Last week there was significant media attention given to a report issued by the Consumer Federation of America regarding the use of software by insurers to adjust bodily injury claims, such as “Colossus,” typically under auto insurance policies. The report explains:
Over the past ten to fifteen years, the payment of bodily injury claims covered by automobile or home and property insurance has evolved from a system based primarily upon the experience and knowledge of claims’ adjusters to a computer-based assessment that has the potential to be easily and broadly manipulated by insurers. This technology has enabled many insurers to increase profits by reducing the amount paid to consumers who file bodily injury liability claims, including uninsured and underinsured motorist claims. . . . The authors’ primary objective in writing this report is to inform regulators about the technical complexity of this topic and the need to exercise better oversight regarding how these systems can be manipulated to the detriment of consumers.
The report was the subject of articles by Leslie Scism and Erik Holm in the Wall Street Journal, by Denise Johnson in Insurance Journal, by Patricia Sabatini in the Pittsburgh Post-Gazette, by Grant Gross in Computerworld, and others.
Denise Johnson’s article quotes a statement from the National Association of Insurance Commissioners (NAIC) regarding the Consumer Federation report as follows:
“Computerized claims systems are generally geared for use in the claims settlement portion that involves pain and suffering, which can be a very subjective process. It is the expectation of state insurance regulators that these systems are just one factor in helping a claim representative reach a settlement conclusion,” the NAIC said in a statement.
In my view, the Consumer Federation is digging up an old issue that has been litigated fairly extensively for a long time (as they say, this has been going on for ten to fifteen years) and it has largely been resolved because class action cases were dismissed, had certification denied or they settled. This is certainly nothing new and it’s unclear why it’s being highlighted now. As I’ve described in posts on this blog over the last year, this is the type of issue on which the Illinois Appellate Court reversed class certification last year, although the Oregon Supreme Court upheld a large verdict after a class action trial.
One thing that seems to be missing from the Consumer Federation report and the articles about it is that, whatever use is made of software in evaluating bodily injury claims, the end result is simply a settlement offer that the claimant or insured are free to accept or reject. The claimant or insured usually have an attorney if the injury is any kind of serious injury (or even a lot of times when they have a soft-tissue injury of questionable significance). The software is nothing more than a tool that can be used in negotiations. There is never any obligation for a claimant or insured to accept any settlement offer. If insurers make offers that are too low the cases will not settle and juries or judges will decide how much to award. Insurers also might risk bad faith penalties in some circumstances in some jurisdictions if they fail to make a “fair” offer before trial.
Litigants who are trying to settle cases never want to pay more than they have to. That is why mediations predictably often start with relatively extreme positions on both sides until finally, at the end of the day, the parties might come close enough to try to reach a settlement. Even before the advent of this kind of software, insurers could train adjusters to be tough negotiators in settling cases. Especially when insureds and claimants have aggressive lawyers on their side, I’m not sure what is wrong with an insurer also having a strong negotiator, perhaps aided by computer data regarding prior settlements, on its side. If insurers enter into settlements that are too generous, it will only lead to higher premiums for everyone. Maybe I’m missing something, but if similar cases are really settling for less than they used to settle for, the only reason for that seems to be because plaintiffs or their lawyers are becoming weaker negotiators. That seems hard to believe.
For purposes of avoiding class action exposure on this kind of issue, as I see it the key for an insurer is not to have hard-and-fast immutable rules about how software is used and what kinds of offers are made by claim professionals, but rather to use software as a potential aid where appropriate, together with the claim professional’s experience, education, discretion and guidance from a supervisor, and keeping mind applicable law in the jurisdiction, in order to try to reach a settlement.