Are You Really in Good Hands? How Do You Know If Your Insurer Will Pay a Large Claim?

Not surprisingly, one of the core consumer protection issues in insurance is ensuring that carriers pay claims fairly and expeditiously.  Unlike many contracts, insurance policies are sequential and contingent: whereas the policyholder performs routinely by paying premiums, the insurer performs by paying a claim if, and only if, a loss occurs.  This dynamic creates special risks of unfair business practices.  These risks are enhanced by the fact that many insurance policies (outside of the life insurance context) necessarily rely on abstract language to describe insurers’ coverage obligations.  For these reasons, much of insurance law – including the availability of bad faith lawsuits and state prohibitions on “unfair claims practices” – is devoted to ensuring carriers’ fair payment of claims.

Despite the centrality of claim-handling to consumer protection in insurance, regulators do essentially nothing to promote transparency in insurance markets with respect to this issue.  The reason is not that it would be particularly difficult to measure this variable:  useful metrics might include how often claims are paid within specified time periods, how often claims are denied, how often policies are non-renewed after a claim is filed, and how often policyholders sue for coverage.  In fact, state regulators already collect some of this data for their own use in policing the market place.   But none of this data is systematically made publicly available to consumers.  Rather, this information is generally treated as confidential on the basis that it could reveal proprietary company information or mislead insurance consumers.    

The only insurer-specific information that regulators do provide to consumers that might partially reflect carriers’ claims-handling philosophies is information about how often consumers complain to insurance departments about their carriers.  But this data is obviously of limited use for a variety of reasons. Most importantly, only a small and unrepresentative subset of consumers ever complain to state insurance departments.  Thus, consider the possibility that the best companies who most clearly inform policyholders of their right to complain to state insurance departments may actually have the worst complaint ratios.  Additionally, consumer complaints concern myriad issues that are not disaggregated in the data, which is itself a product of inconsistent coding rules and department practices (although recent NAIC efforts will hopefully improve data reliability).

In the absence of real regulatory efforts to promote transparency with respect to this crucial issue, market mechanisms do a limited job of filling the informational gap.  Insurers, of course, routinely promise to pay claims fairly and promptly in their marketing materials and advertisements.  But assessing the credibility of these vague promises is essentially impossible, as Michelle Boardman convincingly shows in a recent article.  Meanwhile, consumer information sources like Consumer Reports and J.D. Power conduct surveys of consumer satisfaction with different carriers.   But without access to the key data described above, these surveys are also of limited use: they ultimately rely on the subjective reports of consumers, many of whom have never experienced a substantial claim and are ill-equipped, in any event, to know whether they have been treated fairly if they did file a claim. 

As with disclosure of insurance coverage, these deficiencies in crucial market information may be partially addressed in health insurance markets as a result of the Patient Protection and Affordable Car Act (“ACA”).  That Act requires exchanges to offer a system that would rate plans “on the basis of the[ir] relative quality and price” as well as to devleop and utilize “an enrollee satisfaction survey system.”  Depending on how these provisions are implemented, insurance exchanges could provide consumers with substantially improved information about health carriers’ claims paying practices.   

 

Comments

[Mike Dillon]

Admittedly, Professor, the title caught my eye.

Any comment or insight specifically with regard to "From Good Hands to Boxing Gloves", McKinsey and/or Colossus?

[Leslie]

I am so pleased to have an "insurance guy" on Credit Slips! Do you take requests? :->

I even have the title for the post that I am requesting:

"Homeowners Insurance, Meet Foreclosure Crisis."

I would be eternally grateful for a post regarding your thoughts on the thorny issues that develop when homeowners insurance claims meet up with our current foreclosure crisis.(This might be a topic on which you prefer to co-write with Katie Porter or Adam Levitin!)

I am one who has been closely watching the foreclosure crisis, particularly as it pertains to fraudulent and illegal foreclosure. (Which is, by the way, pervasive.) I have ongoing contact with many homeowners who are in various stages on the spectrum of possibly fraudulent to blatantly illegal foreclosure.

The general question, obviously, relates to homeowner's insurance as it pertains to homes in foreclosure. (Most of which, by the way, are in situations of "negative equity.") But, specifically, my question is regarding pay-outs, claims, or drafts for damage that are drafted by the insurance carrier to the lender, not to the homeowner.

My understanding of the process is that the homeowner receives this check that is drafted to the lender, and then must endorse it over to the lender.It seems very plausible that lenders might be inclined to cash such endorsed checks and not reimburse homeowners in foreclosure who may have paid out of pocket for repairs or who may have contracted with repair companies to be paid upon such reimbursement.

Is it not a valid concern that a lender may not see to it that the homeowner ultimately receives the funds from such a disbursement? (When the lender is contending that the homeowner owes the lender thousands upon thousands of dollars in the first place.)

How is this process supposed to work? And, in your experience, does it work? (Are you seeing more issues arise since the foreclosure crisis began?)

Also, is there a way to get homeowner's insurance on one's home without the involvement of the lender with whom the homeowner is in litigation? There are instances in which the lender listed on the insurance policy is not the proper party in interest--is there a way a homeowner can fix that?

What unique suggestions, if any, do you have for homeowners in foreclosure who want to be able to depend upon homeowners insurance for any damage to their property or possessions? (Or any expenses that arise due to damage to their homes--such as living expenses while the home is being repaired?)Are funds for damage to the structure disbursed differently from funds disbursed for damage to possessions and funds disbursed for living expenses? (i.e. not drafted to the lender?)

Just imagine if we had another Hurricane Andrew this season--during a foreclosure epidemic in Florida. I would think this would become a huge issue. (Actually, with the April/May outbreak of tornadoes in the South--these issues are probably already beginning to surface.)

Thanks in advance for any attention to this topic.

[Daniel Schwarcz]

Mike: My general perspective on "From Good Hands to Boxing Gloves" is that it has some important information but is also told from a very particular point of view. It would be nice if there were objective information in the marketplace so that people could judge for themselves how well different companies pay claims.

Leslie: Thanks for the suggestion. In general, the typical homeowners policy provides that "If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear." My general understanding is that courts interpret this to mean that if the mortgagor/policyholder is in default, then the mortgagee can hold on to the insurance proceeds as security for repayment in addition to the damaged property. If there is surplus once the debt is satisfied, then the mortgagee is supposed to pay the excess to the mortgagor. I have no doubt that you are correct that there is some risk that mortgagees will not do this, though I do not know whether or not this is a common problem.

[Mike Dillon]

Unfortunately, the scenario that Leslie describes is not uncommon, Professor. I am aware of several homeowners who have been fighting with their servicer to release insurance funds for repairs. One family, in particular, has been living in a POD storage unit for several years now as a result of the servicer's refusal to release funds to repair hurricane damage. Mold set in. The house is no longer habitable.

One of the family members had a heart attack as a result of the stress. After the ICU and cardiac stay they were released to finish recovery - in their POD.

I occasionally hear similar stories of insurance proceed "lock down" from Katrina and Rita victims as well. If memory serves, attorney Robert Hilliard in Corpus Christi was handling several of these cases at one point.

Professor, maybe some thoughts on private mortgage insurance and why it isn't helping the current "crisis"?

And, personally, I'm curious about anything that I can learn with regard to "note insurance", policies that are covering losses on securitized pools and exactly what that coverage insures and pays out on.

[Knute Rife]

The insurance claims department scenes in "The Incredibles", with Wallace Shawn's evil claims administrator character, were not fiction.