INTRODUCTION TO THE CLAIMS SETTLEMENT COURSE
Welcome to the course on Claims Settlement.
As an insurance adjuster or insurance agent, your goal is to gain relevant and adequate information about claims settlement issues. This course will help you achieve that goal. By the completion of this Claims Settlement Course, you should be able to comprehend the fundamentals of claims settlement.
You should keep in mind that the information contained in the course materials is only designed to serve as a broad introduction and overview of the course. It will not be possible to cover all of the elements associated to claims settlement in the course due to its dynamic nature. You are therefore urged to improve your understanding by reading more materials on the subject. Furthermore, please keep in mind that some of the classes may cover interrelated topics that have been covered in more than one class.
Here is a list of the course’s topics and objectives:
- Introduction to Settlement
- Use of Claims Evaluation Software
- Duty to Initiate Settlement Negotiations
- Settlement Conferences
- Settlement Types
- Settlement Techniques to Avoid
Introduction to Settlement
An insurance claim may be defined as a formal way for a policyholder to ask an insurance company for coverage or money for a covered loss or policy occurrence. The settlement of a first party claim by an insurer is the payment of money to a policyholder in exchange for the occurrence of a loss or risk against which they were insured.
A policyholder is the individual who is the legal owner of an insurance policy. In their capacity as policyholders, they have the authority to make changes to it. In addition, policyholders are responsible for making certain that their premiums are paid on time. An insurance premium is defined as the amount of money paid in exchange for protection against a loss, risk, or harm of some kind. ‘Premium’ is derived from the Latin word “praemium,” which literally translates as “reward” or “prize” in English. Insurance, in its broadest sense, is a method of risk transferring and risk spreading among individuals. The term “policy” comes from the Italian word “poliza,” which means “folded writing.” As a brief insurance history, caravans of trade and merchants from Phoenicia and Greece specifically divided their cargo among numerous carriers and agreed to share losses if the caravan was attacked or a ship was lost in a storm.
Statutes provide for settlement standards. They guide the insurer on the minimum legal expectations when dealing with settlements. An example is 14VAC5-400-100-Claims settlement standards applicable to accident and sickness insurance, life insurance, and annuities and 14 Va. Admin. Code § 5-400-70- Claims settlement standards applicable to all insurers.
14 Va. Admin. Code § 5-400-70, provides for claims settlement standards applicable to all insurers. It states that:
- Any denial of a claim must be communicated to the claimant in writing, and a copy of the denial must be kept on file in the insurer’s claim filing system;
- An insurer must provide a reasonable written explanation of the reason for any claim denial. Any policy requirement, condition, or exclusion must be specifically referenced in the written explanation;
- The insurer shall not deny a first-party claim on the grounds that responsibility for payment should be assumed by others, unless otherwise provided for by the terms of the insurance policy;
- If there is no disagreement about coverage or liability, an insurer must offer a first-party claimant an amount that is fair and reasonable, as determined by the claim investigation, as long as the amount is within policy limits and in line with policy requirements; and
- An insurer may not unjustifiably refuse to pay a claim in line with the policy’s terms.
When dealing with settlement, a settlement packages checklist should be considered. According to IRM “It is more important than ever that agents and brokers provide value-added services and proper documentation to their clients to ensure their insurance programs are well structured. Development and use of standards, such as insurance checklists, is one way to achieve these goals.” The advantage of using a checklist include dramatically decreased errors and omissions (E&O) exposures, improved reputations, increased sales, and, clients receiving the coverage they genuinely require.
A demand letter/ settlement demand is the first step in negotiating a settlement. The insured’s intent to collect losses is communicated clearly in this document to the other party or their insurer. A demand letter also demonstrates that the insured has all the evidence they need in the event that litigation is ever necessary. The insured will lay out their expectations in detail and explain the reasons therein. To be effective, a demand letter must contain specific facts and details, and make a strong case for why the insured should be reimbursed. The insured must have the right information before they begin writing the letter. Other documents should back up the information they are presenting. Pictures of the vehicle (s), photographs of the injuries, medical records, medical bills, medical expenses for the foreseeable future, expert reports, witness affidavits, and insurance coverage analyses related to the accident are some of the supporting evidence found in the demand letter. When the at-fault party and/or his or her insurance company receive the demand, they have a number of alternatives for responding, including:
- Acknowledging the conditions and terms stated in the demand letter, as well as agreeing to pay the desired sum.
- A counter-offer, or “offer to settle” which is typically a lower settlement amount. Insurance companies would have attempted to estimate the settlement value of the claim. It is necessary for the adjuster to assess how much damage the claimant can prove, their likelihood of prevailing in court, and how much a jury may award the claimant. It may initiate a negotiating process that finally results in an agreement on the difference between what the claimant originally sought and what the insurance company counter-offered.
- Refusing to pay any money and denying the claim, which often indicates that a lawsuit will be filed in order to recover damages.
A demand letter must make a demand within the policy boundaries to trigger the duty to settle.
It should explain why liability is obvious, why losses are likely to exceed the policy limit, and include a fair response deadline. Courts have found in favor of the insurance carrier where the claimant could only produce evidence of a vague request for policy limits by counsel in jurisdictions where a settlement demand is required to establish a breach of the duty to settle.
Use of Claims Evaluation Software
To come up with an assortment of settlement values, insurance firms use software. Adjusters are taught to scan documents for critical value drivers, to enter into the software. For instance, the adjuster may get information from an insured’s medical records, review them then code the injuries, treatments, diagnoses, and prognosis. The software will thereafter do calculations and modifications, allowing the adjuster to offer an acceptable scope of settlement prices. The software’s value scope will be used by insurance companies as either suggestions or set standards, and the adjuster’s task will be to negotiate between those two values.
Adjusters were responsible for analyzing and assigning the value of each and every claim, before to the introduction of claims evaluation software. The use of claims evaluation software has however received criticism, some of the criticism is that the system has been abused and that it lacks understanding or human suffering and pain when evaluating a claim. Colossus is one of the claims evaluation software. Insurance Services Office’s “Claims Outcome Advisor” and “Claims IQ” by Mitchell International are other examples.
In 1988, the Australia Government Insurance Office (GIO) requested the assistance of Computations, Pty. Ltd (later known as “Continuum”) in building a computer system to assist in claim payouts. As a result of GIO’s effectiveness, insurers approached the company to inquire whether they might license the product. Allstate was the first insurance company in the United States to test the system, and USF&G was the first insurance company in the United States to use it. The trade press reported on USF&G success and other insurance firms indicated significant interest in it. Colossus is now used by or has been utilized by several insurance companies in the country.
After purchasing a Colossus license, an insurer must participate in a “benchmark session,”. As part of this session, the insurer is requested to identify skilled adjusters who are familiar with claims in specific regions of the country. A hypothetical set of claims is then presented to the insurer, who must evaluate them in order to establish a consensus on the value of the claims. Afterwards, these parameters are utilized to configure the initial tuning of the software. A “closed file study” is then carried out by the insurer which involves the sampling of many types of bodily injury claims that have been settled derived from all areas of the county where the insurer does business. These claims are reviewed to establish whether or not they are valid samples. They are then entered into the software, which determines what settlement value Colossus would have advised for each claim. Afterwards, the insurer compares the amount recommended by Colossus to the amount the firm actually paid.
As aforementioned, in the 1990s, Allstate initially licensed and popularized Colossus software evaluation model. Colossus was used by Allstate in order to standardize their claims and for its perceived cost-effectiveness. The method also identifies lawyers who are ready to settle for the best deal they can receive rather than pursue a lawsuit. Colossus’ converts an array of information regarding the type and degree of harm into a numeric score/ severity score based on a series of inputs. Before examining a case, Colossus takes into consideration a few preparatory issues. It takes into account whether the insured’s attorneys have a track record of taking their cases to court if they receive a lower-than-expected offer, or whether they consistently accept the highest offer made by the insurance company. It also takes into account the jurisdiction in which the claim is brought.
A significant feature is that the application contains around 600 injury codes, each of which represents a different form of personal injury that can happen. These injury codes have a severity value, and money is awarded to the Plaintiff for each severity point. It carries out a calculation in order to assign severity points to the Plaintiff’s claims. The severity code is determined by a set of principles that were implemented consistently, rather than by the subjective judgements of the adjuster. In order to decide the questions that the software will ask the adjuster in order to create a compensation, Colossus has over 10,000 rules in place. The system adds up the points and calculates a cash value after taking into account the attorneys participating and the venue.
When it comes to the Claims Outcome Advisor, according to Verisk Analytics, Inc, with the Cases Outcome Advisor (COA) Suite, one can better manage personal injury claims from start to finish. The developed suite of tools uses advanced analytics to help claims professionals reduce life cycles, reduce risk, and increase efficiency. Erroneous and uneven settlements of injury claims might attract unnecessary cost to insurers. Using advanced analytics to compare claims to similar instances and historical data, COA reliably determines injury severity and comes at consistent and fair general damage values. To track, assess, and quantify personal injury claims, the solution employs a proprietary severity index and profile that covers over 18,000 medical conditions.
COA is also said to improve event and entity resolution by identifying similar claims which is crucial when using a second claims portal, especially if the identical claim is submitted to both portals. Claims specialists will be alerted to claims of interest by automated features, ensuring that related claims are considered and investigated properly. Another highlighted advantage of COA is that it helps to manage claims proactively with next best action. With solutions that support proactive claims management, one may improve claim outcomes and ensure proper reserves throughout the life of a claim. Data helps drive strategies and offer claims professionals with the information they need to make informed decisions throughout the life cycle of a claim by analyzing the various actions and decisions.
Moreover, as stated by Verisk Analytics, Inc, every personal injury claim requires a medical report under the new whiplash laws, which might cause delays in processing. The medical report reader function in the Cases Outcome Advisor (COA) employs artificial intelligence to triage, capture, and automatically populate the injury assessment tool, allowing insurers to analyze medical evidence swiftly and easily. COA aids in uncovering trends to improve decision making; with crucial insights generated from data analysis, insurers can better respond to behavioural changes that affect compensation. COA collects, analyzes, and monitors a vast amount of data continually, in order to assist in making better decisions. According to Verisk Analytics, Inc, “COA seamlessly integrates with the Ministry of Justice (MoJ) Claims Portal and Official Injury Claim Portal and has helped insurers process more than 2 million claims.”
Mitchell International, Inc. states that rather than historical data, ClaimIQ is based on an insurer’s own claims handling principles and best practices. Mitchell ClaimIQ is a comprehensive claim evaluation tool that lets an insurer provide their adjusters with the data they need to make more accurate settlements on each and every claim, irrespective of their expertise, through a streamlined workflow and integrated environment. The average liability reduction for ClaimIQ customers is 5%, which amounts to $9.8 million in Loss Cost Reductions for every 10,000 BI and PD exposures and a 5% average liability reduction. ClaimIQ also assists carriers in reducing evaluation time by 40% from evaluation to settlement.
As per Mitchell, the ClaimIQ, helps to optimize comparative negligence results and improve injury evaluations. Through consistent evaluation, it increases the accuracy of liability determination and helps adjusters through the liability assessment process to more accurately recognize shared liability. The platform automatically includes liability decisions into claim negotiation and provides users with access to critical information, such as traffic rules, vehicle codes, and historical weather-specific data pertaining to the location, manner, and time of the claim incident. It is a comprehensive evaluation tool that comprises medicals, pain and suffering, permanency, venue, and impact on lifestyle.
It guarantees a constant approach to claim evaluation based on the insurer’s best practice. ClaimIQ enables adjusters by providing built-in assistance that is related to an insurer’s best practices. It also assists them in evaluating general damages using a best practices model. Mitchell ClaimIQ provides adjusters with a more streamlined user experience thanks to pre-integration with Mitchell’s bill review and services processing for demand processing, medical specials evaluations, nurse reviews, and medical referrals. Aside from that, the system delivers management reporting on critical performance metrics at a company, team, and adjuster level.
Some of the ClaimIQ features and advantages to claims adjusters is “Simple-to-use, streamlined interface for quick and easy adoption, all-in-one solution for capturing claim details and artifacts, and negotiation strategy planning based on facts documented throughout the evaluation lead to quicker, more accurate settlements.” For claims managers, Mitchell ClaimIQ offers features and benefits: the assessment conditions are tailored to their best practices, resulting in improved claims handling skills across the board, guidance to ensure that evaluation results are consistent and accurate, and dashboards for analytics to help manage operations and drive teams to better results. For claims executives, Mitchell ClaimIQ also offers features and benefits: to guarantee consistency in loss costs, use of consistent evaluation procedures, integration skills to aid in lowering total cost of ownership and increasing efficiency, and Mitchell provides powerful reporting and analytics, allowing their leadership to manage operations more effectively and consistently while also use the power of perspective.
Duty to Initiate Settlement Negotiations
An insurance company has a duty to commence settlement negotiations when the policyholder’s liability is evident and a judgment in excess of the policy limits is likely. When a considerable likelihood exists that a verdict will exceed policy limits, an insurance company must accept a reasonable and within policy limitations settlement offer. Courts generally accept that the insurer’s good-faith duty to settle the case will force the insurer to do so in order to avoid liability. In such situations, the insurance company’s failure to settle may represent a breach of its duty of good faith, a breach of its fiduciary responsibility, a breach of the implicit covenant of good faith and fair dealing, or give rise to a negligence claim.
In some states, the policyholder, and in some limited cases, a third-party claimant – has a statutory right of action against an insurance company for failing to settle after liability has become reasonably evident
The Model Unfair Claims Practices Act, which has been adopted by most states, defines a unfair claims practice as not attempting in good faith to achieve fast, fair, and equitable settlement of claims submitted in where liability has become reasonably obvious. The criteria used by courts to establish whether an insurance company has violated its responsibility to settle differ. While the policyholder must establish that the insurance company acted in bad faith in some jurisdictions, in others, mere negligence on the side of the insurance company will be enough to support a claim for failure to settle. When an insurance company fails to fulfill its obligation to settle, it may be held accountable for the whole judgment against the policyholder, even amounts in excess of the policy limits. Punitive damages, attorneys’ fees, pre- and post-judgment interest, and damages for economic losses and emotional suffering are also recoverable in some jurisdictions.
Some states require that the insurance carrier receive a settlement demand that is within the policy limits before a claim can be brought for failure to settle a claim. The letter is written by either the policyholder or the third-party claimant when it comes to third-party insurance, depending on the applicable law. In the case of third-party insurance, exceptions to this rule arise when the insurance company rejects coverage and refuses to defend, or fails to alert the policyholder of settlement offer. Other states just assess whether the policyholder or claimant issued a demand, but they do not consider the lack of a demand to be conclusive evidence of a failure to settle claim. In other jurisdictions, the policyholder’s bad faith claim will be unaffected by the absence of a demand letter.
Along with determining whether the policyholder has demanded that the insurance company settle within policy limits, courts consider whether: the verdict is likely to go over the policy limits, the facts of the case make it unlikely that the policyholder will win, the insurance company has taken into account its trial counsel’s recommendations adequately, the policyholder has been told about all settlement demands and offers, and the insurance company has examined the policyholder’s offer to contribute to a settlement sufficiently.
In RM, Inc. v. Great American Insurance Company, 798 F.3d 1322 (10th Cir. 2015), injured train workers requested insurance coverage from the primary and umbrella insurance carriers of a dump truck company. Whereas the primary insurer was willing to provide its limitations, the excess insurer, Great American Insurance Company, declined. After mediation, the issue was resolved with each insurance company paying its policy limits and the policyholder paying an additional $500,000 in excess of the policy limitations. The policyholder subsequently sued Great American, alleging that the insurer violated its duty of good faith and fair dealing by failing to investigate and commence settlement negotiations on the wounded train workers’ claims. According to the court’s interpretation of the policy language, Great American owed no implicit duty to investigate claims or commence settlement negotiations until the primary insurance company paid its policy limits in full. However, the court acknowledged that the outcome could have been different had the injured train personnel made a settlement demand within limits or had the primary insurance company presented a settlement arrangement.
The above notwithstanding, in some instances, courts are in conflict on whether the insurer’s good-faith duty requires it to commence settlement negotiations when the claimant does not make an offer to settle within the policy limitations.
A variety of rationales and policy considerations have been advanced by the courts in support of their decision not to impose the need to commence settlement negotiations obligation on the insurer. One of the reasons is that placing the responsibility of initiating settlement negotiations within the policy limits on the insurer creates an incentive to prolong settlement negotiations until the eve of trial.
In American Physicians Insurance Exchange v. Garcia,the Supreme Court of Texas stated: “Requiring the claimant to make settlement demands tends to encourage earlier settlements. Unlike the insurer, the claimant owes the insured no Stowers duty and cannot face any additional risk or become a defendant in a second lawsuit for refusal to settle, no matter how unreasonable. However, the claimant stands to benefit substantially and increase the assets available to satisfy any judgment by committing to settle for a reasonable amount within policy limits if the insurer rejects the demand. If the claimant makes such a settlement demand early in the negotiations, the insurer must either accept the demand or assume the risk that it will not be able to do so later. In cases presenting a real potential for an excess judgment, insurers have a strong incentive to accept. Early acceptance not only settles the liability case but obviates the possibility of subsequent Stowers litigation altogether.”
Another reason is that if the insurer proposes the policy limitations earlier than the trial date, the claimant will not necessarily accept the offer. One reason is that the insurer has now opened negotiations and is required to stand by its offer or risk incurring excess responsibility if it withdraws its offer without reasonable justification. The courts have held that as long as the claimant does not provide any indication that the claim can be resolved within the policy limitations, compelling insurers to commence settlement negotiations is comparable to requiring them to bid against themselves. “From the standpoint of judicial economy, we question the wisdom of a rule that would require the insurer to bid against itself in the absence of a commitment by the claimant that the case can be settled within the policy limits.” (American Physicians Insurance Exchange v. Garcia). Another reason offered is that requiring insurers to commence settlement negotiations places an additional burden on insurers that no other litigant faces.
On the other hand, where courts have argued that insurers should be required to commence settlement negotiations. The reasons below are tendered and provided in Rova Farms Resort:
- The insured has relative inability to influence the litigation. “The assured is not in a position to exercise effective control over the lawsuit or further his own interests by independent action, even when those interests appear in serious jeopardy. The assured may face the possibility of substantial loss which can be forestalled only by action of the carrier. Thus the assured may find himself and his goods in the position of a passenger on a voyage to an unknown destination on a vessel under the exclusive management of the crew.”
- Separate representation does not effectively protect the insured from the inherent conflict of interest caused by the possibility of an excess verdict. “The normal legal remedy for conflicts of interest is separate representation for the conflicting interests. This remedy, however, possesses only a limited usefulness in the present situation, for while the assured can be advised, as he usually is, that he may employ separate counsel to look after his interests, separate representation usually amounts to nothing more than independent legal advice to the assured, since control of the litigation remains in the hands of the carrier. Control of the defense of the lawsuit cannot be split, and independent legal advice to the assured cannot force the carrier to accept a settlement offer it does not wish to accept. In this instance the normal legal remedy of separate representation is an inadequate solution to the conflict in interest”
- When there is no obligation to commence settlement negotiations, insureds find themselves in an unusual situation. “Where a settlement opportunity exists, the more faultless the client seems to have been the more feasibly he may be subjected by the company to atrial of the case and all the dangers it entails. In the case of an obviously blameworthy client, the carrier would normally take advantage of a settlement opportunity within policy limits since any other disposition would be unduly optimistic. The least blameworthy insured, however, may more readily be delivered to face the risk of excess judgment, since a refusal to compromise a case thought to be a “no liability” case would not be regarded as unreasonable. Thus, in those cases where a compromise may be effected within policy limits the more innocent an insured appears to be, the worse position he is in and the more he is exposed to loss.”
- Costs will be compensated by other variables and should not be sufficient to prevent this rationale from being adopted. “ Any conceivable effect on costs such a rule [insurer’s duty to initiate settlement negotiations] could exert might be more than offset by other factors. For example, savings might be realized from the company’s not having to maneuver for position on the issue of bad faith during the original trial, or from not having to litigate excess liability suits brought by its clients.. . .
The possibility that a broadened standard may increase insurance rates should not alone defeat its adoption. An insurer’s decision not to settle is justified on the basis of that decision’s contribution, in keeping costs down, to the benefit of all insureds. Since policyholders as a class, rather than the particular individual involved in a case, thus profit from the company’s refusal to settle within the coverage afforded, then surely insureds as a whole should share the expense when the refusal results in an excess judgment”.
- Where the insurer’s and insured’s interests diverge, the insurer, who may benefit from its refusal to settle, should bear the consequences of its choice (elementary justice).
A settlement conference is a form of hearing held by a judge to assist parties in reaching an agreement in a case. In some jurisdictions, a settlement conference is used to refer to any meeting between parties whose aim is to reach a settlement. It is an alternative dispute resolution mechanism (ADR) that allows parties to settle their differences outside the court. The development of ADR in the United States took place in various separate phases over time. The establishment of neighborhood justice centers by communities in the 1960s allowed parties to resolve their own conflicts without the participation of the courts. Some states of established screening panels and arbitration of medical malpractice claims in the 1970s and 1980s to try to reduce the cost of malpractice insurance, and the business community adopted mediation and other alternative dispute resolution techniques to resolve claims more speedily. During the 1980s and 1990s, both state and federal courts implemented alternative dispute resolution approaches into their respective court systems.
A settlement conference may be ordered by the court, or it may be requested by the parties. When a court orders a settlement conference, the judge’s assistant will contact the attorneys to arrange a time for the meeting. When one or both of the parties requests a settlement conference, the attorneys contact the judge to schedule the meeting. Parties to a lawsuit may be required to attend a settlement conference before the case can proceed to trial in certain jurisdictions. Settlement conferences may be accessible in a number of different cases. They are relatively brief and less formal than a trial. If all parties participate in the conference in a sensible and productive way, a resolution is considerably more likely.
A conference room or the judge’s chambers are both acceptable locations for the settlement conference to take place. If either or both parties are represented by an attorney, the attorneys will also be present during the conference. If a corporation is involved, it will be required to send someone who has the ability to negotiate a settlement on the firm’s behalf. Several courts have provisions that require each participant to attend the conference with his or her own lawyer. Some courts require that the attorney who will represent the client at trial be present at the conference.
When an insurance company hires one an attorney, a representative from the insurance company will also be in attendance. Some judges enable parties to participate via telephone, particularly if they are located far away from the conference venue or are physically unable to attend in person. Persons who are not involved in the case are unlikely to be allowed to be present during the conference in the majority of cases.
The costs, time and effort involved in going through a trail process sometimes leads to parties opting to settle the matter out of court. In addition, the uncertainty associated with a trail frequently encourages parties to make a settlement outside of court instead of risking the outcome of the case being decided by chance. Settlement conferences assist both parties in reducing their chances of losing the case at trial. If the facts of the case are evident, a settlement can be reached fairly quickly after the action is filed, or after the discovery process has been completed. Obtaining evidence can help both sides gain a better understanding of how a judge or jury would most likely resolve a disagreement. In other cases, they may not reach a settlement until the day before the trial is scheduled to take place.
The parties will usually provide the court with background information about their case. A judge may first convene a meeting with the attorneys representing each party who will present their respective perspectives (this portion of the meeting is not always attended by the parties involved). Alternatively, a judge may convene a meeting with the lawyers and all of the parties involved at the same time. After that, the judge will hold separate meetings with each of the parties and their attorneys to discuss the matter. The attorneys will explain the case and discussions may last for a number of hours. The parties either achieve a settlement or agree that they will not be able to resolve the issue on the same day.
The judge has the authority to communicate multiple offers and counteroffers, as well as to make their own recommendations. The judge, on the other hand, has no authority to compel the parties to agree to a settlement against their wishes. If they are unable to come to an agreement, the matter will proceed to trial. If they are able to come to an agreement, the attorneys for both sides will collaborate on a document that outlines the terms of the settlement. Afterward, the parties will review and sign the agreement, and the case will be dismissed by the judge. Alternatively, the judge may rule that the parties and their attorneys should return at a later time. The parties may restrict the list of issues that they will discuss at trial by reaching a partial agreement. On the other hand, the judge may agree with the parties and their attorneys that a settlement is unlikely and order the case to be tried in court instead. In some circumstances, the trial judge will be the same judge who presided over the settlement conference while in other instances this might not be the case. If the initial settlement conference fails, it is possible that this will not be the last attempt at a settlement. Once additional evidence has been discovered, the judge may recommend that another attempt at a settlement be made.
An example of a settlement conference in insurance is in the context of a personal injury case where a plaintiff, who is the insured is claiming against the defendant, the insurer, and they come to an agreement on the amount of compensation that the defendant would pay the plaintiff for their injuries. This would be determined by among others: the strength of the plaintiff’s proof, the extent of their injury, and the costs associated with the injury. A common occurrence is that the parties exchange many counteroffers before reaching a settlement that is acceptable to both parties.
A fee for a settlement conference is charged by the court, though a party may petition the court to have the price waived in certain circumstances. It is also possible that the parties will be required to pay the attorneys. After the settlement meeting, the lawyer may bill the client for the time spent working on the case. It is possible that this task will include the creation of documentation that affirm the parties’ agreement.
Let us briefly look into some settlement types.
Structured settlements. A victim of an injury receives a series of payments under a structured settlement unlike a lump sum payment. They are aimed at compensating damages and injuries, and they are regarded as providing long-term financial security when compared to lump sum payments. The insurance company that issued the annuity guarantees structured settlement payments. It is especially useful where compensation requires a large payment. An annuity, a financial contract that assures regular payments from an insurance provider, is used by the at-fault party in this instance. The structured settlement agreement specifies how much money the injured party will get over the course of time to make up for the harm they have suffered.
Its history can be traced to when numerous children in Canada were born with birth deformities after taking the drug thalidomide throughout the 1960s. Claims for future medical expenses necessitated a long-term payment plan from the at-fault pharmaceutical firm, rather than a one-time payment. When similar lawsuits developed in the 1970s in the United States, structured settlements were issued. During that period, the IRS issued Revenue Ruling 79-220, which granted tax advantages to anyone who received it. The injured party did not have to pay taxes on any of the settlement amounts because they were not included in their gross income. Payments made to the estate after the demise of the recipient were also exempt from taxation.
Later in the decade that followed Congress’s passage of 1982’s Periodic Payment Settlement Act that extended the prohibitions on taxing personal injury settlement revenue to state governments. Educating and advocating for injured parties through structured settlements was the mission of the National Structured Settlements Trade Association, which was established in 1985. The sorts of personal injury claims eligible for tax benefits were restricted by the Small Business Job Protection Act of 1996. Only damages resulting from “personal physical injuries or physical illnesses” could be excluded from gross income as a result of this legislation. Punitive damages payments were no longer tax exempt.
This may be suitable in circumstances when responsibility is not in doubt and the amount of damages sought at trial is the primary issue at issue. Advance payments, on the other hand, have a negative side effect in that they expose the insurance company to unnecessary lawsuits. For instance, if an insurance company offers an advance payment, and the plaintiff takes that money, but the plaintiff is later granted extra damages at trial, raising the question of whether the advance payment should be credited to the overall award even though that is generally the norm.
Advance payments are deducted from the total award because it is against public policy to allow plaintiffs to receive a double recovery of damages being the advance payment plus the full amount of the verdict at trial. advance payment credits are beneficial to insureds since they encourage more expedient payment and resolution of claim payments and resolutions. For instance, there are some circumstances in which an insurance company offers an advance payment which invertedly leads to the plaintiff agreeing to forego a costly and time-consuming trial in exchange for the advance payment.
A court may however hold that a plaintiff be entitled to a twofold recovery under as shown through precedence. In the case Doe v. Pak, No. 15-0013 in West Virginia, which was decided in 2015. (W.V. 2017). Pak was injured as a result of a hit-and-run vehicle accident. She submitted a claim with her insurance company for uninsured motorist coverage. Pak received a settlement offer from the insurance company in excess of $30,000 for his injury claim. She refused to accept the settlement offer and instead filed a lawsuit against the unidentified vehicle’s operator. Before the trial was scheduled to begin, the insurance insurer made an advance payment of $30,628.15 to Pak.
The insurance carrier included a letter saying that the advanced cash would be applied against any final award of damages. Pak agreed to accept the advance payment and was later given extra damages at the conclusion of the trial.
The Circuit Court’s decided not to credit the advance payment, it was determined by the Circuit Court that the advance payment may be interpreted as a “gift,” thereby precluding any claim for credit against the final award sum. The insurance company however filed an appeal, and the Supreme Court of Appeals of West Virginia overturned the Circuit Court’s ruling. When an insurer provides an advance payment to a plaintiff in a tort claim, the Supreme Court ruled that the amount should be offset against a subsequent judgment in the same case. Despite the fact that the Circuit Court described an advance payment as a gift, the Supreme Court was perplexed by its reasoning.
A release is a settlement reached between parties that restricts one of the parties from pursuing claims or bringing legal action against the other party in the future; it is a document in which the parties agree to resolve their issues, dismiss their claims, and free the opposing parties from any responsibility. The form is also called a “release contract”, “release of all claims”, “liability waiver form” or “settlement release”. A release of all claims form may be included in a settlement agreement as a condition of the agreement.
This form relieves the responsible party of any liability or obligation to compensate an injured party for the losses resulting from an accident. Insurance companies typically need the signing of a release form before they can make any payments in order to protect themselves from future payouts. A release form should include all pertinent information about the claim, such as:
- Specifics of the accident, e.g the date and place of the accident;
- A description of the claims that are being released (i.e., all claims, only bodily injury, or only property damages). A common practice is for insurance companies to create distinct agreement forms for property damage claims, which are typically handled within a few weeks of the accident, and physical injury claims, which can take much longer to complete;
- Parties’ identification in regards to who was involved in the incident and the extent;
- The amount of money that the insurance company has agreed to pay in exchange for the release; and
- Legislation that is relevant to the release.
A release is frequently signed in exchange for money that is paid to a person following an accident that results in bodily injury or property damage. A major reason why the insurance company pays this money is that they wish to exonerate themselves and their policyholder of any future claims that may be filed. This is accomplished by requiring the person who has been hurt or the owner of a damaged property to sign a settlement release agreement.
Once the agreement is signed, the person who has been affected or the owner of the damaged property will no longer be able to sue the person who caused the damage or demand additional compensation. Therefore, consumers are advised to read the settlement release carefully or to consult an attorney because the release is a legally enforceable contract that binds the parties..
While release of claims forms may differ from one insurance company to the next or from one state to the next, they generally contain the below fundamental terms and legal ramifications:
- Generally, the releasor must promise that they will not get any more compensation as a result of the accident or their injuries before signing the document. They will not be eligible for compensation even if they later discover that they have suffered more injuries or damages.
- Signing the release form abandons the releasor’s right to sue: by signing the release form, the releasor renounces their right to sue the insurance company and the insured who caused the accident.
- Release forms state that the parties are not blaming each other for the accident and there is no bearing on how much money the releasor gets in their settlements and admission of guilt by the released party.
- Non-disclosure agreements are included in some release forms. The releasor may forfeit their right to discuss or disclose the terms of the settlement if they sign the agreement.
Settlement Techniques to Avoid
Let us briefly look into some settlement techniques that should be avoided.
When insurance companies make an offer that is significantly less than the case is worth, this is known as a low ball. According to Merriam Webster Dictionary “Low ball: to trick or deceive … to give a markedly or unfairly low offer …”.
Insurance companies are prohibited from “compelling” a case into litigation by proposing a settlement that is significantly less than the sums eventually collected in similar cases. In 2001 in Granger v. USF&G, the Massachusetts Supreme Judicial Court held that the insurance company refused to present a settlement offer after a demand letter, then later offered what the court termed as an inadequate settlement lowball. The Consumer Federation of America issued a research on insurance firms’ lowballing tactics. In 2012, the Washington, D.C. group published a study titled “Low Ball: An Insider’s Look at How Some Insurers Can Manipulate Computerized Systems to Broadly Underpay Injury Claims,” which explored how some insurers can manipulate computerized systems to underpay injury claims. It focused on how the findings of claim evaluation software are shaped to match the objectives of insurance companies.
According to the study, Colossus, a claims evaluation software, may be used by insurers in such a way that it generates offers to consumers that are “Low-Ball” by:
- Reducing the tuning in all economic regions for all claims by a predetermined percentage
- Selectively excluding or omitting higher-cost claims from the tuning sample, resulting in a reduction in the total amount of the tuning recommendation made.
- Manipulating the trauma severity line in the tuning graph to get the desired tuning variables and future values.
- Requiring adjusters with no formal medical education or credentials to second-guess medical professionals by changing significant details of medical reports and selecting injury codes that generate lower recommended settlement values.
- Encouraging adjusters to select final prognosis codes that reduce the recommended settlement value.
- Having adjusters prohibited from recording information concerning the possibility of future medical visits and permanent impairment ratings, which results in a reduction in settlement values.
- Mandatory use of medical re-pricing software such as Mitchell DecisionPoint, followed by entry of the reduced bill amounts into Colossus by adjusters.
- Encourage adjusters to decide that claimants are comparably negligent and, as a result, are accountable for paying a portion of the costs of their care if they are injured.
Insurance company offers to settle cases after a trial for less than the actual verdict were referred to as “low-ball” settlements by a Superior Court. A unsecured scaffolding collapsed in Tallent v Liberty Mutual, causing the plaintiff to suffer serious injuries. The court ruled that the insurance company was incapable of making an honest business judgment and that it attempted to force the plaintiffs into accepting a settlement that was less than the actual jury award in order to avoid the time-consuming process of filing an appeal which was a law ball.
According to the Massachusetts Appeals court, the phrase “low-ball” was used to describe the behavior of one insurance company in a case involving a woman who had been rear-ended by a tractor trailer and had been left permanently disabled by the accident. The court in 2010, in Rhodes v AIG dismissed the insurer’s contribution to pretrial offers as being “de minimus,” despite the fact that real damage estimates and internal insurance company advice indicated otherwise.
The Merrian-Webster dictionary defines stonewalling as “to be uncooperative, obstructive, or evasive.” When an insurer tries to unduly prolong or drag out an insurance settlement unlawfully, this is known as “stonewalling,” and this illegal action may entitle an insured party to recover damages for bad faith against the insurance company. Many believe that if an insurance company decides to stonewall for whatever reason, the defendant will have little recourse, short of bringing a bad faith lawsuit against the insurer after the case has concluded, and that there will be nothing that the plaintiff can do to force the insurance company’s hand.
Some of the ways in which stone walling may occur is where for an insurance, holds Back payment until all claim parts are settled. In a claim involving many components, a claims agent may be authorized to withhold payment of any part of the personal injury claim until a settlement has been made between the parties regarding all of the claims involved. For example, a multi-part claim may include one portion relating to a physical injury and another relating to automobile damage. A claimant’s auto claim may be withheld from payment until the claimant agrees to a settlement regarding his or her medical bills; however, an agent may not unfairly use the insurance company’s authority to force a claimant into entering into an unfavorable settlement regarding property damage being aware that the claimant desperately needs the settlement for medical bills.
An insurance claims representative may, in other cases, insist that an insured party use his or her own personal medical coverage and then take credit for any excess coverage before allowing the insurance company to pay the insured’s medical expenses. In the event of such conduct, an insurance company may be liable for damages. A third and most prevalent instance is one in which an agent applies extreme economic pressure to a claimant who cannot otherwise afford to care for basic human needs, such as food and shelter, to settle for a sum less than the full amount to which the insured may be entitled. As in the previous cases, such bad faith activities may result in the insurance company being liable for damages as a consequence of a lawsuit being instituted against them.
The National Association of Insurance Commissioners (NAIC), Model Act discussed below addressing the issue of unfair claim settlement methods has been approved by a large number of states. These rules usually state that “no person may, with such frequency as to indicate a general business practice, do any of the following”. “Neglect to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear” is one of the forbidden behaviors on the list.
Inappropriately delaying the payment of lawful insurance claims is what may be termed as “unreasonable delay”. It is true that investigations take time, and that the entire process of handling a claim can be time-consuming and complicated, however, a policyholder should not be forced to
to wait an arbitrary period of time before eventually obtaining an offer of payment. An unreasonable delay may be made through among others; stalling investigations, changing the insured’s representative and requesting superfluous records and documents.
An incentive to conduct unreasonable delay may be to cause the statute of limitations on insurance claims to get surpassed and avoid an instance of having a legal action against a party filed. It is necessary for the insurance provider to have a good faith and reasonable justification for delaying payment of a claim if they are to do so. If it is determined that the insured has acted in bad faith by delaying payment of a claim, it is possible that bad faith damages will be awarded to the insured.
In Fern Johnson vs. United Parcel Service, Inc., Liberty Mutual Fire Insurance Co.during the course of a workers’ compensation claim, plaintiff Fern Johnson filed a lawsuit against her employer, (UPS), and Liberty Mutual, its insurance provider. Despite the fact that Ms. Johnson first received some compensation for her medical care, her workers’ compensation costs stopped being paid by the insurance company. Ms. Johnson was injured at work in 1996, and her benefits were denied. After more than a decade of litigation, she was finally able to obtain benefits. The lower court had ruled that the work injury had resulted in chronic pain for which she was receiving continued treatment. Liberty Mutual, on the other hand, refused to pay her benefits even after the court ruled that she was entitled to them. Ms. Johnson was forced to file a second lawsuit against UPS and Liberty Mutual, and that case contained an email from a Liberty Mutual claims representative in which he expressed his desire to “bury” her. As a result, the insurance company was found to have engaged in outrageous and unreasonable behavior on their part. The court handed Ms. Johnson a $15 million bad faith judgment against UPS and a $30 million bad faith judgment against Liberty Mutual.
Odin Anderson v. National Union Fire Insurance Co. of Pittsburgh; Plaintiff Odin Anderson received a variety of injuries, which included a traumatic brain injury after being struck by a bus while crossing a street in Boston. Anderson’s claim against the bus company was denied by the bus company’s insurance company because the driver claimed that he did not see Anderson before the collision and that Anderson made no attempt to avoid the accident. The insurance company, according to the court, failed to undertake a reasonable inquiry based on the facts and failed to give a timely settlement after liability was proved. The court also determined that the insurance company engaged in outrageous conduct by withholding relevant information in order to deprive the plaintiff of adequate financial compensation. The insurance company’s actions resulted in the imposition of the maximum penalty allowed by Massachusetts law for double damages.
Some instances of intimidation, is where insurance firms invoke the duty to cooperate clause to compelling the insured to deliver information and where the insured fails to deliver such information, e.g in resistance to improper discovery, and the insurer will assert that the entire policy is null and void, and that the insured is not eligible to file a claim with them.
A cooperation clause can be found in the majority of insurance policies. If the insured “substantially and materially” violates such a condition, they may be contractually precluded from bringing a lawsuit if there is demonstration that the insurer has been really prejudiced by the insured’s actions. (Staples v. Allstate Inc. Co., 176 Wn.2d 404, 411, 295 P.2d 201 (2013).,) In Staples, before litigation was brought, the insured failed to submit to an examination under oath (EUO). The insured’s subsequent complaint for bad faith was dismissed due to their failure to cooperate to the EUO. The Supreme Court reversed this decision by the trial due to the court’s failure to demand a demonstration of real prejudice.
In Tran v. State Farm Fire & Cas. Co.,, 136 Wash.2d at 228–29, 961 P.2d 358 (quoting Canron, Inc. v. Fed. Ins. Co., 82 Wash.App. 480, 491–92, 918 P.2d 937 (1996), the court stated that I n order to establish genuine prejudice, the insurer must provide ” ‘affirmative proof of an advantage lost or disadvantage suffered as a result of the breach, which has an identifiable detrimental effect on the insurer’s ability to evaluate or present its defenses to coverage or liability”
Pay and walk
A “pay and walk” clause is a section of an insurance contract that indicates that an insurance company has the option of paying the maximum liability limit of a policy and removing itself from a lawsuit. When an insurer enters into a settlement with a claimant that releases the insured only to the extent of the policy limitations, the insurer is not in breach of its contract with the insured, nor is the insurer acting in bad faith (Novak v. American Family Mutual Insurance Co.).
In the case of Young v. Welytok, Young was riding a motorcycle when he was involved in an accident with the Welytoks’ minor daughter. Young filed a lawsuit against the Welytoks and their insurance provider, American Standard. When the Welytoks’ insurance policy had reached its maximum liability limit, American Standard proposed to settle with Young for $100,000 (the maximum liability limit of the Welytoks’ policy). However, the only difficulty with American Standard’s offer was that Young had requested a sum greater than $100,000 in compensation. To Welytoks’ disappointment, the American Standard paid Young $100,000 and attempted to extricate themselves from further litigation. The Appeals Court determined that the Welytoks’ insurance policy did, in fact, contain a legal “pay and walk” provision. Furthermore, the provision was bold and capitalized, thereby attracting attention to the fact that it existed. Due to the fact that American Standard paid out the insurance limit, the Welytoks were solely liable in terms of any additional litigation and damages that may have arisen.
In Gross v. Lloyds of London Insurance Co., addressed the issue of “tendered for settlements” clause, now usually referred to as the “pay and walk” clause. This was a lawsuit brought about by an accident at the Experimental Aircraft Association’s annual fly-in in Oshkosh, Wisconsin. In the decision handed down by the Wisconsin Supreme Court, addressed the question of whether an insurer was released of its obligation to defend an insured after the policy limits had been expended. The decision was unanimous. The court determined that when a policy’s “pay and walk” clause appears in the policy in conspicuous print, such as in “bold, italicized, or colored type,” the insured has received adequate notice that the insurer’s duty to defend will terminate upon payment of the policy limits, and thus, the insurer is “relieved of its duty to defend by tendering the policy limits for settlement.”
Lowballing, stonewalling, unreasonable delay, intimidation, and other similar behaviors in claim settlement are referred to as unfair practices. In order to avoid litigation or issues with the insured, it is necessary for an insurance adjuster or agent to understand what constitutes unfair claims practice and fair claims practices, to ensure compliance with applicable laws (s). Unfair Claims Practice refers to an insurer’s improper avoidance of a claim or an attempt to lessen the magnitude of the claim/ engaging in unscrupulous claims procedures.
The Unfair Claims Settlement Practices Act, designed by the National Association of Insurance Commissioners (NAIC), is a model unfair claims practice law that has been used and passed by numerous states. The aforementioned legislation differs from state to state, and each state’s insurance departments is responsible for implementing it. The Model Act is intended to prohibit insurers from arbitrarily disputing claims or compelling claimants to litigate legitimate claims to judgment with the intention of compelling them to take a settlement for less than the full amount of their losses.
The Model Act empowers a state’s insurance commissioner to enforce its terms by conducting an inquiry and, if necessary, imposing sanctions. Courts have ruled that the Act merely authorizes state regulatory bodies to sanction insurance corporations, rather than creating private causes of action. In addition, the Act defines what constitutes unfair claims practices. These include: misrepresenting insurance policy provisions, failing to set and execute acceptable criteria for prompt claim investigation, failing to acknowledge or act fairly soon when claims are presented, and declining to pay claims void of an investigation.
The insured enjoys administrative remedies, civil damages, common law remedies, and punitive damages in non-contractual actions against a non-compliant insured. Where an insurer has endeavored to avoid a fast, fair settlement, prejudgment interest may be awarded. The Model Act’s Section 4 lists 14 unfair claims procedures that are forbidden. These banned practices can be divided into three categories:
- Mandatory claim adjusting standards. Insurance firms are required to establish and execute acceptable standards for the rapid investigation and settlement of claims occurring under its policies (Section 4C);
- Interactions with insureds and claimants. Five banned practices involving interaction with insureds and claimants are listed in Section 4 of the Model Act:
- intentionally misrepresenting relevant facts or policy terms relating to the coverages at issue to claimants and insureds;
- neglecting to recognize pertinent correspondence regarding claims emerging under its policies with reasonable swiftness;
- failing to say whether or not they will cover a claim or claims within a reasonable amount of time after the investigation is done.
- neglecting to give a realistic and correct account of the rationale for claim denials or offers of compromise settlements as soon as possible;
- failure to produce appropriate paperwork for presenting claims within 15 calendar days after a request, along with reasonable reasons for their use (the paperwork); and
- Conduct that is prohibited.
If the state insurance commissioner decides that there has been an unfair claims practice, monetary fines can be levied under the Model Act. The NAIC has implemented a two-tiered penalty mechanism. The first tier applies in cases when the Act has been broken but there are no aggravating circumstances. The first tier of monetary sanctions has a $1,000 per violation cap and a $100,000 aggregate cap for all infractions. When a breach was committed flagrantly and in conscious disregard of the Act, second-tier sanctions apply. Second-tier fines are limited to $25,000 per violation, with a total limit of $250,000. The Model Act contains no direction for commissioners in determining the appropriate amount of a monetary punishment. Punitive damages are also not provided for in the Model Act.
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