Page 2: Insurance adjusters rewarded for shrinking claims checks
"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 Cooper, 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 Linda 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 Harrisburg, 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.
Cooper 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.
Continue to page 3: Tightening the screws