E Adjuster quotas for claim denials, with
job tenure jeopardized if adjusters don’t
meet a requisite number.
E “Spiffs” or rewards for reducing claim
Performance reviews that implicitly or
explicitly reward claim denials, coverage
denials and loss payment reductions.
Companies with these compensation
practices may, from an “enterprise risk”
standpoint, expose themselves to institutional bad faith claims. The allegation
will be that the “carrots” and incentives
seeping down to adjusters caused them to
breach fiduciary duties to policyholders
and their good faith duties to claimants.
Claims professionals often offer tips to
others about managing risk. It is time to
look in the mirror.
Six Tips Revealed
Here are six management practice tips
for preventing institutional bad faith and
1 Prefer ‘macro’ financial targets over
‘micro’ goals. “Macro” targets would be
improving things such as profitability,
loss ratio and combined ratio. At the file
or desk level, it is tough to move the needle here. Good claims handling can, however, yield better financial measures from:
J Reducing overpayments.
J Quick and accurate settlement offers
that trim legal expenses.
J Treating customers well to create and
retain happy clients.
J Expanding market share by
delivering superior claim service.
From a bad faith standpoint, macro
incentives may be on firmer ground than
2 Reassess ‘carrots’ linked to specific
file outcomes. The more compensation
ties to individual file results, the more
suspect the comp system. Society must
be wary of financial spiffs tied to specific
file results. Here’s an example: “You’ve reserved this case at $200,000. If you settle
it under XX amount, we’ll pay you 10 percent of what you save.” This incentivizes
(a) over-reserving and (b) low-balling
individual claim files to get a direct financial payback.
Looking at professional athletes, NFL
players often have incentive clauses in
their contacts. They earn bonuses for
recording sacks, fumble recoveries, in-
terceptions and other statistical accom-
plishments. No one suggests that these
incentives are unethical or dysfunc-
tional. Financial incentives can cross the
line, though, even in the rough and tum-
ble NFL. Providing bonuses for hurt-
ing players, for example, is considered
beyond the pale. The current “Bounty
Gate” scandal, which saw players receive
spot bonuses for hurting players—“kill
shots,” cart-offs, and so on—caused
Commissioner Roger Goodell to come
down hard on players, coaches and even
the entire New Orleans Saints organiza-
tion. Such activities are considered out-
side the lines.
Kevin Quinley is the principal of Quinley
Risk Associates LLC. He is frequently
engaged on litigated matters involving
institutional bad faith and may be reached