Rewarding Claims Adjusters for Reducing Expenses and Use of Medical Review to Cut Claims

[Guest guest]

Documents obtained by www.insure.com show that Allstate Insurance Corp.,

Farmers Insurance Group, and State Farm Mutual Automobile Insurance Co. -

the three biggest auto and home insurers in

the nation - currently have in place or have had in place companywide

practices that reward their claims adjusters for reducing expenses and

cutting costs, including strategies for cutting the amount

the insurer pays for claims.

See how adjusters are rewarded for doing it here:

http://www.insure.com/gen/adjusterperformance.html

Insurance adjusters rewarded for shrinking claims checks

By Joe Frey

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The three biggest auto and home insurers in the nation reward their claims

adjusters for reducing expenses and cutting costs.

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Insurance companies calculate everything. From a policyholder's ability to

pay bills to the likelihood that he or she will contract a rare disease,

insurance companies assign numbers to even the most straightforward

concepts, such as age, in order to rate the " riskiness " of a policyholder.

It should be no surprise, then, that insurance companies calculate with

pinpoint precision how well their employees - specifically, their claims

adjusters - perform their jobs.

And why not? Insurance companies, like other corporations, seek a good value

for their employees' services and reward those who boost the company's

bottom line. Performance-based pay or incentive-based pay (as this concept

is known) is one way insurers retain their employees in today's increasingly

competitive job market. It's also a way for the company to build long-term

wealth.

Financial strength is certainly a characteristic consumers look for when

shopping for an insurer, but documents obtained by insure.com show that

Allstate Insurance Corp., Farmers Insurance Group, and State Farm Mutual

Automobile Insurance Co. - the three biggest auto and home insurers in the

nation - currently have in place or have in the past had in place

companywide practices that reward their claims adjusters for reducing

expenses and cutting costs, including strategies for cutting the amount the

insurer pays for claims. Adjusters are insurance company employees who come

out to survey your car or house damage and estimate your repair costs.

Critics say these compensation practices are, at best, shrewd efforts to

maximize profits, maintain a competitive edge, and keep insurance costs as

low as possible. At worst, they are inappropriate and unethical practices

that represent gross conflicts of interest. And sometimes it's difficult to

distinguish between the two.

Performance Planning & Review

What is surprising about performance-based pay programs at some insurance

companies are the standards by which insurers judge their adjusters'

performances.

In May 1979, the late Bruce Callis, an executive at State Farm, introduced

an employee compensation program called " Performance Planning & Review "

(PP & R) in order to " actuate corporate, region, department, and function

annual plans into individual action plans for all levels of employees, "

according to State Farm's PP & R manual from 1979. A sample goal for a claims

superintendent or claims supervisor, who both oversee the handling of

customers' claims, included limiting the average Personal Injury Protection

(PIP) paid. Another way was to ensure that adjusters were settling

totaled-car claims at or below the National Automobile Dealers Association

(NADA) guide value, and using (cheaper) aftermarket crash parts on a

specified percentage of all automobile repairs.

How much of a raise?

Typical raises for State Farm adjusters who receive " meets expectations " on

their yearly PP & R would be a $500 raise in base pay, according to former

claims adjusters. The new base pay would then be multiplied by a

cost-of-living allowance (COLA). For example, an adjuster at the MA1 pay

rate - the entry-level pay position - might earn $18,000 in base salary in a

year in which the COLA is 1.2 percent. If he or she meets the PP & R

expectations, State Farm would raise the base pay to $18,500 and multiply

that by 1.2 percent to arrive at the adjuster's new salary: $18,722.

An adjuster's base pay would jump to a higher level when he or she is

promoted to a higher pay rate, such as MA2 or MA3. Currently, MA3 is the

highest claims adjuster pay rate at State Farm. Team leaders, formerly known

as claims superintendents and supervisors who oversee a group of claims

adjusters in one office, receive the next highest pay rate: MA6.

These goals were designed to cut expenses, specifically by reducing the

payout on automobile insurance claims, sources say. Similar goals were set

for claims supervisors and adjusters who handled home insurance claims.

Claims supervisors and adjusters who met or exceeded goals were rewarded

with raises and promotions under State Farm's PP & R system, used nationwide

from 1979 through 1994.

State Farm stopped the PP & R program in September 1994 when Haines, its

top claims executive, fired off a memo to company claims executives and

managers throughout the country telling them that State Farm's PP & R goal of

reducing claims payouts was " inappropriate. "

There are myriad reasons why PP & R is inappropriate, sources say. The No. 1

reason is that it rewards claims adjusters and supervisors for making

unethical decisions in an ethical dilemma: Should adjusters and supervisors

reduce the amount of the claim payment to a deserving customer in order to

boost the company's bottom line and their own chances for promotions and

raises, or should they pay properly, which could hurt their chances for

advancement?

" The insurance company owes a duty of good faith and fair dealing, which

means that the claims people should be paid and compensated for doing a good

job and arriving at fair settlements, " says Eugene Andersen, a New

York-based attorney who specializes in insurance. " But if a fair settlement

is $1, and adjusters get paid bonuses for settling for $.90, that's not a

fair settlement, " he says.

The State Farm memo authored by Haines indicates that PP & R goals included

reducing the average dollar amount of claim checks, and the company today

says there is no such practice in place. " State Farm is definitely not

'rewarding' claims people with bonuses and promotions for reducing claims

payouts, " says Dave Hurst, a spokesperson for State Farm. Further, Hurst

says the goals of PP & R were not to create profits at the expense of

customers.

Claims personnel at State Farm understood that PP & R goals could be met by

performing " quality investigations, " handling claims efficiently, and paying

claims promptly, Hurst says.

State Farm today uses a system called Quarterly Performance Review (QPR),

and Hurst assures that claims adjusters are not compensated based on the

dollar value of claim payments they approve.

Andersen and other critics who spoke to insure.com doubt the practice has

ended. State Farm may have changed the name of the program, but it didn't

change the substance, they assert. The goals of reducing claims payments by

specified amounts are no longer written on an adjuster's QPR evaluation, and

thus harder to trace, but adjusters are encouraged to send medical claims to

medical-review companies, which provide support for an adjuster to limit or

deny payments, sources say. State Farm reportedly uses more than 500

medical-review companies.

" We pay what we owe "

Inside the adjuster's mind

" You're trained to do things the State Farm way. They tell you they do

things the right way. When I was working for the company, I didn't feel

[reducing claims payments] was inappropriate. When I started looking at it

from the injured person's perspective, I knew that reducing claims payments

was inappropriate. "

Those are the words of a former claims supervisor for State Farm. He worked

for State Farm for 24 years in several claims positions. And while he

adjusted and settled claims, he wasn't thinking daily about meeting his goal

of limiting claims payments to such-and-such amount, but he knew his job was

to save money for the insurer.

" I focused on the competitiveness they instilled in us more than anything

else, " he says. State Farm would routinely pass around nationwide

claims-payment statistics so claims offices and individual adjusters could

compare their performance with offices and adjusters around the country.

State Farm also would conduct contests within a claims office to see which

adjuster could reduce claims payments the most, the ex-State Farm claims

employee says. The winner didn't get a big prize, he says. Instead, the

company would take the winner out for a fancy dinner worth $50 to $100. The

adjuster thought it was his job to pay a customer what was owed, " but the

incentives obviously led you to settle it for the lowest range possible, " he

says.

Other adjusters agree. None of the objectives State Farm listed in its PP & Rs

were inappropriate when considered separately, says another former claims

representative who worked for State Farm until 1998. But considered

together, all of the goals motivated adjusters, who wanted to receive

acceptable performance reviews, to reduce claims payments.

The former adjuster says he focused on trying to exceed each goal on his

performance evaluation while he was adjusting claims. Those goals included

making contact with claimants within 24 hours of their claim, closing as

many claims as possible within 30 days, and reducing the number of open

claims. " I needed to make more money for my family, " says the former

adjuster. " I wanted to get enough [exceptional reviews] that when the next

managerial position came up, I was head and shoulders above the rest. "

After 1994, State Farm PP & Rs never explicitly noted that reduction of claims

payments was a goal for all adjusters. " It doesn't have to be written down

to be understood, " the former State Farm adjuster says. " How you got there

was up to you. "

State Farm might have stopped writing claims-payment goals into PP & Rs in

1994, but Farmers was doing it for at least another year. In January 2000, a

startling revelation came out of a California court proceeding in the matter

of Nordhoff vs. Farmers Insurance Group. A 1995 PP & R evaluation of Farmers

Insurance's current California director of commercial claims stated that one

of the director's goals, as read into the court record, was to " reduce the

ratio of indemnity to earned premium [to] 57.3 percent. " In other words, the

claim director's goal for 1995 was to reduce his unit's claims payments to

approximately 57 cents for every dollar of premium Farmers collected from

its policyholders.

Bernie Bernheim, a North Hollywood, Calif.-based attorney and counsel for

the plaintiffs in the Nordhoff case, says that often an adjuster's

objectives in PP & R evaluations are perfectly appropriate. " Where it gets

real black-and-white in terms of appropriateness is in claims, " he says.

" Any prospective goal to achieve a certain amount of indemnity payment - to

reduce the average claim paid from $5,000 to $4,900 for the year, for

example - is inappropriate. " An adjuster's job is not to fiddle with the

company's loss ratio, Bernheim says. An insurance company's underwriting

department is the only group that should be adjusting the loss ratio, and

they would do that by altering premium rates to fit riskiness.

Farmers' director of claims administration, Lyle Owens, staunchly asserts

his company has never asked its claims management or adjusters to reduce

payments to claimants. " We pay what we owe, nothing more, nothing less, " he

says. " Nobody in this business I know of would capriciously reduce claims

payments. "

When asked whether the California director's PP & R encouraged that employee

to reduce claims payouts, Owens says to read it that way is an assumption.

He speculates that the evaluation may have been asking the director to make

sure his department is paying what it owes, and not shortchanging

policyholders. When asked whether reducing claims payments to a specified

level is fair to policyholders, Owens says, " That's like saying, 'When did

you stop beating your wife?' There's no appropriate way to answer that

question. "

It's in the manual

Allstate's review of its claims adjusters' performances are part of a

companywide program called Claims Core Process Review (CCPR). The program's

goals include managing " specific components of severity to provide greater

financial support to the company, " according to the insurer's own CCPR 1995

manual. Reducing extraneous claims payouts is certainly within an insurer's

purview, but Allstate's approach is to reduce all claims payouts as much as

possible.

For example, Allstate's CCPR manual says claims adjusters should strive to

settle as many cases within the company's historical base range - the 10th

percentile of all payouts. In other words, Allstate encourages its adjusters

to settle as many claims as possible for no higher than what the company

historically paid out on the lowest 10 percent of its claims.

Sharon , a spokesperson for Allstate, says her company approaches all

claims with " fairness and objectivity in order to pay the appropriate amount

that the customer or claimant is entitled to under the terms and conditions

of the insurance policy. "

But sworn testimony from three claims employees at Allstate calls into

question the objectivity with which claims adjusters are supposed to handle

claims. As a general practice, Allstate does not set claims-payout goals in

its adjuster performance evaluations, but according to Brown, a claims

employee who resigned her position at Allstate in March 1999, Allstate's

management in Northbrook, Ill., sent customer-payment goals to all of its

claims office managers who, in turn, orally relayed the goals to adjusters

in office meetings.

Anny Cordova Berry, currently a claims manager in burg, Pa., testified

in May 1999 that Allstate expressly told her to pay less than any claim is

worth. Allstate calculates a claim's worth based on payments the insurer had

made in the past and the facts of claim. This is known as " evaluation. "

Cordova Berry was instructed to pay out less than 100 percent of the

evaluated worth. She testified that in 1995 and 1996, three different

adjusters in her office were commended for meeting the office's goal: They

paid between 93 percent and 95 percent of the evaluated worth on all of

their claims.

What's more, Allstate claims managers annually conduct Performance

Development Summaries (PDS) to review the performance of company adjusters.

The adjusters' ability to pay as close to the evaluated amount as possible

is part of their PDS objectives, and claims managers use PDS objectives to

" measure [adjuster] performance in terms of their salary increases, "

according to the sworn testimony of Carla Kline, a current Allstate claims

employee.

And while Allstate adjusters don't receive cash bonuses for their work to

improve the company's bottom line, Allstate's own 1995 CCPR manual might

explain why some adjusters may be trying to skimp on claims payments:

Allstate's approach to managing and handling claims is to " promote

[employees] based on performance; develop skills to 'win every claim'; and

[measure] based on outcomes and by activities. " In other words, adjusters'

promotions and compensation are tied to how well they perform their jobs

according to Allstate's predetermined financial goals.

acknowledges that Allstate " promotes claim employees based on

performance, " but she would not comment on the meaning of " win every claim, "

nor would she respond to specific questions about her company's CCPR program

and how it relates to claims payouts.

Allstate's CCPR program is still in use today

Tightening the screws

A fabulous trip to the Caribbean

How'd you like to spend three days in the Caribbean for doing your job well?

That's just what The Hartford asked its claims adjusters in the Northeast.

The Hartford conducted a contest between June 1, 1999, and May 31, 2000, to

boost the number of crashed cars that were sent to the insurer's

direct-repair shop facilities, known as Customer Repair Service Program

(CRSP) shops.

CRSP shops, like other direct-repair programs, give The Hartford discounts

on parts and labor charges in exchange for a steady flow of crunched cars to

repair, which helps reduce the overall cost of claims. While direct-repair

facilities might show aplomb in repairing vehicles, it's possible the

insurer is using those shops to shortchange claimants. (For a discussion of

the pros and cons of direct-repair facilities, click to Inside the

direct-repair process.)

The Hartford's CRSP contest was held monthly, with claims adjusters who

showed the most improvement in referring customers to CRSP shops and

adjusters who referred the most customers to The Hartford's shops earning

cash bonuses: $500 for first place, $300 for second place, and $200 for

third place. In addition, the monthly winners automatically qualified for a

shot at the grand prize - a Caribbean cruise for two.

A company brochure advertising the contest, obtained by insure.com, tells

adjusters, " Together, we can provide our claimants best-in-class customer

service, while positively impacting the bottom line. "

Michener, a spokesperson for The Hartford, says the contest was a

one-time program open to auto insurance claims adjusters, conducted in order

to improve customer relations by providing claimants with better repair

options. Michener says that CRSP shops have indeed increased customer

satisfaction and policy renewals, while cutting claims expenses for The

Hartford.

Critics of claims adjusters' performance evaluations - including former

claims adjusters themselves - acknowledge that an adjuster's goal could

include more than just reduction of claims payments. Handling claims more

efficiently by improving response time to claimants is often another goal.

Claims personnel evaluations from State Farm and Allstate obtained by

insure.com also note that adjusters are graded on their ability to

investigate claims thoroughly and their willingness to participate in

continuing education courses.

Appropriate professional goals notwithstanding, former claims employees

speak of a corporate culture at Allstate and State Farm that breeds mistrust

between the claimant and the adjuster.

Efforts such as sending more claims to the legal department so that State

Farm can fill its litigation quota, sending more medical claims to

independent medical examiners, and putting all communication to claimants in

writing, rather than speaking to them face-to-face in a personable manner,

are designed to " tighten the screws on claims payments, " the former claims

rep says. And what most claimants don't realize, other former claims

personnel say, is that steps such as these are part of companywide

settlement strategies designed to lower claim payments and maintain the

company's bottom line.

" There are people taking advantage of the system, " a former State Farm

claims representative who wishes to remain anonymous says. The former claims

adjuster notes that insurance fraud is a real problem, and that " it is

perfectly fair for the insurance company to investigate claims that appear

to be suspicious. But when those efforts become so extreme as to infringe on

the rights of all claimants, that's not appropriate, " he says.

Gainsharing the wealth

The Big Three aren't the only companies that have adopted incentive-based

programs for adjusters. Other insurers compensate their claims personnel for

a job well done, as long as that job reduces claims payments. Progressive

Insurance Co.'s 1999 annual report, for example, outlines the Year 2000 plan

for " gainsharing " and how the insurer will measure an employee's financial

performance to calculate his or her bonus.

Employee bonuses at Progressive are essentially determined by how much that

employee can bolster the company's bottom line. Progressive employees have

the opportunity to earn between 8 percent and 135 percent of their salaries

as part of the gainsharing program, with senior executives and top managers

getting a shot at the biggest bucks. Rank-and-file employees can earn up to

8 percent of their salary as a bonus if they can augment Progressive's

profitability.

And how do claims employees increase the company's profitability? They

aren't cutting back on the number of staples and paper clips they use,

sources assert. They're allegedly cutting back on settlement checks. " The

only way an adjuster can participate in gainsharing is by cutting the claims

payments, " alleges Matt Sharp, a Reno, Nev.-based attorney.

Progressive vehemently denies that its adjusters are shirking their duty to

pay claims properly in order to bolster their share of the company's wealth.

" Does gainsharing influence the amount paid on an individual claim? " asks

Kolleda, a spokesperson for Progressive. " Absolutely not. "

The quandary

Compensating employees for their job performance is a common business

practice in the insurance industry. But when claims adjusters are asked

directly or indirectly to reduce claim payments to unfair levels in order to

boost their employer's bottom line, a quandary develops: Can an insurer deal

with claimants fairly and in good faith if it has asked its claims employees

to reduce payments? No, says attorney . " There are quotas insurers

can impose on adjusters, but one of them can't be, 'If you pay more than

$50,000 in claims, your raise won't be as good. "