Gradual or Abrupt Change

Insurance is as ancient a field as organized religion, and both have undergone considerable change over the millenniums. From worshipping rocks to spreading risk through Phoenician bottomry contracts—a form of ancient marine insurance—both have gradually and quite suddenly adapted various changes over time.

While most change in the insurance industry has been gradual, some has also been radical and fast-moving, like an invasion, to keep up with the times. State regulation was the rule until 1944, when the U.S. Supreme Court's South-Eastern Underwriters decision made insurance subject to federal anti-trust laws. That led to the McCarran-Ferguson Act in 1945, restoring state regulation. Now Congress may chip that away gradually or abruptly, affecting all of us in the industry.

Consider the Gothic invasion of technology over the last 50 years. We advanced from the quill pen of the 18th century to the typewriter, and then, in the 1980s, to the personal computer. The courts looked at recorded statements taken over the telephone and decided that they were valid enough to impeach a witness, and telephone adjusting became a reality in the late 1960s. Today, a handwritten statement taken by an adjuster might be considered as antiquated as belief in a flat world.

In the 1980s and 1990s, new forms of software came along to assist adjusters in their investigation and evaluation of claims. Most claims today are handled with almost no direct contact between the insured, claimant, and adjuster. It is either indirect, perhaps by mail or an email, or involves a telephone call, but little else. Today, we can purchase our insurance online, handle claims under the policy we receive online, and never see a living soul. The Goths may be invading, and we will not know it until they have plundered and left. It is called insurance fraud. An Open Door to Abuse

Many insurers utilize various software programs in the evaluation of claims, especially of bodily injury claims. One problem with computerized claim evaluation, however, is that the “one size fits all” theory of evaluation often overlooks factors that should be taken into consideration. Evaluation systems based on various cost factors are, at best, only theories of an individual claim's value. True value of an injury claim can only be determined by a jury, and that is far too costly of a method for the vast majority of claims. Analysis of jury verdicts also produces a false valuation, as only a tiny percentage of claims ever reach a jury, and even those that do and receive a verdict may be overturned on re-hearing or on appeal.

For more than a decade, injury evaluation systems have been used by a number of insurers, based on a “market conduct examination.” One such system, produced by the Computer Sciences Corporation (CSC), is named “Colossus.” It is one of several insurance claim evaluation programs produced by the company, including fraud detection, accident fault determination, and legal management systems. “Colossus” allows the adjuster to input data such as medical details and costs, accident causation, disability, and other factors while the software suggests a dollar settlement evaluation.

Use of the system, however, has been subject to complaints of abuse, where claim managers have instructed adjusters to offer only a percentage of the evaluation produced by the software. This has proved to be problematic, especially for conscientious adjusters who know that such offers are insufficient and are forced to repeatedly return to their supervisors for additional authority.

Beware the “Black Box”

In the 2010 New Mexico case of Quynh v. Allstate Ins. Co. (227 P.3d 73), a certified class action was filed against an insurer for violation of the state's Unfair Practices Act. Plaintiffs alleged that the insurer's use of the CSC software program was designed to underestimate the value of their claims. The insurer argued that under the state's statute, the use of the software fell within the exemption for “actions or transactions expressly permitted” as an adjustment method by conducting “market conduct examination.” Based on this theory, the lower courts agreed and granted Allstate summary judgment. On appeal, the New Mexico Supreme Court reversed, holding that market conduct examinations failed to “create the kind of express permission that would exempt Allstate's challenged conduct” from examination under the Unfair Practices Act.

While the state's high court examined the case on a variety of technical and legal points, the court ultimately found that there was nothing in the New Mexico Public Regulation Commission Superintendent's review of the use of the software that would indicate approval of its usage. Rather, the report adopted by the superintendent said only that the examination showed no claims that appeared to be mishandled or abused. As Colossus and similar systems are used nationwide by a variety of insurers, it is likely that other legal actions will be encouraged by the New Mexico decision.

On Oct. 19, 2010, Claims cited a related Allstate decision first reported in National Underwriter online: “Allstate Corp. said it has reached a $10 million multi-state agreement to create what it calls an 'education fund' for regulators. The settlement was the result of an 18-month National Association of Insurance Commissioners (NAIC) market conduct examination led by four states into the insurer's use of claims-handling software, Colossus. The program was a 'black box to regulators.' Steve Nachman, deputy superintendent for frauds and consumer services of the New York State Insurance Department, told [National Underwriter's] Online News Service. Once the box was opened, regulators found some irregularities in the use of the Colossus software, but no 'systemic or institutional underpayment of claims,' said Mr. Nachman. The examination found some breakdowns when it came to management and oversight of the software program regarding the payment of bodily-injury claims, Mr. Nachman added.

 “Specifically, Allstate's use of Colossus did not always 'account for discrepancies,' and did not reflect recently-settled claims, he said. [He] said Allstate agreed to notify claimants when Colossus may be used, enhance oversight of that program, strengthen internal auditing of Colossus, and make it clear to adjusters that they do not have to settle claims based solely on what Colossus recommends.”

Chad Hemenway, Assistant Editor of National Underwriter, also reported that New York's share of the $10 million will be $1.2 million. Forty one states will participate in the settlement, including Fla., Iowa, and Ill., which will receive $50,000 each for expenses related to the examination. Not the First Gothic Invasion of Insurers

In Strawn v. Farmers Ins. Co. of Oregon (228 Or. App. 454, 209 P.3d 357, review allowed at 347 Or, 258, 218 P.3d 540 [2009]) a number of auto insurers were included in an Ore. class action suit resulting from the use of a software program designed to reduce personal injury protection (PIP) benefit payments under Oregon's no-fault law. The software was designed to compare medical bills with payouts for similar billings in a given region. One insurer specified that billings higher than 80 percent of the regional average would be denied. PIP is a mandatory coverage in Ore., and the state's statute provides benefits for medical and hospital services. The software was intended to replace the individual adjuster's evaluation of what was “reasonable and customary” under the law.

The case came to a head in 1997 when prior methods of evaluation were replaced with vendor review using the cost containment software program, which reduced billings by around $750,000, mostly in small amounts. In 1999, one insurer increased the cutoff factor from 80 percent to 90 percent. In the ensuing court case, the insurers argued that each policyholder should have the burden of proving that the individual's claim for medical expenses was reasonable before the insurers should have to prove that the fractional denial was reasonable. The courts rejected that argument, and the Oregon Supreme Court in Ivanov v. Farmers Ins. Co. of Or., (344 Or. 421, 185 P.3d 417 [2008]) held that when an insurer uses a method of denying a PIP or a fraction of a claim which is impermissible or unreasonable, the insured's medical claim is to be regarded as a presumptively reasonable one, thus the burden of proof falls to the insurer that reduced the billing.

In the Sept. 15, 2010, issue of Insurance Litigation Reporter, Phoenix attorneys Steven Plitt and Nathanael Scheer analyzed a software program that assessed usual, customary and reasonable medical charges for insurance companies called Ingenix. They cited litigation involving the database in 2008 and 2009, following a year-long examination by the Office of the Attorney General for the State of New York and Aetna, and found that the program contained a “conflict of interest,” as “among Ingenix's sources of information are the largest health insurers in the country.” This led to an order to cease using the software program, and to develop a new one not controlled by insurers. For users of the system, the Goths had invaded again.

Most invasions are gradual. From the time the first Europeans arrived in the Americas in the 16th century until the current migrations from around the world, the media reports as if these were invasions by the Goths. With time, all the groups will meld, and like Gothic architecture, the new will begin to seem old. Some migrations are slow, others suddenly invasive. The same is true with claims technology. Gradually, we will get it right, and new and changing methods will be found to be acceptable by the courts.