurance companies, making it a game where insurance companies and claims adjusters will deny hundreds of legitimate auto accident claims and save millions of dollars. The public policy for protecting Michigan citizens against insurance company abuse could not be worse.
Here is Professor Feinman on the reality behind the claims handling process in America today:
Insurance companies sell security. You’re in good hands with Allstate. Like a good neighbor, State Farm is there. Nationwide is on your side.
But insurance companies increasingly fail to honor their promise of security. To improve their profits, companies delay payment of claims, deny payment of valid claims, and defend their actions by forcing claimants to sue to get what they are entitled to.
This strategy is known as “delay, deny, defend,” and it perverts the insurance industry’s promise of security. Within the vast bureaucracy of insurance companies, actuaries assess risks, underwriters price policies and evaluate prospective policyholders, the marketing department sells policies, and management supervises the whole process. The claims department’s only job should be to pay what is owed, no more but no less. Delay, deny, defend turns the claims department into just another profit center.
Three things happened from the early 1990s onward to cause this shift.
First, there were a series of external shocks that put insurance companies under financial pressure. Financial conditions pressed companies to continually cut premiums to attract customers. Medical costs, a principal part of the payouts of auto insurance companies, rose dramatically. Mother Nature made things worse as hurricanes, earthquakes, and wildfires imposed losses for which companies had inadequately reserved.
Second, attitudes changed. As elsewhere in American finance, a mania for growth and profits took hold. Many companies shifted from mutual to stock ownership to tap the capital markets as a source of growth. Allstate embarked on an extreme strategy of reducing underwriting standards and expanding its base of agents to increase its market share, and as it spun off from its lifelong association with Sears, shareholder value became primary. GEICO began spending half a billion dollars annually on advertising to attract customers, triggering a price war fought with premium cuts and advertising dollars.
Third, a change agent entered the picture. Allstate and other companies hired the mega-consulting firm McKinsey & Company to develop new claim strategies. At Allstate, McKinsey defined claims as a “zero-sum game,” with the policyholder and the company competing for the same dollars. Its goal was “to redefine the game . . . to . . . radically alter our whole approach to the business of claims.” Computer systems would be put in place to set the amounts policyholders would be offered, claimants would be deterred from hiring lawyers, adjusters would be rewarded for underpaying claims, and settlements would be offered on a take-it-or-litigate basis.
The results have been dramatic. For the property/casualty industry as a whole, for every dollar that a consumer pays in premiums, the companies pay out a nickel less in claims compared to 10 years ago and a dime less compared to 20 years ago.
Treating claims as a profit center undermines the trust created by insurance companies’ advertising. The companies need to honor their promise of security through prompt and fair claim handling, not delay, deny, defend.
– Jay M. Feinman is Distinguished Professor of Law at Rutgers University School of Law, Camden, and the author of Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It.
