I am hidden sometimes in the disappointment of an elected cosmetic surgery. Or, sometimes, I am as apparent as a pair of surgical scissors left behind. Be careful when handling me. I am hot to the touch because there were many health professionals involved in my coming to life.  So, I can burn doctors, nurses and technicians regardless of fault. And since my owner had treatment and consultations for months, I can even trigger coverage across multiple years for each of my targets.

Not to fret though, there is a ceiling in my home state. My owner cannot recover more than a few hundred thousand for pain and suffering. Luckily though, that ceiling gets higher every year. I wish I was born in one of the 20 or so states with no caps on medical liability damage awards.

My goal is to show that one or more doctors or nurses breached the recognized standard of care. Once I do that, it will be pretty easy to show that my owner suffered an injury caused by that breach. I also have to show that there was more than a 50% chance that a better result could have been achieved if the standard was followed.

You are probably hoping that my owner fails to file me as an official lawsuit in time. Trust that I will make it to court on time. You will know about me long before the court finds out. Michigan law requires I give some advance notice and that a qualified medical expert certifies me as “meritorious.”

My hope is that you lack the tools and knowledge to handle me when I arrive. Many of my older relatives were lucky enough to be input into a system made for handling auto property damage or residential flood claims. I love it when they do that. Those systems have no way of properly organizing the expert testimony needed to defend me. If they had an investigative workspace where opinions and testimony could be adequately gathered and analyzed, I would be in trouble. When I see that you have compiled notes and analysis in the way shown below, I know I am in for a battle.

Once you have set me up in your system, you are going to make a guess as to what I am worth. But, if you fail to address all of the damage categories I can claim, you will definitely not get it right. One of your colleagues used a chart like the one below for a friend of mine, and my friend got picked apart. There was a lack of supporting evidence for my friend and he got whittled down to nothing.

One way I really confuse people is by introducing a continuum of errors and mistakes by several different medical professionals. I know it sounds crazy but almost no one puts together a proper timeline anymore. Timelines like the one shown below would make it pretty apparent that my owner’s injuries were not related to medical treatment but instead caused by an auto accident that occurred 3 weeks after his operation.

This will be an exciting ride for both of us. Of course, I am playing the percentages that your failure to have the proper handling tools will result in a nice settlement for my owner. I will soon go from being a medical malpractice claim to a large medical malpractice settlement.  And one day, you get to tell your friends at parties about how much money is paid out on medical liability claims because of greed. A better system would show exactly where Med Mal claims come from.  Check out the segmentation by legal theory shown below.

Takeaway

Claims adjusters across the country face daily challenges as they take on cases involving complex areas of law. In this article, I address medical professional liability claims. But, the tools needed to handle specialized claims are generally lacking in most software solutions.

The solutions needed are not going to come from your traditional carrier or the broker. The risk managers and legal professionals of self-insured organizations are the ones who must create the right tools to handle the challenges of today’s liability claims.  

Darren Lossia is Director of Risk Management Services at Innovative Computer Systems, Inc. and creator of the Direct Claim Solution (DirectClaimSolution.com).  He is a licensed attorney and claims professional specializing in bringing creative claims handling solutions to clients seeking significant operational improvements. 

The post I Am a Medical Malpractice Claim appeared first on Direct Claim Solution.

The financial benefits of premium reduction and tax reduction are sufficiently motivating in the captive formation stage. These owner-centric benefits have been well-documented. But, certain types of captives offer so much more than profit preservation for the owner. Many of the less obvious benefits are underemphasized and under-celebrated.

This article is focused on extended warranty captives formed by consumer goods retailers. It is intended to highlight three of the less tangible yet positive and powerful forces that go to work when a retailer takes ownership and control of its program.

Because we are referring to a program offered through the retail channel rather than the warranty of the product manufacturer, the more legally accurate name is an “extended service contract”. This term distinguishes it from the product warranty that is inseparable from the product purchase. The common theme of these three benefits fits the spirit underlying the key captive concept. That concept is control. 

What are extended service contracts?

An extended service contract is a contract between a goods purchaser and an “obligor”.  The obligor is a company required to satisfy the duties of repair, maintenance or replacement of the purchased product. Satisfaction of this duty is often arranged through an in-house service team or outsourced to local companies. The terms and conditions of the service obligation are set forth in the extended service agreement.

Unlike a manufacturer’s product warranty which attaches to the physical item at the time of purchase and without a separate price, an extended service contract is optional. It is separately priced and sold as a distinct line item on the customer’s receipt. In many cases, it is the goods retailer who offers this add-on at the point of sale. In other cases, the extended service is offered by a third-party warranty administrator not affiliated with the retailer through common ownership.

These contracts are in demand for higher value consumer goods such as large appliances, consumer electronics, and vehicles.  They are also in high demand for items such as expensive medical diagnostic equipment such as MRI and CT scans as well as other types of commercial and industrial machinery.

Each of these physical items typically comes with a manufacturer’s warranty limited in time and scope with no added cost. The extended service plan extends the term of coverage and often expands the scope of coverage. Consumer arrangements are frequently consummated at the checkout counters of hardware and appliance stores as well as car dealerships. Home builders also offer these products which cover a number of items and systems included with the home sale.  

A common example of an extended service contract may be the purchase of a 3-year extended service plan sold for $129.99 on a $1,200 LED television set. The 3-year plan here may cover certain costs and expenses in the first year that are not covered by the manufacturer’s warranty.

For example, first-year coverage for this plan may give free in-home service calls or free shipping costs on repairs so that its scope of coverage is larger than the basic manufacturer coverage. It’s this expanded coverage that makes the deal attractive even to those who believe the duration of the manufacturer’s warranty is sufficient.

Home and kitchen appliances along with heating and cooling equipment are almost always sold with an offer of an extended service plan. These plans also include additional coverages during the manufacturer’s term so that the first year of coverage does not duplicate the manufacturer’s warranty.

Benefit #1 – Enhanced Customer Relationships

Owning the warranty insurer is better for customer relationship building.  When the retailer is seen by the customer as the product seller and the quality guarantor, the relationship is strengthened. The ideal place for a retailer to occupy is the inside of the customer’s advisory circle with something to lose if things go wrong.

Selling an ongoing relationship is usually preferred to selling a transaction when one considers the true cost of gaining a customer. The extended service program can certainly be funded through a commercial carrier, but this takes away the key benefit of control. The ability to make the final decision on whether your customer gets a fourth repair visit or a new replacement product is powerful.

With ownership, the retailer can protect the relationship and set policies that serve long term goals. With this alignment between insurer and retailer, the brand becomes more valuable as goodwill increases. Not to mention, few things validate a consumer’s choice like a retailer that stands behind its sale.

Benefit #2 – Negotiating Power with Manufacturers

Knowledge is power. When a retailer owns and controls its own scorecard on the types of defects incurred, the timing of the defects and the relative failure rates by model and manufacturer, real knowledge translates to negotiating power.

Take a retailer that carries six brands of refrigerators. With its self-insured, self-administered service program, the retailer is armed with years of clean, reliable and robust information.  Metrics on every aspect of model failures including frequency, severity, and timing are available in real-time. The predictive value alone is useful. But leveraging that information during supplier price negotiations can boost margins and the bottom line.

Imagine that same retailer walks into the negotiation with a spreadsheet comparing defect rates and average costs by the manufacturer. The manufacturer has been shown that its burden on the warranty program is significantly higher than other suppliers even adjusting for sales variations. That failure rate directly impacts the servicing costs assumed by the retailer’s warranty obligor. Would you suppose a ten million account could obtain a purchase discount when this is revealed with actual data?   

To illustrate this point, we provide the graphic below that shows a manufacturer with a defect rate on washing machines that is clearly an outlier (Manufacturer E). This manufacturer’s warranty loss costs far exceed its share of warranty sales as a percent of the total warranty costs. Ownership of the warranty program means the information necessary to present this argument is under the control of the retailer.

An additional negotiating strategy is to protect your business with a guarantee agreement that requires your suppliers’ products to “not exceed” a pre-determined defect experience.  If a certain make or model does not perform up to the standard during long term use, the manufacturer is required to fund all or some of the excess loss incurred by the captive. With this type of agreement, the manufacturer becomes a de facto reinsurer and gains valuable information about design and defect issues evident only with information about the long-term use of its products.

Without the participation of the retailer in the extended service program, the manufacturer may not have a strong monetary interest in long term design defects. Product guarantee agreements are one way to get the finance team and the design engineers on the same page as the end-user.

Benefit #3 – Diversification with Higher Margins

Consumer goods is a highly competitive space. The volume at stake allows companies to sharpen pricing. But this environment makes retailers less focused on the long-term goal as it races margins to zero and beyond. Thin margin businesses require creative marketing programs, special offers, gimmicks and often times leads to the need to diversify in order to survive.

An extended service program is a creative way to take the sales of your primary business and turn it into capital surplus and margin. Properly run programs generate both short- and long-term profits for the risk owner that are typically in excess of the consumer goods margins.

Additionally, the time value of money offers an extended warranty captive owner the chance to partially fund losses on a mature program with investment income. Would a high volume retailer really want to surrender the most profitable part of the business to a commercial insurer?

Conclusion

Before launching a warranty captive, one of the first questions to ask of course is whether the consumer goods retailer knows whether the existing warranty program managed by a commercial carrier generates an underwriting profit. For many programs, the question may be difficult to answer. The long-term nature of a program that offers three, five- and ten-year promises means that the final score first-year business is not known until half a generation has passed. With the benefits of such a program comes cost and risks. An experienced program advisor and captive manager can make a significant difference.

The extended warranty captive of a retailer is much like other captives with financial benefits. But with retailers, the organizational benefits and control aspect makes the argument compelling. In any event, there will be an organization that will interface with the customer and provides the guarantee and the servicing. That organization is going to be rewarded with profits in exchange for taking the risk. So which organization should handle the program? The customer likely prefers the organization with a long-term relationship in mind.

The post 3 Unique Benefits of Extended Warranty Captives appeared first on Direct Claim Solution.

Each claims professional described in this article has a different purpose and end game. And, each uses different methods and tools to achieve the objective. But all share the common goal of resolving the claim.

Each participates in a type of clean-up effort.  Often, these professionals are brought together in some combination when someone or some “thing” got hurt. Conflict can occur as each attempts to ‘make it right.’ For fighting the good fight, all will be recognized by the deity of their choice when their days on earth are done. But, why wait until the gathering in the golden banquet hall to get to know one another? Let’s introduce the players now while there are still claims in the inbox.

1. The Carrier Adjuster

This claims professional comes in a few varieties but typically specializes in either property or liability.  The 1980’s version of this person likely handled both. Carrier adjusters use words like “coverage disclaimer,” “liability denial,” “reservation of rights” and “panel counsel.” They constantly ask questions about each other’s “pending volume.” A larger pending is a badge of honor in these circles.

The sad, unspoken truth is that being a prolific closer of files in this circle only gets you slammed with more files. They tend to talk about “lines” of coverage because they think about claims in terms of their relationship to insurance policies which belong to a certain “LOB” (line of business).

Self-insurance is a foreign concept. Their old system would not add a claim record unless there was a policy number associated. It is common for the carrier adjuster to be well-schooled in claims intake, assignment routing, and identifying an exclusion. But many have been swallowed by the processing and administration portions of the job, leaving little room for actual field investigation and gathering of witness statements. Instead, they often work their files through outside vendors and service providers. Their desk is like an airport hub where reports and info requests are constantly coming in and going out.  Damage appraisers and defense attorneys pour information on the carrier adjuster by the gallons, and it’s their job to soak it all up like an air traffic controller the day before Thanksgiving.

The carrier adjuster faces obstacles right out of the gate when a claim is assigned.  The days of one set of forms per insurer were over a long time ago.  Today, insurers issue policies under a dozen different NAIC issuing companies and each policy form is slightly different. Although it can take some work to deny coverage, the carrier adjuster is secretly happy to deny but not for the reasons you may think. A coverage denial is one quick way to be “done” with a claim. Many carrier adjusters have become the victims of out of control business processes that prevent actual work from getting done. Actual tears will flow when the claims manager has to tell the carrier adjuster that they must drag along the carcass of a green screen AS/400 system for another 5 years because “we can’t afford a new system.” 

The ideal day for a carrier adjuster involves attending a mediation or conference. This provides the chance to work with outside defense counsel to craft a settlement within authority and within current reserves.  Carrier adjusters are often controlled by their diary of tasks and deliverables. They must meet reserve setting deadlines and must be timely with reserve adjustments in order to avoid a negative audit.  A harrowing day for a carrier adjuster is claims committee day. In this setting, they argue and recommend a handling strategy that calls for settlement or trial. Confident adjusters enjoy making recommendations to “pay no more than.” Really confident adjusters recommend trial. Contrary to popular belief, the appetite for a trial decreases as you climb the insurance claims hierarchy. Carrier adjusters are painfully reminded that the defense dollars it takes to get a case to trial often makes settlement the best resolution…. as compared to all other relatively bad financial outcomes. This fact is a massive hidden cost of a broken legal system, but we shall not digress. The best thing a plaintiff attorney can do to a carrier adjuster is make a final demand in the upper stratosphere.  Nothing makes the job easier than saying “no” to an absurd demand.

2. The TPA Adjuster

The Third Party Administrator Claims Adjuster has seen her share of hell on earth.  The TPA adjuster is especially motivated to serve her client, which is often a self-insured organization, captive, or risk pool.  She usually feels a strong connection to that customer and knows their business well.

Of course, TPA owners are true “fee for service” businesspeople. And, often times, the amount of work and servicing required barely turns a profit as the work tends to expand over time, but the “fixed price” does not move. TPA adjusters can be overworked and undertrained. Depending on the structure, some TPA adjusters are dedicated to a certain industry or account and can actually get their hands into the meat of investigative and legal issues. Those adjusters become proficient quickly with the repetitive issues found within the volumes of food poisoning or slip and fall cases, for example.

The TPA Adjuster is used to doing a lot of external reporting.  Letters to excess carriers and letters to the client contact are a normal part of everyday life.  The reporting can be counterproductive at times as clients may require a report every time the TPA adjuster inhales oxygen. For a stretched TPA adjuster, these requests are like pulling up the flowers to see how the roots are growing.

3. The In-House Claims Professional

In-house claims professionals may work in the legal department or the risk management department of a larger organization. These claims professionals may be lawyers, so it is important to understand their perspective. Their goal is to cut off liability and reduce or eliminate the chance of a future claim. They see many interactions through the lens of the litigation forum and are quick to understand the impact of poor investigation.

In-House Claims professionals are able to spot issues and complexity. Typically, they are not hampered by stale or outdated processes which gives them great autonomy. Although their overall volume may be less, the average level of difficulty is relatively high when compared to other claims professionals. They may outsource and manage service providers and defense counsel and usually have their favorite “go-to” lawyer on the outside for regular consultation and guidance.

In-House claims people work closely with risk control and offer strategic ways to reduce exposure. They do this because there is no hiding in this role.  Do a poor job, and you’ll be back at InsureCo in no time. These professionals pride themselves on knowing exactly what the insurance policy says in terms of coverage, conditions, and exclusions. Depending on how business savvy they are, some get creative on alternative ways of resolving problems other than the traditional “deny, defend, litigate, mediate strategy.”  You can tell someone is in-house because they use words like “exposure” and “retention” or “excess layer.”  They have a keen sense for what to prioritize, and they usually set the tone for the organization’s appetite to try cases.

4. The Subrogation specialist

The subro specialist is a special kind of annoyance in the industry…unless he is on your side.  Many insurance companies have learned that pursuing loss recovery takes a special kind of person that is in almost direct contrast to the defense-minded claims adjuster persona. Subro specialists are part of the bizarro world. They are on the attack and may have cauliflower ear from spending so much time on the phone doing follow-up from their demands.

Subro specialists have a high volume of work and often deal with a high degree of complexity in the area of accident reconstruction, origin and cause and allocation of fault. These professionals are greatly underappreciated for their skills and their value to a company.

Subrogation is the red-headed stepchild of claims. Subro specialists are not understood by the traditional claims adjuster nor are they welcomed into the club by plaintiff’s counsel. They assert rather than defend claims. Because they work for insurance companies, the plaintiff’s bar shuns them. A subrogation specialist quickly learns where the low hanging fruit is and when they may need to climb a long, steep hill and risk finding a lump of coal instead of a pot of gold. They use words like “arb” (short for arbitration), “restitution,” and “responsible party.” Their greatest tool is a well-reasoned demand letter and a smart claims system that understands their needs. But, many do just fine by assuming liability and writing a “please pay us” request.

An exciting day for a subro specialist is when they get word that a brass fittings manufacturer just admitted their poor design caused thousands of homes to flood during a particularly cold winter. Their finger-pointing can serve society well. Properly placing financial responsibility with the source of the problem keeps everyone focused on safety and loss prevention. But, if this was a claims pool party, the subro specialist will be the first to do a cannonball near the cupcakes.

5. The Broker-Agent Claims Representative

See also, “box of chocolates.” You truly never know what you are going to get here. The broker claims rep can be someone from the sales side of the business or an underwriter in transition. They can also be a well-trained coverage expert who knows the policy inside and out. The goal here, coverage for all and coverage now.

There are reps whose sole purpose is to obtain coverage for expected property damage, stemming from a drug transaction in mainland China, submitted by an incidental beneficiary of a voluntary worker hired to remediate a chemical spill. You can talk conditions and exclusions until you turn blue, but you will wind up paying defense costs under a reservation of rights somehow. 

The agency claims rep sees the world differently.  “If it’s not covered, why did my client buy the insurance in the first place,” they ask. This is where the carrier adjuster has to admit that the warranty coverage applies only to…. “things that never break.”  Ouch! Score one for the policyholder. Indeed, the broker rep is a necessary part of the process. 

No one should see a doctor alone and no one should seek insurance coverage alone. Having an advocate in the room is a great protection against getting the run-around. The broker claims rep strength may actually lie in “not knowing” the coverage back and forth because it forces the carrier to explain the purpose of the policy in plain language. Few underwriters can even do that. Headscratcher since they sold the policy.

Day to day interactions between claim professionals can be difficult. Increasingly, dialects and terminology are getting more diverse.  For that reason, this light-hearted portrayal of certain claim personas is helpful for all to keep in mind.

The post Five Claims People You Meet in Heaven appeared first on Direct Claim Solution.

You also want to improve the vendor process and workflow efficiencies. You expect your new system to be in place for the next 20 to 30 years. With that in mind, it should be adaptable for growth as well as the inevitable changes.

Here’s the question. Are you thinking about extending access to your service providers using a shared claims software system?  If not, why not?

What is a Shared Claims Software System?

A Shared Claims Software system allows an organization to extend direct access to external stakeholders. That’s right. In addition to optimizing the efficiency of internal staff and management, a shared system makes your service providers better. It does this by simply allowing users that are external to the organization to have login credentials and a set of defined permissions to view, add, edit or extract information.

In a shared system, specific workspaces that you populate and view are shared directly with others. Because risk and insurance involves a large number of vertically aligned service providers in the chain, a shared solution is a highly effective way of bringing many specialists together to a common location for information exchange. To create such a solution, the system designers must possess in-depth knowledge of each user’s contribution within the big picture workflow.

The key advantage of a shared solution for a claims department is that a common workspace eliminates the need for internal staff to request reports, receive and process reports and then re-type summary information. For many claim professionals, those tasks take up 80% or more of their entire workday. Worse yet, much of the effort is not ‘value-added’ because it is heavily administrative and only partly analytical.

There is a better way. In having direct access to the system, service providers such as defense counsel, damage appraisers, and assigned experts can deliver their work-product in the exact format and order preferred by you “their customer.” Direct access eliminates the need for processing, interpretation, and transcription from an externally provided document. It’s a direct pour into the claim mold.

The key disadvantage is that external service providers have access to your system. But never fear, this is where smartly designed software offers one of its most valuable tools. That is the two-pronged security feature of data isolation and user permissions. In data isolation, claim records not assigned to a vendor are not accessible.

Further, a “Rights and Permissions module” defines what pages and functions can be seen and operated by users based on that user’s assigned role. Limitations can be set such that external users may only view and edit certain areas of the system such as the litigation or subrogation screens. A rogue external user can be prevented from modifying data in places that should not be modified. And, a single question on the user-setup page tells the system who is “internal” and who is “external.”

External users can be “walled off” from viewing claim records that are not within their responsibility. With these security features, access is a highly manageable risk.

The Use Case for Litigated Claims

A perfect example of the benefits of sharing is seen in the litigation handling context. Litigated claim files rightfully garner a lot of attention. These are files that result in an exponentially higher cost in terms of time, energy and money. They often involve several outside service providers to assist with coverage issues, fact investigation, witness statements, legal research, and valuation.

Companies spend massive dollars on discovery and settlement efforts for litigated files. These matters typically have the longest cycle time and largest negative financial impact on results. So, how can a shared system minimize the blood-letting on a litigated file?

First, it is important to understand that a shared system does not change the respective roles and responsibilities of the parties involved. There is still a claim professional responsible for the overall handling of the claim file to resolution. That claim professional assigns and manages all service providers working the case.

Service providers perform a variety of functions from investigation and legal research to appraising damage and theorizing causes. Service providers conclude their work with reports that include findings, opinions, and recommendations.

The Problem – Excessive costs of information exchange between claims professionals and service providers. These costs are evidenced by rising headcounts, increasing pending claim volume, and increasingly poor quality of claims handling amid a level inflow of claims.

Current Process – The industry is predominantly using litigation report templates and emails to communicate. The defense firm (service provider) typically has dozens of clients, and each client has its own version of the “proper” litigation report template.

Claims professionals send email notifications to defense counsel to request overdue reports and grant extensions of time. Few claims professionals can keep up with their litigation caseload. Their requests for information and subsequent review of that information is often severely delayed. Defense attorneys are often unable to keep up with reporting deadlines and either fail to submit reports or submit them untimely for various reasons.

Additionally, defense firms are unable to keep up with the template differentiation across clients and subsequent changes in those templates as dictated by each insurance company from time to time. In this kind of slow traffic, claims start to turn sour for everyone involved.

Shared Software as A Solution – With a shared system, the claims professional directs the system administrator to add the service provider as a “vendor” on the claim record. Once complete, that service provider defense attorney can directly access the litigation management screen and other select features within a cloud-based system. Fields and content can be populated by the defense attorney with key information summarizing investigations, legal research, and valuation of the claim along with procedural developments in the case. Demands by plaintiffs can be tracked, and recommendations can be entered directly into the claim system.

This direct access eliminates the need for the defense attorney to locate the most up-to-date litigation template, and then complete and send for review. In turn, the claims professional must receive the report and translate or interpret key data into respective claim system fields. The shared solution brings the voice and the eyes of everyone involved in the same location where collaborative claim analysis can be accomplished.

Who Will Drive the Demand for This Feature?

The most likely scenario is that TPAs, startups, captive insurers or risk retention groups will push this innovation toward shared software. These organizations can quickly adapt their current systems or transfer to new systems with this capability. Vendors that charge hourly fees are not likely to push this efficiency although it would forge better relationships. Larger commercial carriers may have an incentive but lack the ability to pull this off in most cases.

Many insurers have struggled with implementing changes. Granting access to a vast number of service providers requires centralized controls and addressing security issues across an extensive network. This can be a roadblock in large bureaucracies that have built armies around the old methods.

Relatively smaller organizations like captives and risk retention groups are also more likely to outsource experts and create a broader group of external system users. That kind of structure would find tremendous value in a shared system that brings outsourced expertise inside the ‘production environment’ with an immediate impact.

Direct delivery of the work product of professional services in the desired location and format translates to significant value and a huge leap forward in claims handling and resolution. The concept has been tried before with incredible success. Many years ago, underwriters and software designers imagined an agent portal to serve customers better and eliminate redundancies. In that way, application information could be entered by agencies seeking to quote new business.

Direct entry into the system eliminates long wait times and enforces the validity of required information.

Conclusion

While futurists are working on artificial intelligence and blockchain, a number of easy solutions to claim handling inefficiencies remain unaddressed. The waste of exchanging information by use of emails, attachments, and disparate vendor templates that are all inconsistent with the destination client system along with all of the noisy administrative coordination to request, receive, review and translate work product is seriously harming quality and results.

There is an opportunity that brings real advancement to this process, and it lies in offering vendors direct access via a shared claims software system. In real practice, the failure to have sharing software creates far more risk and cost to the claims organization than providing managed access.

The post Shared Claims Software is the Future appeared first on Direct Claim Solution.

The 8 Ingredients for a Successful Claims System Implementation

As your company migrates to a new system, keep in mind these 8 ingredients to ensure your claims system implementation is a success.

#1 – Choose Correctly – Popular Vs. “Right For You”

The first place to start is with system selection. Choose software that is right for your organization’s needs. Every claims department has a unique profile. Consider factors such as:

1. the kind of exposures handled
2. the volume of pending and new claims
3. the number of users
4. intake and coverage review processes
5. the degree of outside access

The interplay of these factors determines what is right for you. Specific questions should be answered in detail, such as:

• Are we a quick turnaround processing shop?
• Is each claim a complex project that involves sophisticated tools of investigation and analysis?
• Is speed our primary objective or is it critical that we get every aspect of coverage, investigation and legal analysis correct?
• Are we a self-insured organization about to purchase a commercial carrier claim system? If so, why are we doing that when there are systems that cater to the self-insured?”

These are important considerations.  The choices of “off-the-shelf,” custom tailored or home-grown systems should be made carefully and depend largely on your organization. The smoothest implementation of the wrong system is just a giant step backward.

#2 – The Right Project Team with Sufficient Time

The challenge here is that many organizations with a need for a new system are hampered by a lack of time. And, the lack of time is often caused by a bad system. If your internal point-person and others responsible for working with developers are pressed for time because they are working a claim load at 120% of capacity, the project may fail. The project team needs sufficient time to think critically.

A new system offers great opportunities to put a superior process in place and support the process with tools and information to guide claims adjusters. A team pressed for time may simply make decisions to “get through it.” Or, they may not have adequately addressed the details needed for developers to design the best solution. Some companies hire outside parties to assist in this important area because they lack the white space to spare key people for prolonged projects.

Perhaps equally important is forming a team that has input from underwriting, marketing, accounting, and risk control. Creating a cross-functional team will ensure that the system’s inputs and outputs spread the advantages across the company.

#3 – Internal Staff With “Know-How”

In addition to the time resources needed, the internal team must have a near mastery of the company’s claims department. This is one of those cold and harsh truths. If the lead person does not fully understand how the claims system must operate efficiently to serve not only the claims department but also underwriting, accounting, subrogation, litigation management, and the agent network, the system is not going to live up to expectations.

An implementation is challenging for even the most experienced and knowledgeable claims professional. The sheer number of issues to be adequately addressed is daunting. The depth of detail of many of the issues is enough to make you wish you got into rocket science. A good project team must have the deep knowledge to see the project through to the point of universal success.

#4 – Internal Buy-In

Knowledge and time are necessary but not enough. The internal group responsible for the implementation must be fully committed and hungry to go through the process. The “buy-in” is necessary because perseverance can only happen when the person quarterbacking the implementation believes in it. System implementations fail when the lead person simply does not see the benefits of a new and improved solution. There is no faking your way through a project like this.

#5 – A Software Vendor That Understands Your Specific Business

It’s not just the internal challenges that can sink your implementation. The project manager on the vendor side must take painstaking steps to fully and completely understand the industry, the business, the people and processes that surround the contemplated new system. This requirement is not an easy task. Everything counts here. The vendor should perform a thorough review of the organization’s departments, processes, forms, and templates.

Conversely, the software buyer must be willing and able to educate the vendor by highlighting the fine grains of distinction that separates their business from the generic. The process takes time and should not be rushed to meet a deadline.

#6 – Project Momentum Management

Some projects are truly massive and take a long time to complete. But if a project lingers too long with little or no direction or progress, the chances for failure rise. Multi-year projects are not uncommon. If they involve the focused effort of 10 to 20 key people, staff turnover is a real risk.

System implementations can be like surgery where you don’t really know what you have until you open things up and look around.  For that reason, initial planning and mapping can be helpful but will not necessarily prevent issues of scope-creep, indecision, miscalculations and delays.

#7 – Consider Recent or Future Business Changes and Direction

Was the goal of the new system to solve yesterday’s problems?  Be sure the system being implemented has the capacity to move the company forward. Some implementations replace an old data storage system with a new data storage system that holds more data. A small step forward but not exactly the system of the future. Rethink the workflow and business processes that are currently in use.

Do this before you imagine your new system’s features and not after.  Then, you will have the freedom to create and implement a high impact system for the business you want to become instead of the business you were 5 years ago.

#8 – Think Deeply About the Proper Scope and Limits of the New System

Should this system be all things to all people?  Or, do we unbundle and create the perfect claims system that integrates with the policy system?  Is it more or less problematic and secure to share this platform with external users?

There are many important scoping questions that should be thought out in light of what your business needs. Everyone talks about scope, but few truly know how to contain it properly.  Limits of the project cannot be chosen arbitrarily. It’s not helpful to build just the front half of a car. If that one extra module in the system will complete a workflow loop so that there is a common location for related information, by all means, build that module into the system.

A good example here is the implementation of a coverage analysis module inside of the same claims system that holds information about the facts of the claim, the claim notice and the policy details. Inclusion of this module inside the claims system eliminates needless duplication.

Conclusion

System implementation is delicate. The project’s requirements should be defined clearly while also leaving room for flexibility. Most systems end up requiring far more customization in both number and degree. It is important to develop a strong relationship among the people involved. Your RFP may prove out who’s best at a beauty contest, but your company requires accurate function and elegance.

The post 8 Ingredients for Successful Claims System Implementation appeared first on Direct Claim Solution.

Before you answer this question, think about your organization’s claims system design. Does it properly highlight the important information you need? And, does it present that information in the right order?

Scorebug Graphics

One of the most watched television networks in the world changed its scorebug graphics for college basketball. In 2017, ESPN introduced a new scoring banner in its lower third. This change caught my attention immediately. By the way, who knew the banner on the screen was called a scorebug? This banner is incredibly important to anyone watching sports. It is hard to imagine how we watched sports before these were introduced. Just the same, I wonder how claims were handled before software gave us a proper screen display.

ESPN’s new scorebug graphic is a reminder to software designers and system buyers. The new graphics heavily highlight the score of the game in large bold font. What’s wrong with that you ask? Well, there was a simultaneous decision to put the team names in a smaller and less prominent font size. So, the thing that pops most visibly is the Score.

The Argument

I have no doubt there was a heated conversation about this change. One side of the argument probably went like this: “The score is what people want to know most!  We must bold and “biggie size” the score of the game. The score is critical.”

It would seem like a great argument. No doubt that the score is really important. It’s the item on the banner that likely changes the most other than the ‘time-remaining’ in the period. It is probably the most frequently sought information while watching.

The other side of the argument which clearly lost the battle at ESPN probably went like this:

“Wait, yes, I agree the score is really important and should be prominent and visible. But, here’s the problem. The score is only meaningful once you know what teams are playing. The ‘who is playing who’ question is the first question. Only when that is known and held in one’s memory does the score matter. Score is only important when you know who is playing. We cannot throw two large numbers at a viewer like a hot potato and ask them to hold that information in their head before they have a place to put those numbers. The question of ‘who is playing?’ is primary. If I just hand you the numbers “48” and “36”, you will drop them to the ground unless I first give you a place to put them.”    

I have no doubt this argument was faced with a seemingly valid, but flawed response by the more powerful personality in the room. The response likely went like this:

“Once you know the teams playing from your first inquiry, you then only need to know the score from that point on. So, the graphic of enduring value, as viewers flip channels, is the score. We are going with a large, bold font that shouts over the team names and that’s that.”

Something about the new graphics definitely bothered me. And, from the feedback I observed online, it bothered others too. I did not immediately connect the dots on why, but I was bothered. It was an ‘interior and abstract discomfort’. Then, it hit me. ESPN got it wrong. As my 9^th grade English teacher would say, “the actor comes before the action” when writing in active tense. That may seem philosophical and even biblical at some level, but the world is right when we first know “Who”.

Order Matters

In software design, the principle holds true.  When you look at your organization’s claims software system, you get so much more than just information. You get a glimpse into what the designer felt was most important. You learn about order and importance with regard to functionality.

If your claims system was not designed by a person intimately familiar with claims handling, they would tell on themselves with a poor layout. They will design a system with fields out of order. They will fail to prominently display key information leaving an impression of equality between the primary and the subordinate topics. Use of the program will be awkward, causing wasteful navigation.

Getting It Right

The proper ordering of information to facilitate function is the ultimate sign of intelligence. It would have been interesting to be in the room at ESPN when they debated the new scorebug graphics. Does order matter? Tell me what you think or send me an example of your system design success or failure.

The post Scoreboards and Claims Systems Design – Why ESPN Got it Wrong appeared first on Direct Claim Solution.

That practice is completely understandable. But how many risk managers are familiar with the long history of past policies purchased by their organization? Or policies inherited from a recent acquisition? It’s important to understand prior history to be able to tie a claim to the correct coverage or policy.

What Triggers You?

A thorough review and summary of all past and present insurance policies may be worth its weight in gold to a risk manager. Why is this important?  Lapsed or expired policies are, in many cases, a company’s most significant risk management asset.

Ask a risk manager for any college university facing sexual misconduct allegations. Consider how municipalities are impacted when law enforcement activity from the 1980s becomes the subject of a new lawsuit. When conducting your historical review of policies, remember to ask the key question, “What triggers you?”

The Coverage Trigger

In the insurance coverage world, the term “coverage trigger” refers to the event that must occur before a loss implicates a particular liability policy. The trigger date becomes the claim date or date of loss for the purpose of claim system setup.

Something Has To “Happen”

Each insurance policy and each coverage grant within that policy provides coverage based on some type of “happening.” The “happening” is the triggering event that must occur within the policy term, but it is not always the day that a loss occurred.

Examples of “happening”:

1. An event that leads to wrongdoing such as an unlawful arrest or an unwelcome remark of a sexual nature. Some call this the wrongful conduct date or date of the offense.
2. Initial onset of physical or emotional harm often referred to as the date of injury.
3. The last event in a set of legally required elements that forms the basis of a claim. An example may be the date of publication of a defamatory statement.

There could be some amount of time between the unlawful conduct and the resulting injury.

Claims-made triggers, often used in professional liability policies, set the trigger date to the day when the claim was first made. In these instances, claims-made coverage rarely coincides with the date of the wrongful conduct or the date of injury. An advantage for insurers who issue these policies is the likely elimination of consecutive policy trigger which can result from injuries caused by frequent exposure to a harmful condition or ongoing harassment.

The point here is that an erroneous determination in this critical area can cause the misapplication of limits and deductibles. In some cases, it can implicate the wrong insurance company. Rather than reviewing the wording of policies after a claim is made, a better practice is to dissect and summarize each coverage part for every policy before a claim is made.

Coverage Forms Chart

The chart below shows various coverage trigger examples that may be found across certain commercial coverage types. Your risk management department would benefit from creating and maintaining a chart like the one below. It should be combined with an annual chart of insurance policies with effective dates, limits, deductibles, and conditions that apply to each policy.

As shown above, bodily injury or property damage claims for general liability and commercial auto coverage implicate the coverage term in place when the injury or damage occurred. For example, take the case of a retail customer injured from a slip and fall in a car dealership showroom. The negligence claim against the dealership alleges that an unreasonably slippery floor caused the fall. That claim will attach to the policy in-force at the time of the injury and not the policy in-force at the time the flooring was installed. Since the general liability policies for most organizations also include coverage for personal and advertising injury, it is important to break out that coverage portion into a separate row for analysis as shown in the chart.

For professional liability coverage, sometimes referred to as “Errors and Omissions” coverage, the trigger would be the date of the wrongful act if written on an occurrence basis. For example, the date of loss may be called the date of wrongdoing, but most professional lines coverages are written on a claims-made form.

Claims-made coverage alters the analysis. A claim is typically defined as a written demand for damages. For example, a notice of claim or a letter of retention from counsel representing the claimant that mentions the pursuit of damages likely constitutes a claim. A lawsuit is almost certainly going to qualify as a claim. Claims-made coverage analysis asks, “On what day was the claim first made?” This question may involve some degree of investigation and discovery in matters where verbal and written communications dealing with a series of related events have taken place. In ordinary practice, insurers place policyholders on notice that a claim’s “loss date” is being investigated to correctly determine whether coverage applies and if so, which policy.

Trigger Theories

To make things even more complicated, there are a number of trigger theories used by courts to determine when a policy is implicated. These theories are used to determine coverage on occurrence-based coverages under commercial general liability policies.  Depending on the type of injury or damage alleged, one of the following theories may be applied.

1. Injury-in-fact theory – the date when injury or damage actually takes place
2. Exposure theory – the date when exposure to the harmful conditions first occurs
3. Manifestation theory – the date when injury or harm is first discovered
4. Multiple or continuous trigger theory – multiple dates including actual harm, exposure to harm and discovery of damage

Depending on where your organization’s liability claims are likely to be litigated, any of these theories may be applied. It would be helpful to know the court rulings in this area of the law before you discuss changes to your insurance program.

Conclusion

The practice of summarizing and maintaining a chart of insurance coverage is essential to protecting an organization. The chart will help bring instant knowledge and handling ability to any claim coming through the door. Instead of scrambling to find historical policies and reaching out to brokers and agents of yesteryear, your coverage chart prepares you to immediately notify the correct carriers and coordinate a defense in a timely manner.

The post What Triggers You? A Question for Every Insurance Policy appeared first on Direct Claim Solution.

The Coverage-Liability-Damages (CLD) Formula

The formula may seem obvious on its face. In practice, it is frequently ignored. Like most formulas, this one has a step-by-step priority. The tendency across the industry is to either fail to recognize this formula or fail to apply it correctly. Many give in to the temptation to start evaluating and investigating liability or damages as their starting point. Liability is often more interesting and colorful. Damages often appeal to the financial instincts of the claims staff.

Further, coverage is seen as either really easy to determine or ridiculously complicated. Some claims professionals come from areas where coverage is rarely an issue or where coverage is “assumed” until proven otherwise. Many assume the agent submitting the claim already determined there was coverage so “why should I question that?”  That mindset can lead to serious mistakes.

The Simple Road Map for Claims

The three main issues of Coverage, Liability and Damages act as a road map. The formula also communicates the proper order for resolution. There are many sub-issues to analyze, and each topic has its own workflow and checklists for getting through those sub-issues.

But, all issues essentially fall within the “Coverage, Liability, and Damages” formula. Whether the claim stems from an auto accident or a multi-party, multi-occurrence sexual harassment matter, the framework offered by the formula still applies.

Why does the order matter? Focus on these steps out of order and the handling of the file is in jeopardy. Of course, parties in a dispute can certainly agree to litigate issues of liability and damages first and preserve arguments over coverage until the liability determination is made. In cases where the potentially high cost of a coverage dispute dwarfs the cost of litigating the underlying claim, it may be wise to proceed with a damages determination.

To be clear, the formula does not mean that an analyst should delay or fail to preserve evidence related to liability and damages just because coverage questions are looming.  If physical evidence or witnesses are involved, consideration must be given to the need to gather items and statements that may not be available after a delay. And, the formula does not signal that an adjuster must make an immediate decision on coverage before even examining and analyzing liability and damages.

An effective practice is to put a formal placeholder on a coverage position while reserving the right to argue later.  Reservation of rights letters are commonly used to address delays involved in coming to firm conclusions.

Nonetheless, the order in which these issues are concluded can have an impact. Take the example of the hasty insurance claims adjuster. The hasty adjuster skips over issues of coverage and moves straight into the collection of witness statements and records on issues of liability and damages. Perhaps this rush is an unintended consequence of a misguided initiative to post case reserves before “X” number of days. The adjuster may assign defense counsel without first reserving rights to later assert a coverage position.

In asking for damage estimates and assigning defense counsel without first warning of non-coverage, the adjuster sets up an expectation in the policyholder’s mind that the matter is under the control of the insurance company and covered. These actions can be misleading and create an estoppel argument for the policyholder seeking coverage.  In many companies, coverage work is handled by a separate claims professional in order to avoid these very issues.

Another example is the case of the “operations-oriented” General Counsel. Eager to get the production facility up and running after a fire, the General Counsel directs plant management to proceed with the removal of a large piece of food processing equipment that caught fire. The problem is that the disposal occurred prior to a cause and origin investigation. Could this move jeopardize coverage under the plant’s excess liability policy? Could it also impair loss recovery efforts if negligent wiring by the equipment maker was the cause? The answer is “yes” to both of these questions.

Self-Insured Claim Handling

Does the CLD formula apply to self-insured claim handling? Yes. The practice of first starting with coverage questions applies no matter what perspective you have as a file handler. You may simply be the oversight adjuster working on behalf of a self-insured that outsources files to a TPA. You may be a claims attorney working in the legal department of a self-insured university. This formula still applies.

Even self-insureds must first be concerned with policy coverage at the excess layers or rights to indemnification by other contracting parties where risk is shared or transferred.

Notice to excess carriers is a critical responsibility of every self-insured. While the duty to report a claim may be determined by the agreements in place, the analyst must consider the notice requirements. Secondly, the self-insured claims analyst should understand that taking certain positions during the pendency of claim defense may hamper the ability to take an alternative position for the purpose of coverage litigation.

An example is the situation where a self-insured company argues that an employee acted ‘outside the scope’ of employment in order to bolster its liability defense.  However, that position creates a problem if a defense duty hangs on the question of whether the employee was acting inside the scope. Simultaneously taking two positions that are incompatible are bound to be problematic.

Even if damages are assumed to be well within the Self-Insured’s retention, coverage matters. Certain policies may contain aggregate limits on the SIR such that coverage attaches after a certain aggregate dollar limit is reached.  In other cases, numerous events may be considered related such that a final determination of coverage cannot be made until after more claims have come to light.  In such a situation, a self-insured failing to properly identify coverage issues or failing to provide notice to all potential insurers will undoubtedly face coverage challenges.

Conclusion

The Coverage-Liability-Damages approach to liability claims is time tested. It has served many managers and adjusters in their ability to competently present recommendations before a claims committee. It dictates some level of organization in workflow and analysis.

Those who do not use the formula wind up gathering dozens of “claim-bits” on issues without putting the full claim story together.  With disjointed pieces as the finished product, there is little chance of getting the right resolution strategy together.

The post The Claims Handling Formula You Cannot Do Without appeared first on Direct Claim Solution.

Against the backdrop of a burgeoning lawsuit minefield, a critical function of litigation managers and claims departments is to measure the value of their defense attorney dollars against alternatives. This is where litigation scorecards come into play.

California Leading the Way with New Laws

Law firms that do corporate defense work are strongly encouraged to develop their own litigation scorecards using these metrics. In that way, someone else doesn’t “tell your story.”

In 2019 in California alone, there were dozens of new laws put into effect as of January 1^st. Laws addressing issues such as breastfeeding at work, regulation of street vendors, plastic straw bans, healthy child drink mandates for restaurants are just a few that go into effect for 2019. For publicly held corporations with executive offices in California, a new 2019 law requires that at least one corporate board member be female.

A few key metrics serve to assist in this scorecard endeavor.  Take caution.  These metrics are strong indicators.  But they must be coupled with actual first-hand knowledge and experience with the professional service providers to which they apply.

A ‘litigation scorecard’ should always be accompanied by a written analysis that explains the results as well as the methods used to obtain the data.   There are usually aspects of the data that an independent business analyst may not see or appreciate, so it helps to have claims management deeply involved in the gathering and analysis of this data.

The key metrics are:

• Cycle Time
• Median Legal Spend
• Median Settlement Amount
• Dismissal Rate.

#1 – Cycle Time

The first metric and most important in my view is cycle time.  The best definition of cycle time is the number of days between the initial defense assignment date and the professional services completion date.  Cycle time almost always ranks as the most useful predictor of relative value.  That is, those defense firms ranking high regarding ‘lowest cycle time’ are usually ranked higher in dismissal rate, median settlement amount and median legal spend.

Getting accurate and fair data for cycle time can be elusive unless the claims system captures ‘assignment date’ in a separate field as well as ‘completion date’ by defense firm.  Claim open and closed dates will not suffice for this metric.  And, in case you were wondering, your spreadsheet software will, in fact, subtract one date from another in your ‘completion minus assignment’ formula to give you the number of days.  The goal is to capture the time it takes the defense firm to perform its services and should not consider the time before or after the litigation assignment based on processes completely out of the defense firm’s control.

Having collected good data on cycle times in the past, I learned the importance of segmenting claims by matter and jurisdiction.  In my experience, matters involving auto injuries tended to have lower cycle times than employment practices cases.  So, do not compare your Ohio auto defense specialist to your Ohio employment law firm without segmenting the claims by exposure type.  Cross-jurisdictional comparison will also account for variations in your scorecard.  Your West Virginia defense firms may only be comparable to firms handling cases in other judicial hellholes like Cook County Illinois for example.

#2 – Median Legal Spend

The second metric is median legal spend.  Median legal spend is different than the average legal spend.  Averages include all observations. Averages distort metrics when there are outliers.  In using “median,” the effect of outliers is greatly minimized.  As with cycle time, median legal spend must be viewed in light of the types of cases, the jurisdictions and the average complexity of the cases being assigned.  As an aside, I am a proponent of scoring the complexity of a case based on (1) the number of parties, (2) the number of liability theories being defended, and (3) the number witnesses.  All of these factors greatly influence the legal defense budget.

#3 – Median Settlement Amount

The third metric is median settlement amount.  This metric receives the most ‘push-back’ from law firms.  Median settlement amount can be a measure of the law firm’s negotiating expertise.  Or, it can be an indicator of the willingness to ‘buy peace’ as they say. The more you value peace, the more expensive it becomes.

One aspect of a solid defense firm is its ability to instill confidence in the way it develops the strengths of the defense.  A defense attorney that builds up a solid defense and communicates a feeling of confidence is more likely to embolden claims management to stand firm on their offers.  Of course, one must know their own company’s tolerance for litigation to put this metric into perspective.  And, if there is a change in settlement philosophy, this metric can produce false negatives.

Firms whose median settlement amounts are significantly higher than or significantly lower than other comparable firms must become a focus. This is especially true if those same firms offer little to no offsetting reduction in cycle time or legal spend.  A good claims management technique is to explain the variance with reasoning and then test the hypothesis against actual cases.

#4 – Dismissal Rate

Finally, the fourth metric is dismissal rate.  Dismissal rate can be measured as the number of successful attempts to dismiss an allegation of liability divided by the total number of dismissal attempts.  This can be rated at the “allegation” level or “claimant” level.  Or, if only available at the claim level, this may suffice.

There is tremendous value in dismissals.  Other than the obvious elimination of the threat, a dismissal sends a signal that the defendant is willing and able to fight back.  The plaintiff’s bar is keenly aware of who is likely to fight and who is likely to settle, and it often factors into their calculations.  Believe it or not, seasoned personal injury attorneys collect and record the tendencies of your claims adjusters so they know who they can exploit for higher settlements.  Because actual trial verdicts are rare as a percentage of cases filed, dismissals are fast becoming the ultimate homerun ball of defense litigation, and their frequency should be measured.

Conclusion

One aspect to emphasize is that the metrics should not be used in isolation.  The value of these metrics comes when they are viewed as a whole and as part of a qualitative valuation that considers overall client service, responsiveness, manageability, stability, staffing expertise, and other factors.  I never recommend anyone use ‘numbers alone’ to make judgments regarding which firms are ‘panel-worthy. Numbers alone are highly susceptible to throwing false positives as well as false negatives.

The post 4 Key Metrics For Your Litigation Scorecard appeared first on Direct Claim Solution.

Most people working in the insurance industry did not plan this career in their youth. But, after finding a home in this exciting industry, many of us are glad we fell into it. So, how did we gain the knowledge required to be productive? On-the-job training of course. Still, some concepts are difficult to learn “on-the-job” without a good mentor or a solid classroom-style explanation. After years immersed in the claims side of the business, I gathered a few gold nuggets from mentors and formal claims training. One of the most compelling lessons that stuck with me was the “bucket analogy”.

The Bucket Analogy Lesson

The “bucket analogy” gives a physical form to the abstract concept of a claim reserve. Finance and accounting terms like claim reserves and “incurred” vs. paid loss can be confusing. The “bucket analogy” makes a comparison between posting claim reserves and setting aside money in buckets. Its imagery is accurate and memorable. On that basis, I want to share it so that others can get the same benefit.

Imagine that a certain insurance company called InsureCo holds all of its cash in a vault located in its center conference room. This room is located on the third floor of its headquarters. The cash in the vault goes to pay for everything from agent commissions to staff salaries to building rent. Of course, InsureCo issues thousands of insurance policies and it anticipates paying claims as well. But, while sitting in the vault, all of InsureCo’s cash is stacked in one pile. We refer to that pile as the General Fund. None of the dollars in the General Fund know where they are headed.

Here is where the process begins. Each day as new claims are reported, the assigned claims adjuster gets a tin bucket from the claims closet and brings it to the center conference room. The adjuster then writes the claim number on the outside of the bucket and goes to the vault. Then, the adjuster inserts a piece of cardboard inside the newly labeled bucket separating the space vertically into left and right.

Next, the adjuster uses a special claims key to open the vault. With the vault open, the adjuster stares at the cash pile and considers how much money will be needed to pay for that particular claim given all of its unique characteristics. Adjusters use information about coverage, limits, deductibles, damages and the likelihood of payment. Then, they make a good initial guess. In order to set aside the money for anticipated future payments, the adjuster removes the estimated amount from the vault. He places it in an envelope marked with the claimant’s name. The envelope is then put inside the left partition of the bucket. Depending on the type of claim, the claimant could be the policyholder (first party loss) or some other person seeking damages from the policyholder (third party liability). This process completes the initial setup of a loss reserve.

After an amount is set aside to pay the claimant, a separate envelope is filled with enough money to pay anticipated expenses. These expenses are necessary to administer handling of the claim such as appraisers, outside loss adjusters, experts, record services and defense attorneys. That envelope would be labeled “Expenses” and placed in the right-side partition of the bucket. This process completes the initial setup of expense reserves.

Once sufficient monies are in their respective spaces of the bucket, the vault can be closed and locked. At that point, the claim bucket is ready to be held in the “Claim Pickup Drive-through”. This area is a large room in the corner of the first floor of InsureCo’s building. It looks like an oversized coat-check room and has a sliding window facing the outside which serves as the pickup window. This room holds all the numbered claim buckets that contain envelopes with cash. Each claim has its own bucket.

With the cash now separated from the General Fund, it goes from being “available” to “reserved”. Once reserved, the total amount set aside is considered a “Loss” from a financial perspective. That’s right. Once it comes out of the vault and into a claim bucket, the company’s accountant scores it as a “loss” on that month’s profit and loss statement. The claims manager at InsureCo properly calls this reserved money, “Incurred”. True, the money is still within reach of InsureCo and it is still a company asset. But, now it is an asset tied to an equal and offsetting liability. The recognition of that liability happens as soon as the money is put in the bucket. The affected liability account at InsureCo is called, “Losses Payable”.

InsureCo is like all insurers. It must take steps to separate out money that it anticipates paying for claims. And, it must do so when it has a justifiable reason to know of the loss. This is true even if there is no immediate need to make a payment and even if the exact amount cannot be determined.

What happens next? The claims adjuster investigates the claim in terms of the scope and limits of coverage and he values the damages that are owed. The adjuster may decide to change the amounts originally set aside to reflect a better estimate. If he decides his initial estimate was low, he may get more money from the vault and put it in the bucket. That transaction is called a reserve increase. Conversely, he may decide the initial estimate was too high. In that case, he may take money out of an envelope and put it back into the vault. That transaction is a reserve decrease.

Eventually, the claim is settled by a final determination of the amount to be paid. When that happens, the adjuster notifies the claimant to meet at the drive-through window where delivery of the funds occurs. Claimants only pick up monies from the left side of the bucket, the “loss” side. Service providers and vendors get paid from the right side of the partitioned bucket. That is the “expense” side. If there are monies on either side remaining after all claimants and service providers have been paid, the adjuster returns those funds back to the vault in the conference room. Some people call that process, “zeroing out the remaining reserves”. This is important because the adjuster is not allowed to return a claim bucket to the closet if it still has money in it. All buckets returned to the closet must be empty. In other words, claims cannot be closed if there is still money sitting in reserve. The process of “zeroing out” reserves reduces the “incurred” amount for the claim.

Understand that the “incurred” increases only when money moves out of the vault and into a bucket. “Incurred” does not change just because someone at the drive-through window picks up money. Also, understand another rule. Claimants and service providers get paid at the drive-through window only. No one is allowed to be brought up to the third-floor conference room to get paid straight out of the General Fund, i.e. the vault. The movement of money first to reserves and then to paids is what helps an insurance company maintain an accurate and timely picture of its financial strength. If not for reserves, insurance companies would be overstating net worth and income. Reserving claim losses creates a more reliable financial picture.

Conclusion

Why the bucket analogy? The bucket analogy creates the image of a physical separation between general funds and money set aside for claim payments. Of course, with technology and electronic bank accounts, companies do not need to physically separate money in its currency form. They simply enter accounting transactions that match the reserve and payment instructions fed into the claims system by claims adjusters. The analogy also illustrates that each claim has two key components with regard to outgoing money (Indemnity paid to claimants and Expenses paid to service providers). The loss component must be further allocated with separate accounting for each claimant and each coverage part. Use the bucket analogy as part of your claims transaction training and discussions. I think you will find it helpful to get adjusters, underwriting and accounting professionals all on the same page.

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