Why The Current Insurance Model Doesn’t Work
By Mark Proulx and Perry Hicks- Special to GCN
There is form of insurance abuse that might as well be called fraud. It is extensive, expensive, and outrageous but, you don't see much about it in the media, in insurance company mailings, insurance brochures, or on television. There are no organizations to fight it. And you don't see those guilty of it going to jail.
We’re talking about the form of insurance “fraud” that is committed by insurance companies and their claims adjusters, their lawyers, their claims examiners, and their other personnel. The abuse consists of denying claims with merit, or needlessly delaying payment, or asking for unnecessary substantiation, or other acts such as “losing” client files in order to intentionally thwart a fair and efficient claim decision.
In some ways, “insurance fraud” committed by insurance companies is even more reprehensible than policyholder and claimant fraud. Insurance companies and agents are licensed by the state. They have both a statutory and contractual fiduciary responsibilities to policyholders and claimants. In as much, insurance companies claim they are subject to the highest ethical standards classifying their agents as “professionals,” not unlike a CPA, engineer, doctor or a lawyer.
This is not just the Gulf Coast’s problem. Insurance companies that write auto, homeowners, health, life and other forms of insurance have long been charged with denying valid claims. These insurers take this denial approach as they know that most policyholders won't fight a denial for a number of reasons and can easily be worn down. Here are some of the many reasons policyholders across the country - and in every situation - don't get what they are entitled to.
One common tactic used by the insurance industry is requiring policyholders to sign forms stating that property damage was caused by flood water instead of wind damage.
By misclassifying property damage as damage caused by “flood water,” the insurance industry hopes to skirt billions in claims that the victims of Hurricane Katrina so desperately need.
In an effort to defend these hapless policyholders, Mississippi Attorney General Jim Hood has initiated lawsuits against five major insurance carriers – All State, State Farm, Mississippi Farm Bureau, Nationwide and USAA – charging them with actions designed to deliberately cheat victims out of billions of dollars in claims.
Insurance companies do not want to pay meritorious claims, even to each other. A Commonwealth Court judge in Pennsylvania ordered the liquidation of an insurance company saying in his opinion, “The failure of the reinsurers to honor their contractual obligations (is not limited to Legion Group; it) is endemic to the industry.”
Get a “CLUE?”
The Comprehensive Loss Underwriting Exchange or CLUE has become the new roadblock for many homeowners and the cause of the largest growth in complaints at state regulatory agencies over the last year. The insurance industry has kicked up its efforts to use the information about the home and the owner to deny or cancel policies.
An Industry Insider Tells All
Herb Denenberg, a former Pennsylvania Insurance Commissioner and consumer advocate said in his column for November 13, 1999:
“First, insurance companies are adept at stalling and stonewalling on a claim. They move claims along slowly. They may ask for more evidence of loss or proof of value. This is often the start of the process of wearing down the policyholder. Send this form. Get that document. Pretty soon the policyholder may give up without even getting a denial or payment or settle for less than should be paid.
“Second, a large proportion of policyholders don't know enough about their policy and the claims process to know they've had an unreasonable denial. So they don't challenge or appeal the denial of their claim. Insurance companies are notorious for writing unreadable policies and for confusing rather than helping and educating their policyholders.
“Third, even if they know or suspect an improper denial, policyholders may have neither the will nor resources for a protracted battle. It's hard to get an attorney except for the largest and most meritorious of claims. A policyholder hesitates to do legal battle with a gigantic insurance corporation. Sometimes the policyholder needs money and can't hold out for the full entitlement and can't wait for extended negotiations or litigation to come to an end.
“Fourth, even if they have the resources and connections to fight a battle, it may take years to collect as the insurer may vigorously defend itself and drag out the proceedings. If they win a verdict at trial there may be appeals.
“Fifth, most policyholders need a lawyer to assert their claim. But lawyers are not likely to take a case unless there is a substantial amount at stake. But most insurance claims are for small amounts, so lawyers aren't interested in a battle with an insurance company that is likely to produce a minor fee.
However, stalling tactics by insurers can sometimes backfire if the insurance company’s actions are such that a policyholder is able to take advantage of a certain law designed to protect them.
Bad Faith Law
While bad faith law varies by venue, there are some commonalities. In general, state code defines acts of “bad faith” on behalf of insurance companies as delaying, withholding, or denying policyholder benefits that are based on legitimate claims filed under valid insurance policies.
It provides that if the insurance company demonstrates bad faith in handling a claim by totally ignoring the interests of the policyholder, then the policyholder may sue for punitive damages and interest on the claim value, and the cost of attorneys fees and other expenses involved in the litigation.
The bad faith law is then an important part of the regulatory structure applicable to the insurance industry. It creates a level playing field and provides an important incentive for insurance companies to treat policyholders fairly.
Attorneys specializing in bad faith law can be found at FindLaw.com.
The greater the catastrophe, the more incentive insurance companies have to stonewall and deny.
Need to Rethink the Insurance Business Model
The central-most issue to Katrina recovery is the question of flood insurance. Most homeowners were told that they did not need flood insurance. And owing to its cost, most who were told they didn’t need it didn’t buy it. And if they did by it, the $250 thousand cap may mean a home cannot be rebuilt to its former value thus giving the owner negative equity; they will owe more on the existing mortgage than the new structure is worth. Or, the cost of the mandated elevated structure will be far more than the flood insurance will pay.
For this reason, those in the effected areas are looking for relief by having hurricane damage to their homes classified as “wind” rather than “flood.” To this end, Mississippi Attorney General Jim Hood is suing insurance companies in order to make them pay. This has not set well with everyone in government.
For the industry, the four hurricanes that hit Florida in 2004 represent an estimated $20 billion in insured losses. According to Florida Treasurer Tom Gallagher, Hurricane Jeanne is estimated to have $6 billion in losses. More than 1.5 million claims have thus far been filed for all four hurricanes.
The state's catastrophic insurance fund, with $6 billion in cash on hand heading into this hurricane season, is expected to payout a maximum of $3.5 billion. (Private insurance companies must have a combined loss of $4.5 billion with each storm before the CAT fund begins paying out.)
"This really vindicates the unpopular things we did over the last 10 years," said Sam Miller, executive vice president of the Florida Insurance Council. "It vindicates the rate increases, it vindicates creation of the CAT fund, it vindicates the deductibles. Without those things, companies would be going bankrupt right and left."
The counterpoint to Miller’s argument is that by keeping insurance regulated with the various states, badly needed recovery funding, such as Florida’s $3.5 billion, is not available to service other areas of the country who have suffered a catastrophic event. And should Florida need more than its $6 billion dollar CAT fund, money may not be available from elsewhere.
To summarize, insurance regulation is "of, by and for" the insurance industry. But that's the way the regulatory, legislative and political system works. Money runs politics, and, consequently money runs the system.
Thus, a new insurance model may be needed in order to spread catastrophic risk over a much wider area.