Fast-Track Resolution, Indemnification with Property Claims Audits

The following is a continuation from a previous article in which we introduced the mechanics of a claims audit, as well as the benefits that can be derived from the results of an audit. The most obvious positive benefits arising out of claims auditing are the identification of:

Strong claims handling activities and strategies that should be retained and built upon.
Areas where claims handling are not as efficient or effective as they should be and that should be strengthened to reach a “leading industry practices” standard.

This identification process allows the insurer, third party administrator (TPA), independent adjuster (IA) or other entity to take steps to improve the overall claims program. The outcome of the improved claims programs should be reaching claim resolutions promptly, providing the policyholders with a level of service that meets or exceeds their expectations, and controlling claims costs and expenses to the extent possible.

Property Claims Are Different

The primary focus here is on auditing property claims, which require significantly different claims handling than the workers' compensation claims that we covered last month. Effective property claims management requires more of a claims processing effort, as opposed to claims management that we emphasized in handling workers' compensation claims.

There are a variety of ways in which to handle property claims. An insurer may use in-house adjusters, or may use the services of TPAs or IAs to perform some or all of the tasks associated with handling the claim, including preparation of the repair/replacement estimates. The insurer, TPA, or IA may also use numerous external vendors, and the services of these vendors must be well coordinated during the relatively brief life of a property claim to achieve the optimal outcome.

Property claims require fewer touches, and in many cases can be resolved relatively quickly, at least as far as the claims management work is concerned. Property claims, except for the periodic large loss or catastrophic claim, should be handled, paid, and closed within a 30-day period, except for the possible need to reopen the claims later to pay replacement cost values. Property claims are generally categorized more as “short-tail” claims, and create fewer reserving issues.

Property losses, however, depending upon the type of loss and the time required to get the property back to pre-loss status, can also cause significant hardships for one or more persons. Homeowners' property losses disrupt a person's or family's lives, and can also cause financial hardships. Commercial losses lead not only to the need to re-build and re-stock over a period of time, but can also lead to financial loss for the policyholder and its employees if the business is interrupted for lengthy periods. A commercial loss may also have a negative impact on other companies that rely upon the company that sustained the loss as one of the links in its supply chain, or as a key customer. Therefore, it is critical to efficiently and promptly manage the claims to mitigate the losses to the greatest extent possible.

Added Benefits of Claims Audits: Three Perspectives

Property claims management enhancements which are developed following objective claims audits can provide benefits to three different major parties—the policyholders, the insurer, and the TPA or IA. Several benefits apply to all three parties:

Improved communication/reduced conflict in resolving the claim.
More accurate payments.
Early resolution, thus allowing rebuilding to begin promptly.

There are other benefits, however, that are specific to each party. For example, consider the items below.

Major Parties	The Benefits
Policyholder	\| Prompt payment to repair or replace damaged/lost property to get life back to normal as quickly as possible. Reduced negative impact on quality of life. Reduced negative financial impact on a business, its owners, and its employees.
Insurer	\| Reduced claims costs and expenses. Improved use of vendors, thus providing greater expense control. Satisfied/pleased customers, which should lead to higher customer retention and recommendations to other customers.
TPA and/or IA	\| An improved relationship with the insurer or ultimate customer, potentially leading to more business from that customer and recommendations to other potential customers. Improved cash flow if payment for its services is based on prompt completion of the required tasks—for example, field inspection and appraisal presentation.

What An Audit Reveals

In last month's article we emphasized that workers' compensation claims require more claims management rather than just claims processing. Effective management of property claims, on the other hand, should be focused more on efficient processing of the claim. Leading industry practices or “Best Practices” in property claims management place critical important on timely and coordinated activities and actions that allow the policyholder to recover from the losses as quickly as possible. A claims audit can help to identify where there are impediments to efficient processing and resolution.

Reviewing Claims Activities

The claims audit should measure the performance of the insurer, TPA, or IA against leading industry practices while also evaluating the efficiency of the processes. A property review should include but may not be limited to, the following characteristics. There are numerous criteria under each major topic that should be considered while evaluating that component. Refer to the examples listed on the next page.

Topic	Characteristics
Documentation	\| Did the adjuster and supervisor document their actions as well as those of its vendors so anyone reading the file could understand the status and plans?
Intake	\| Did the policyholder and/or agent promptly report the loss?
Set-up and assignment	\| Was the file promptly set up and assigned to the adjuster with the appropriate level of experience and expertise?
Coverage analysis and confirmation	\| Was the coverage properly applied to the loss? The analysis of commercial coverage is especially challenging, and may require the review by more experienced or more senior claims personnel. Were the appropriate endorsements, exclusions, limits/sublimits, and so forth, evaluated?
Contact (initial and ongoing)	\| Was prompt and meaningful contact made with the policyholder within one workday of claim receipt and was contact maintained throughout the life of the claim? Did the adjuster keep the policyholder informed of his/her role in the claim, and are they informed of the plans and timelines?
Investigation	\| Was the investigation initiated at the time of initial contact, and did it include a thorough investigation and consideration of other avenues to investigate (e.g., potential recoveries)? Was the loss as the result of a covered peril? Does the loss as described by the policyholder fall under the coverage? Were ancillary services used when needed (e.g., aerial photographs, drawings, and measurements; damage mitigation services) to augment the investigation/scoping?
Field inspection	\| Was field inspection required for this type or severity of loss? If so, then was the field inspection scheduled promptly, and was the extent of damages adequately scoped? Were photographs taken to document and memorialize the extent of damage? Was the information gathered at the site inspection consistent with what had been reported and that had been compared to the coverage provided? Were reports obtained from fire and/or police departments as needed?
Damages documentation/ estimates	\| Was the repair or replacement estimate prepared while on-site? Were updated price lists used for labor and materials? Were supplemental estimates reviewed for reasonableness? Were replacement cost (RC) and actual cash value (ACV) estimates prepared as required based on the coverage provided? Did the adjuster identify issues that must be addressed by a more experienced adjuster or by a specialist (e.g., structural engineer, cause and origin specialist)?
Reserving	\| Was the reserving process and estimate reasonable, and did the case reserves reflect the estimated ultimate value?
Potential recoveries	\| Were potential recovery opportunities identified and pursued (e.g., subrogation, apportionment through tendering to other parties, reinsurance)? Was the site preserved for additional inspection or evaluation if that was needed? Were the appropriate experts used to evaluate the loss (e.g., cause and origin specialists, engineers)?
Fraud investigation and/or referral to SIU	\| Were red flags identified during the investigation that led to the need for more investigation and/or for referral to the special investigation unit (SIU)? Were civil authorities consulted if a questionable loss? Was a reservation of rights letter promptly sent to the policyholder?
Payment calculations	\| Was the appraisal/repair estimate accurately completed, recognizing that hidden damage may require supplemental estimates? Were the appropriate limits, sublimits, and deductibles applied to the payment? Were payments based on RC or ACV as required by the policy? Was the repair completion confirmed before issuing replacement cost payments?
Negotiation / Settlement	\| Was the repair or replacement estimate written so that all parties could confirm the costs required to place the policyholder back to pre-loss status (or replacement cost if allowed by the policy)? Were specialty firms used when appropriate to provide objective and consistent RC/ACV when required (e.g., like kind and quality (LKQ), services, contents valuation firms)?
Planning / Resolution	\| Was the claim actively moved toward resolution at all times, based on documentation in the claims file?

For property claims, it is critical to ensure that the claim is handled as expeditiously as possible, that accurate repair and/or replacement appraisals are prepared, that the policyholder is kept aware of the claim's status, and that the resolution is reached promptly so that the policyholder can get the repairs underway and completed as promptly as possible.

Expected Claims Audit Output

The audit report should provide information such as:

Observations regarding the timing and completeness of key claims activities, and any redundancies, unnecessary hand-offs, or other inefficiencies that slow the resolution of the claim
Objective measurements when possible. This may extend to intervals between specific steps and activities that were or should have been taken, such as the interval between the date of first contact and the date of field inspection, the interval between the field inspection and completion of the appraisal.
Examples and data to clearly illustrate and support the findings
Specific recommendations in any area where claims management performance did not meet “leading industry practices” and were not efficient.

The recommendations that the claims auditor provides should be supportable, and the auditor should provide specific recommendations to retain strong claims-handling activities and improve those that are suboptimal. It is through this objective documentation of findings and recommendations that the insurer, TPA, or IA can achieve a greater performance level.

Property claims audits should be viewed as part of the process required for insurers, TPAs, and IAs to strengthen their programs. The goal is to reach prompt resolution of the claims while providing the policyholders with excellent service. This means minimizing the number of surprises and disagreements. Policyholders may then continue with rebuilding their properties and returning their lives to pre-loss status as quickly as possible.

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