A very fine insurance defense attorney, Brian Hunter, made a comment to yesterday’s post, Do Insurance Companies Overpay Claims? with the following observation:

"Second, not only can claims be overpaid, they can be underpaid…."

Assuming this is true, and it probably is based on the law of averages, how can we have any meaningful data? What is the standard against which a claim is judged over- or underpaid? Is it the proof of loss, or the public adjuster’s estimate, or the appraisal award, or something else? Even if we use the most presumably objective of these, i.e., an appraisal umpire’s award, as a standard, then a good many claims I have seen resolved in that manner have been simultaneously underpaid by insurers and grossly inflated by the insured and/or public adjuster.

Of course, in most cases, an appraisal award is a legal fiction that may or may not bear a rational relationship to the amount necessary to repair the property; but it is certainly and merely an estimate. Frequently, the umpire’s award is an average of two competing estimates. Regrettably, few court-appointed umpires have any specialized training in the construction fields, and many have never written an estimate of their own nor done any kind of construction work. Maybe a better standard is needed.

What we do not have is reliable data in Florida during the past several years comparing claim payments with amounts spent by policyholders to actually accomplish like kind and quality repairs. (If I am wrong, I would love to see a source.) Changing the law to require insurers to pay actual expenditures, and not mere estimates of replacement cost (some honest, some not, all estimates nevertheless), would bring greater certainty to all the parties, I think. Yet this is opposed by the same folks, i.e. public adjusters, bemoaning the lack of accuracy in claim adjustment.

In my reply, I noted the following:

However, many insurance companies have adopted a claims management practice which rates and audits claims handlers for overpayment of claims—these are often called "leakage" reports, analysis, etc. So, the major insurers do try to prevent overpayment of claims through various processes. These claims management techniques are not often reported in the press.

It is foolish to think that insurance companies do not track and audit closed claims files. They do so, in part, so they can minimize overpayments.

In Is Claims Management Only Concerned About Overpaying Claims?, I made a very important point regarding the purpose of “leakage” reports that track these overpayment statistics:

Nowhere in the article is there any mention of a problem caused by adjusters underpaying their customers’ claims. I first came across the term "leakage" in a McKinsey and Company analysis of the USAA claims organization done in the late 1980’s. The analysis focused on various changes which needed to be made so that USAA could recover "opportunities" caused by "leakage" in the claims handling process. Again, the study never discussed any problem with adjusters cheating customers by underpaying claims. In all the management metrics that I have ever read, I have never seen one where a claims manager received a bonus because the unit or group he supervised had the lower "underpayments" to customers.

Instead, claims management is for reducing claims severity or lowering the loss ratio to premiums. Indeed, has anybody seen an industry article questioning that the claims industry should be concerned about underpaying claims? The entire culture seems to be about driving down claims payments rather than getting the payment right. I am not picking only on State Farm. Most major insurance carriers have some form of re-inspection. The former re-inspector explained it to me in his videotape.

Typically, he would go out with less experienced adjusters or adjusters whose "severity payments" (the average amount paid on claims) was above levels acceptable to management. He would critique the claims handler’s activities to show where claims payments could have been reduced so that new adjusters would learn and the higher paying adjusters would be brought back in line with the group. I asked him if State Farm ever returned money to a policyholder where he found a mistake that resulted in an underpayment. He responded:

“Chip, you don’t get it. My job was not to make certain that the payments were right. My job was to make certain that the problem of overpayments was stopped.”

People often ask me how our law practice stays so busy. With a claims management overly concerned about one side of claims inaccuracy, the answer is pretty obvious.

  • Mark D. Wood

    Adjusters are licensed by the state of Florida. So are Roofing Contractors and General Contractors.
    This should mean that both professions are held to some set of standards, correct? Who enforces these standards? The Office of Double Standards?

    On the other side of the coin, I can easily remember a half dozen news stories related to a contractor mistreating a homeowner. These news stories often included video footage of the contractor in question wearing handcuffs and being escorted by police. Handcuffs!

    When the states decide to level the playing field and hold individuals personally responsible for their work product you can bet the insurance industry will be turned on it’s ear overnight. I will gladly support license revocation and personal and corporate fines ( large painful fines!). For repeat offenders, THROW THEM IN JAIL! Defrauding an insured is a crime regardless of who profits from the action.


    Insurance companies frequently overpay claims because they pay for preexisting damage. This is because they co not document or examine the property prior to the loss. This lack of diligence on their part is costly, which it should be. Then they cry foul and nobody listens; next they cause very bad legislation to be passed, which then basically gives them a free hand to underpay all claims. The reaction to this over time is for everyone to hate insurance companies and then a legislative reaction ensues and there is also a reaction by jurors. The cycle repeats over and over.

  • Brian C. Hunter


    Thank you for the kind words; know that they are mutually felt.

    Respectfully, I think anectdotal evidence steers the discussion away from the point of my original post.

    You, I, and most of the contributors here could tell war stories supposedly supporting our “side” of the argument. I might tell you that in the majority of cases I have tried where a public adjuster testified about their itemization of damage, the jury stifled snickers or rolled eyes. I might say that most of the cases I have tried where fraud was an issue on the verdict form, the defendant prevailed. I might tell you that I have had insureds admit to fraud during depositions or withdraw their claims after EUO’s after being confronted with unrebuttable evidence of their misdeeds. I might tell you that I have heard public adjusters refer to appraisal as a “game,” or that I have seen public adjusters vastly and inexplicably inflate their estimates after a retired judge was appointed to serve as an umpire, possibly with the expectation of a result worthy of Solomon. I might respond to Mr. Wood’s comment above by referencing actual convictions of public adjusters and/or their associates for insurance fraud and conspiracy to commit insurance fraud, or that his post does not mention the very real civil penalties imposed for provable insurer bad faith. We could go back and forth laying blame for inaccurate claim payments at the other’s doorstep.

    The issue is, are claims overpaid and/or underpaid? War stories don’t help us answer the question, and they certainly are not instructive or determinative in any given claim. It is like arguing whose college football team is the “best.” Great fodder for debate, but ultimately subjective opinion.

    As I originally said, I think the answer is to require a legal correlation between payments and actual expenses. The law as currently written requires advance payment of an estimated repair cost, thereby favoring fiction over reality. The law does not require the insured to return any unspent monies, and it does not explicitly give the insurer any recourse if it has voluntarily and unwittingly overpaid a claim in the absence of provable fraud. The cost of such litigation and the likelihood of meaningless paper judgments is another deterrent to insurers trying to recoup overpayments. Meanwhile, insureds have the right to sue or demand appraisal for more money, even if they have not spent a dime to make repairs, and their target is a collectible insurer. I submit that statistically this imbalance of remedy probably results in more claims being overpaid than being underpaid. A change in the law will bring greater certainty and fairness to insureds and insurers alike. This would be true even in the theoretical case where a company culture exists to avoid overpayment while avoiding the issue of underpayment because an objective measure of accuracy would be available.

    Anyway, thanks for the forum. I enjoy the blog tremendously.

    – Brian Hunter

  • Gary Greenfield

    “In all the management metrics that I have ever read, I have never seen one where a claims manager received a bonus because the unit or group he supervised had the lower “underpayments” to customers.”

    Really? That’s a major point in “From Good Hands to Boxing Gloves.” The other major point is that by systematically targeting smaller claims settlements for underpayment, the carrier would win a war of attrition simply because a percentage of policyholders would not have the means, representation, or stamina to wage a protracted battle with their carrier for underpayment of claims.


    “…People often ask me how our law practice stays so busy..”

    Behind every great law firm…I mean lawyer…are several great women. :)


  • Correct Payments May Appear To Be High When Referenced Against Massive Synthetically Low Payout Values

    Today is February 3, 2011. On October 5th, 2010, a major hailstorm hit Phoenix, Arizona, and according to reports, affected approximately 200,000 insured residential and commercial properties.

    Being a fairly rare event, I believe that the majority of policyholders there are very naive regarding their own insurance company’s true face, are prime for being taken advantage of by their trusted insurer, and exactly that is happening.

    Many consumers & contractors are dealing with insurers (Allstate, American Family, Farmers, State Farm, USAA) polished underpayment methodologies, such as the following-

    (Note – Travelers Insurance has not practiced the following)

    1) Field/armchair adjusters claim, like they all had the same script, that materials, labor, and sales tax are legitimate replacement costs, but primary/general contractor overhead and profit costs are not towards certain clients’ projects.

    2) They consistently claim that they do not pay general contractor overhead and profit costs (GC O&P) on roofing systems, or other single trade work won by a GC.

    3) They consistently claim they do not pay contractor overhead and profit unless damage is severe or “complex” enough to “require” a general contractor.

    4) They do not pay GC O&P on roofing systems, no matter how much of the structure is damaged. Period.

    5) They consistently do not even show general contractor overhead and profit costs in their initial offer to a policyholder. Most consumers are clueless about those RCV premium values, and subsequent ACV loss claim values.

    6) Allstate Insurance, just as they have in Texas, since July 2010, is using “Xactimate” to estimate loss claim values / reconstruction costs. Just like in Texas, one of their favorite & infamous mantras is that ‘the default average prices in Xactimate is ALL we pay in a given zip code’.

    Per the Phoenix event, one Allstate adjuster, Mark Schuessler, recently claimed that he ‘NEVER paid general contractor overhead and profit on the 3,500 (hail damage) claims he handled in his relatively short career, anywhere across the U.S.’

    That indemnification position statement can be verified by Mr. Schuessler, (and supposedly his manager will back him), directly, @ 1-800-366-2958. x67035.

    Too, approximately September 19th, 2010, a North Texas claim office representative, Candice Mata, made a statement that ‘Xactimate’s default average pricing for a given zip code is ALL that Allstate adjusters will be “allowing” for payment of home/business damage to structure claims. Period.’

    And to address Mr. Hunter’s comment- “War stories don’t help us answer the question, and they certainly are not instructive or determinative in any given claim. It is like arguing whose college football team is the “best.” Great fodder for debate, but ultimately subjective opinion.”

    In my and others in-the-trenches opinion, (per 23 real post-cat markets), major insurers do not underpay claims to keep premiums down for their beloved clients benefit, or to supposedly make sure they do not overpay, but do so to protect certain profit margins, credit ratings, personal wealth, and personal/business relationships.

    “War stories” carefully researched pseudo-indemnification, price-fixing, and unfair market manipulation FACTS can indeed be “instructive or determinative in any given claim” if ones move past irrational “subjective opinion” logic.

    My suggestion – Become a contractor that rebuilds in post-catastrophe markets, and ones will experience firsthand how major insurers treat/abuse their clients, and their bottomless bag of underpayment trickery schemes.

    Let those natural market facts (via claimants, contractors, adjusters, and their managers, testimony and paperwork) prove how insurers propaganda can cleverly and deceptively manipulate and poison the general public’s “subjective opinion”.