Insurance contractors who write estimates for insurance companies with which they have close relationships have a conflict of interest. When contractors are not in league with insurers and they are making truly independent estimates they expect to complete without change orders, I find that the estimates are much higher and more liberal than when a contractor does not expect to do the repair job or knows he can write change orders at a later date.
I recently came across a report and claims audit conducted by GuideOne Insurance regarding this very topic while preparing for a deposition. GuideOne Insurance purchased an insurance restoration contractor, Taylor Ball Construction. The construction company then became known as GuideOne Tayor Ball. GuideOne Taylor Ball owns an alter ego restoration insurance vendor known as TC3 Construction Services. The introduction to the report noted the following:
GuideOne Insurance, 1111 Ashworth Road, West Des Moines, IA, owns a construction company called GuideOne Taylor Ball (hereinafter GTB). Due to employee complaints of the preferential treatment given to GTB, GuideOne conducted the GuideOne/GTB claims study. (emphasis added)
The report clearly recognizes the conflict when its own subsidiary acts as the contractor:
Even though we are technically the same company, we often have differing goals: claim’s goal may be to repair more items and their’s may be to make more money, which may cause GTB to be more liberal in their scope and or pricing….
There needs to be an audit program for all the jobs that GTB does get, at least for a while. This audit would be to verify that their actual costs are in line with what we’re paying on other claims in similar locations and with similar type losses. Currently, there is no audit process to really know how their actual costs compare to the market. This audit process should be done utilizing an outside vendor to prevent any possible conflict between claims and GTB and to obtain an unbiased opinion. Once the audit has been completed on a good number of GTB jobs and a certain level of confidence is obtained with their pricing, the audit could be scaled back to only a certain percentage of their jobs so that we are not spending money unnecessarily on too many audits.
Disband the entire program, credibility and trust are serious issues not to mention the financial ramifications.
A GuideOne Insurance claims employee honestly wrote in a critique that the conflict of interest exists and supports my impression that insurance vendors write estimates higher or lower, depending on whether they expect to get the job:
Always write the estimate the same way without regard for whether or not they will possibly get the job. I hate knowing that I was told by GTB that they write their estimates more liberally or conservatively depending on whether they are getting the job and that this has always been their practice. It concerns me that a savvy attorney could make this look like an act of bad faith in that we pay a higher amount when our contractor gets the job and less when they don’t.
Even though we are technically the same company, we often have differing goals: claim’s goal may be to repair more items and their’s may be to make more money, which may cause GTB to be more liberal in their scope and or pricing.
This report and critique is a good study of ethical claims handling. I do not know whether GuideOne Insurance reinsures its losses. But as a reinsurer, I would want to know if a primary carrier profits on the construction of a loss which is paid, in part, by reinsurance.
The claims department seems to indicate that it has a claims goal to reduce indemnity dollars. Certainly, the report indicates that "severity" is a concern of the claims department.
Finally, it seems that the claims department knows that vendors estimate differently, depending on their role in a particular claim. This practice has been going on for some time.