Fighting Back When Your Insurance Claim is Denied

DELAY, DENY, DEFEND: Why Insurance Companies Don’t Pay Claims – And What You Can Do About It.

It’s sad when a company loses its way.

Toyota built a worldwide brand on the promise of quality and reliability, only to see that brand tarnished by its recent massive recalls. It’s sadder still when an industry loses its way, and that is what has happened to a substantial part of the insurance industry over the last two decades.

Insurance companies basically sell security. A consumer is willing to pay insurance premiums in the expectation that if something bad happens—a house burns down, a car crashes—the company will pay for the loss that otherwise might financially ruin the consumer.

But insurance companies increasingly fail to honor their promise of security.

To improve their profits, companies delay payment of justified claims, deny payment altogether, and defend their actions by forcing claimants to sue to get what they are entitled to.

This strategy is known as “delay, deny, defend,” and it perverts the insurance industry’s traditional role. Within the vast bureaucracy of insurance companies, actuaries assess risks, underwriters price policies and evaluate prospective policyholders, and agents market policies. The claims department’s only job should be to pay what is owed, no more but no less. Delay, deny, defend turns the claims department into just another profit center.

What makes a company or an industry lose its way?

In the case of the insurance industry, three things happened from the early 1990s onward to cause the shift.

First, there were a series of external shocks that put insurance companies under financial pressure. An extended soft underwriting market forced companies to continually cut premiums to attract customers. Medical costs, a principal part of the payouts of auto insurance companies, rose dramatically. Mother Nature intervened and made things worse as hurricanes, earthquakes, and wildfires imposed losses for which companies had inadequately reserved.

Second, attitudes changed. As elsewhere in American finance, a mania for growth and profits took hold. Many companies shifted from mutual to stock ownership to tap the capital markets as a source of growth. Allstate embarked on an extreme strategy of reducing underwriting standards and expanding its base of agents to increase its market share, and as it spun off from its lifelong association with Sears, shareholder value became primary. Industry giant State Farm announced that “the big dog is off the porch” and cut rates to gain market share. GEICO began spending half a billion dollars annually on advertising to attract customers, triggering a price war fought with premium and advertising dollars.

Third, a change agent entered the picture. Allstate and other companies hired the mega-consulting firm McKinsey & Company to develop new claim strategies. At Allstate, McKinsey defined claims as a “zero-sum game,” with the policyholder and the company competing for the same dollars. Its goal was “to redefine the game . . . to . . . radically alter our whole approach to the business of claims.” Computer systems would be put in place to set the amounts policyholders would be offered, claimants would be deterred from hiring lawyers, adjusters would be rewarded for underpaying claims, and settlements would be offered on a take-it-or-litigate basis.

In the short run an abandonment of basic principles can benefit a company or an industry, but in the long run it may be catastrophic. Economies in engineering or management may have helped Toyota become a dominant manufacturer, but their real cost to the company has now become apparent. For insurance companies, cutting claims payments at the expense of their policyholders helped them grow and profit. If the consumers lose faith that insurance companies will fulfill their promise of security, however, everyone—policyholders and companies alike—will suffer.

Guest Author: Jay M. Feinman is Distinguished Professor of Law at Rutgers University School of Law, Camden, and the author of Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It[email protected]