Market conduct examinations of insurance company claims practices are important. Do you think that examiners are listening to the same repetitive complaints I hear from policyholders, contractors, roofers, public adjusters and other lawyers at the various seminars and trade shows I attend?

Many market conduct studies never analyze internal operation analysis insurance companies own claims departments. Instead, most examinations are claim file examination which look for technical deficiencies.

The North Dakota Department of Insurance paid attention to the internal claims documents of Farmers claims management and fined Farmers $750,000. The Insurance commissioner noted that it was not his job to investigate why other states did not address Farmers “Bring Back a Billion Program” and incentive pay claims culture, but he had this to say about it:

We felt that Farmers’ programs created a natural, inherent bias against policyholders. When a person is either punished or incentivized by shortchanging the policyholder in how they pay a claim, that, in my opinion, is a violation of (state law).1

Here are some quotes from that North Dakota examination:

A series of catastrophic events in 1994, including the Northridge earthquake in California, resulted in Farmers paying out over $2 billion in insured losses. As a result, Farmers experienced a significant reduction of its policyholders’ surplus. In response to this situation, Farmers instituted a slogan, “Bring Back a Billion,” as well as certain programs, including a program called “Quest for Gold,” along with other cost-cutting, “non-rate” programs, all in an attempt to focus efforts on rebuilding that surplus. The stated goals of these programs included cutting costs and reducing the occurrence of claims handlers paying more than was required on particular claims, as well as reducing the possibility of paying on fraudulent claims. Farmers voluntarily terminated these programs in 2002….

The “Bring Back a Billion” slogan, adopted on a company-wide basis in 1994, was aimed at encouraging all Farmers’ employees to work to rebuild the surplus that was lost as a result of the several natural disasters in that year. Some employees signed “pledges” as part of this slogan campaign, promising to work toward rebuilding the surplus.

The “Quest for Gold” program, implemented in 1998, involved awarding bonuses to offices and management groups that met certain goals related to overall performance, and included cost cutting goals for all groups and offices. The Bismarck, North Dakota, branch claims office included specific monetary goals in individual claims employees’ “Performance, Planning and Review” forms (“PP&R”), which are evaluation forms that include the performance plan for the particular employee, as well as the review for each objective in that plan. The PP&Rs…included the employees’ performance as judged against numerous goals including “average claim payment goals” from prior years, adjusted for inflation. These individuals’ evaluations noted whether they had met the average claim payment goal, exceeded it, or failed to meet that goal for the year.

…the management of Farmers Insurance Exchange set various goals for claims handlers and other employees in an effort to increase company profits and thereby grow company surplus.

…Many of the performance goals for individual claims employees were appropriate. However, goals that were arbitrary and unfair to policyholders and claimants were also identified.

…The Company evaluated the performance of claims employees based, in part, on these unfair and arbitrary goals.

….These unfair and arbitrary goals do not take into account or make allowance for the unique circumstances or facts of each individual claim.

….Slogans such as Bring Back a Billion and incentive programs such as Quest for Gold may have created certain bias or interest on the part of claims handlers to pay less on claims.

….The unique circumstances and facts which comprise each individual claim are beyond the control of claims handlers.

….Because meeting these unfair and arbitrary goals was a part of the performance evaluation process and, therefore, linked to an employee’s pay, a potential conflict of interest was created between meeting these goals and effectuating a prompt, fair, and equitable settlement of each individual claim on its merits. This potential conflict may have created a certain bias or interest on the part of claims handlers, in some instances, to pay less on claims or to handle claims in an inappropriate manner in order to meet these goals.

The Insurance Regulatory Examiners Society has this to say about their mission and history:

The public decided long ago that fair, firm, honest insurance regulation is in everybody’s interest. The job of protecting consumers and preserving a robust, competitive marketplace was delegated to the states, where individual state insurance departments have built a strong and enduring foundation upon which all insurance now thrives. The Insurance Regulatory Examiners Society (IRES) is an important part of that foundation.

Protecting consumers and the public from underpaying insurance companies is very important. If insurance claims organizations are to have their claims payment philosophies and processes fully examined, a common-sense suggestion might be that examiners also ask for:

  • public comment about the carriers
  • internal management claims directives and goals,
  • third party consulting company analysis and reports of any claims department processes.

By asking for these materials, many insurance companies would not be tempted to start these wrongful philosophies and those who did would be more easily caught violating the law.

To be fair and balanced, I would like to give a shout out to USAA. Over the past two months, three former USAA claims adjusters in different parts of the country have told me stories of their honest and policyholder centered claims culture. They discussed time periods between 2009 and 2014. It was former USAA adjusters that tipped our firm off to TWIA managers wrongfully lowering Hurricane Ike damage estimates in 2009. One of them told me, “Chip, I don’t normally like talking with you; but, this is just not right.”

Thought For The Day

I follow three rules: Do the right thing, do the best you can, and always show people you care.
—Lou Holtz
1 N.D. Regulator Fines Farmers $750,000. Insurance Journal. July 2, 2007. Available at