INSURANCE BAD FAITH
IT'S NOT WHAT YOU THINK IT IS
By Michael Abourezk
We all think we know what an insurance bad faith case looks like. Right?
Not necessarily. I found out a few years ago that I had no idea what to look for in a bad faith case. I was looking for villainous behavior from claims people that lie, cheat, underpay my client, and then let me catch them at it. If that is what you are looking for in a bad faith case, you may see one or two cases in your career.
On the other hand, once you begin to understand what is going on behind the scenes, you will discover that true bad faith cases are a lot more common than it might seem. In fact, you have probably seen a lot of them. You just didn't know it. You may have several right now. You just don't realize it.
What really makes a bad faith case is what you don't see at first glance. It is hidden from you.
For instance, did you know that many insurance companies have developed programs that give claims adjusters a direct interest in the claim? Some of them pay cash bonuses in return for hitting payment goals set by the company. In other words, claims adjusters get paid MORE, as a reward for paying LESS to the company's policyholders
Conversely, claims people who don't help achieve these goals, don't climb in the company.
These programs result in bad faith claims handling. It isn't the horrible, instantly recognizable conduct that we all look for in bad faith cases. It is, instead, the day to day chiseling of a few dollars here, and a few more dollars there, over and over again, on claim after claim.
This is the same behavior that we lawyers all see, all the time, from overly tight-fisted claims people who seem to be so rock headed that we can't reason with them. Well, now you know, there is a good reason that they are so unreasonable.
Denial of a small claim, no matter how unfair, rarely results in a serious challenge to the company. Few people can find a lawyer to litigate over a few hundred or even a few thousand dollars.
Moreover, insurance companies handle many more small claims than large ones. Consequently, the best opportunity to save millions of dollars is in the area of small claims, and that is where you will find the most examples of bad faith, as well as some of the most flagrant examples.
As a result, what we need to look for are not just the large claim denials. We need to watch for the small ones too. When you see a denial of a small claim that just doesn't make any sense, don't just assume that it is a mistake. More than likely it isn't a mistake at all.
For instance, a few years ago my sister developed cancer. Fortunately, she had earlier purchased a special cancer insurance policy to help with the travel and lodging and other expenses faced by cancer patients. When she went to Houston to seek treatment, the company denied her travel expenses on the grounds that the policy didn't pay for experimental treatment.
The policy itself, though, didn't exclude travel for experimental treatment, it just excluded experimental treatment. I wrote to the company and pointed out their error. They ignored me.
We were already struggling to deal with my sister's cancer, and had little enthusiasm to argue with an insurance company over air fare and hotel bills. But when we looked closer, we found many thousands of dollars of other reimbursable expenses that the company had ignored. The case of a few hundred dollars underpayment eventually resulted in a nationwide class action which forced the company to reimburse cancer patients in 29 states.
In another case, a workers compensation insurer denied my client a few thousand dollars in medical expenses and benefits. She couldn't find a lawyer to help her, because the claim was too small to provide much of a fee.
Finally she found a very civic minded lawyer willing to take the case. After a year of litigation, she won. The lawyer, of course, lost money on the case.
In the bad faith litigation that ensued, we found the company's incentive plans. They paid bonuses to claim handlers based directly on reductions in claim payments. The jury awarded many millions in punitive damages.
In yet another case, a workers' compensation insurer denied payment of $6,000 in medical bills to my client, with no legitimate grounds at all. Again, most claim denials of this kind go unchallenged and the insurer wins by default. What lawyer wants to litigate a $6,000 case for contingency fees allowed in workers' compensation proceedings?
But this time, the claimant found a lawyer, won the case, and we brought suit against both the insurer and the employer for bad faith. The insurer settled. The employer went to trial. The jury again returned a verdict in the millions against the employer for aiding and abetting bad faith.
Most of us wouldn't look too hard at a dispute involving only a few thousand dollars. That is where you need to change your thinking. Why? Because you are accustomed to handling transactions one at a time. Insurance companies handle thousands of these same transactions over and over. They teach their personnel to handle each similar case in the same way.
If they are denying this claim without any reasonable basis, then they are probably handling many other similar claims in the same way. That means the case involving denial of a few hundred dollars might actually be a case involving denial of tens of millions.
In addition, when you scratch under the surface, you find that these little cases often have big agendas behind them, hidden from view. When you reveal the hidden agenda, the little case takes on massive proportions.
AN EXAMPLE OF INCENTIVE PLANS IN ACTION
To show you how insurance incentive programs operate, I have selected excerpts from discovery of personnel files obtained in litigation here in South Dakota against one very prominent insurance company.
The facts are simple. The plaintiff was in a car accident, caused by an uninsured motorist. The plaintiff experienced soft tissue injuries, and submitted her medical bills to her own insurer. The insurer hired a medical review organization from Minneapolis, who issued a report saying that the actual treatment exceeded what was necessary. Thereafter, the insurer denied payment of $2,800 in physical therapy bills. We brought suit for breach of contract and bad faith. The insurer then paid the medical bills, and the bad faith case proceeded.
INTERNAL PROGRAMS FOR CLAIM PAYMENTS
Documents produced in discovery confirmed that the insurer has engaged in the practice, for at least the past fifteen years, of setting financial goals for claims personnel to meet in making claims payments. The performance evaluations of each employee track their success in meeting their goals. Their pay is linked directly to their performance.
Some of the internal goals set by the insurer include:
Goals of denying a certain percentage of claims (30.96%);
Goals of holding the average payment per claim at a specified dollar level;
Goals of claiming a certain amount of contributory negligence on claims across the board (18%).
ADJUSTERS' PAY IS LINKED DIRECTLY TO PERFORMANCE
This insurer has a written policy called Pay for Performance. This policy equates accomplishing company goals with pay increases and promotions for the claims representative. The written instructions provided to claims handlers tells them that:
YOUR PERFORMANCE WILL LINK TO YOUR PAY
You should be compensated according to how well you perform in critical performance areas. By rewarding achievers, we put ourselves in a position to develop future leadership and to accomplish our critical company business goals. On the other hand, if performance fails to match expectations, your compensation will reflect that.
This performance management program is designed to link our pay system. You can expect that your individual performance ratings will play a key role in determining your pay level each year.
THE COMPANY CONCEALS THESE ACTIVITIES
In resisting discovery, the company offered the testimony of a regional claims manager at a motion hearing, claiming that no such programs existed.
First, the regional claims manager testified that the company creates no financial goals for claims personnel, and admitted that such conduct is wrong:
Q Did I understand you correctly that there are no financial goals or expected results put out in front of claims handlers by the company?
The regional claims manager even went so far as to say that such conduct is strictly forbidden, and that any supervisor caught engaging in such conduct is subject to disciplinary action:
A That's true.
Q Would you agree with me it would be wrong to do that?
A Yes, I would.
Q Would you agree with me that it would be unethical for an insurance company to put out expected results in front of claims personnel and have them strive for those results, financial results, with respect to paying claims?
A It would be wrong because they wouldn't have control over the results.
Q Okay. But at any rate, you're clear on the idea that [the company] does not keep track and evaluate individual claims adjusters on their averages of what they pay out each year in claims?
The trial court ordered discovery to go forward anyway. All this testimony turned out to be false.
A To my knowledge, that's strictly it's forbidden that they do that. If a supervisor is doing that, he or she is subject to disciplinary action.
The following are excerpts from a number of different employee performance evaluations subsequently produced in discovery:
(For abbreviations see footnote below).
Your collision costs were down 11.9%, your COMP costs were down 26.9% and your PD costs were down 10.9%. These are excellent results and you should be congratulated.
Your average costs are: Med $1,025 (-25%), NF $1,566 (- 42%). You have not only maintained indemnity costs at inflationary levels, but you have made a significant reduction in your costs. This is a very good result . . .. Exceeds expectations.
APD - your average APD costs through September 2001 are: COLL $2,056; COMP $1,849; PD $1,497. Your average costs are a concern as they are all above the BCO average.
Liability - Your average costs through September 2001 are BI $4,353; UM $0. You have achieved an excellent result in your BI costs as they are considerably lower than last year.
APD - your average costs through September 2001, are: COLL $2,065; COMP $2,828; PD $1,244. Your COMP costs are high and of concern.
Your costs have increased 41% while BCO costs increased 23%. . . . below expectations.
COMP = Comprehensive Coverage; PD = Property Damage; NF=No Fault; COLL = Collision Coverage; BI = Bodily Injury; Med - Medical Pay; UM = Uninsured Motorist Coverage; BCO = Branch Claims Office.
CLAIMS PERSONNEL ADMIT THIS CONDUCT IS IMPROPER.
In deposition testimony, the supervisor in charge of plaintiff's claim in this case eventually conceded that, in her opinion, it is wrong to include financial goals in the performance appraisals of claims personnel, and concedes to telling her own supervisors it was wrong. She continued to use the practice, however, because she was told to do so, and was just doing what she was told.
This same supervisor conceded that no matter how well intentioned you are, you can't help but be influenced when your job and your pay is affected by the things that the company is telling you to do.
Bad faith is as much about WHY the insurance adjusters behave the way they do, than it is about the events that happen to any particular plaintiff in any particular case. This type of evidence gives the jury a flavor for the fact that while the company refused to pay only $2,800 in this case, the actual amount of money involved is much more than that, and it will take very significant action by the jury to correct this behavior. Otherwise, it is simply more profitable for the company to keep doing it.
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