Why insurance claims get contentious

When it comes to claims, insurance companies operate like high-speed trains. Their goal is to take insurance claims from Point A to Point B as quickly as possible with no stops. Anything that might slow a claim down has to go through a strict cost-benefit analysis and management approval.

So, if speed is the “status quo,” then why do claims get contentious and drag out for months or years?

Usually, because insureds don’t understand insurance and what it covers. They were sold a policy they believed protected them from bad things happening, and when something terrible occurs, the policy doesn’t respond as expected.

The vast majority of adjusters are in the business of paying claims. They want to find coverage and pay what is owed under the policy. One thing that can slow the process is paying a large claim. A now-famous example was the Farmers adjuster who worked on the Melinda Ballard mold claim. The claim was about $100,000 to replace damaged wood flooring. The adjuster only had $20,000 in authority, so she wrote a letter to the insured saying she needed more time to evaluate the claim. What she needed was time to get both her supervisor and the claims manager to authorize the $100,000. A trial court in Austin decided that was bad faith and that verdict sparked the 2001 mold insurance crisis in Texas.

Experiencing an insurance claim is a very emotional event. Being in a car accident is very scary.  Having a house flood where precious pictures, furniture and other household goods are ruined leaves people with a profound sense of loss. Sometimes that emotion, especially when tied to an unreasonable recovery amount, can slow the process.

Experience with claims is a key variable in this decision-making process. Fundamentally, the continuum of claims expertise looks like this:

Those with experience in how claims evolve are well aware of the typical path for insurance claims that become contentious. What are the key variables in these cases?

1. Amount of loss. This is basic risk-reward. If the potential recovery is large, then there is generally more willingness on the part of various parties to “bet” on their ability to recover at least a portion of the potential.
2. Facts of the case. If the facts are clear, it is a different issue than if they are uncertain and require witness testimony to help clarify the sequence of events.
3. Number of parties involved. When there are multiple parties involved, especially in construction and potential subrogation claims, it complicates the investigation process and generally slows down the resolution time.
4. Government involvement can slow down the process. It can complicate things as well and can be as simple as restricting site access. Many of us have also seen reports written by OSHA, police, fire marshals, and others that misidentify liability, forcing the involved parties to hire independent experts.
5. Retaining experts. In complex claims, there are times where an insurer hires an expert to write a report that basically says, “My client is not at fault.” That forces the other side to hire another expert to dispute the report. In poker, when you have a lot of chips and you bluff, it is called a “stacks play” because you’re betting the other side doesn’t want to commit the resources necessary to find out you are bluffing. This is an insurance company leveraging its resources to try to force a policyholder to ‘fold.’

Consider this case study: There was a $270 million claim in South America following a fire at a manufacturing plant. There were two tenants in the plant, one insured by ABC and the other by Brussels. ABC hired an investigator who didn’t even enter the building and wrote a report that determined the Brussels tenant had liability. Brussels hired an investigator, who also didn’t enter the building but wrote a report placing liability on the ABC tenant. The two reports caused nothing to happen for nearly 18 months. A third expert was retained and was able to move the process along.  How much did it cost in reserve allocation, labor, supervision and other expenses to have the claim open for 18 months?

Managing the emotional context, the extent of damage, delineation of liability and recovery options, and having a clear understanding of the root cause early in a case allows both sides to make strategic decisions regarding the potential value and risks involved and to reach an informed decision on the best way to proceed. Adjusters, experts and attorneys skilled in this ‘big picture’ understanding and focus can add substantive value to a claim.

Tim Christ is an executive business coach and loves helping companies grow by defining/implementing strategy, creating scalability, and improving profitability. He is the author of “Becoming a World-Class Expert: The Business of Forensic Engineering.” He can be reached at timc@expressinfo.com.

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