In several of my older posts, I wrote about different ways some insurance companies have tried to make a profit by changing the way a claims handling department is operated. The following posts touched upon ways that claims handling employees can be compensated for meeting different types of goals set up by the insurer that, in effect, turn a claims handling department into a profit center: The Big Picture in Discovery of Insurer Claims Practices; Don’t Forget to Consider the Severity of Your Claim; Don’t Forget to Consider the Severity of Your Claim: Part II; Plaintiffs are Entitled to the Claims File in a Bad Faith Lawsuit. Some insurance companies also determined that they generally pay less on claims when the policyholder or victim is not represented by an attorney. As a result, it has become more appealing to an insurance company to resolve a claim with an unrepresented individual, and some carriers have spent money, time and energy implementing policies or procedures with the goal of dissuading policyholders or victims from hiring an attorney.

The decision to hire an attorney can be a difficult one for policyholders, particularly for those who really have not had much exposure to the legal system and have never been involved in any sort of lawsuit or court proceeding. I can only imagine how daunting it could be to stand in the shoes of a policyholder who has paid hard-earned money for premiums only to find that it is necessary to sue the carrier to recover the benefits rightfully owed. In some instances, homeowners have had policies with the same carrier for years and have never previously filed a claim, but, when they do, their claim is denied or the insurer fails to pay funds sufficient to conduct the necessary and covered repairs. Unfortunately, many homeowners find themselves in a situation where the only options they have left is to let the claim go or file a lawsuit and pursue payment.

A policyholder’s or victim’s decision to retain an attorney, however, does not seem to be in accordance with how many insurance companies would like for a claim to proceed.

In his book Delay Deny Defend, author Jay M. Feinman addresses the goal behind various cost saving methods implemented by carriers, and he writes about yet another way that carriers can cut costs and keep more of the premiums paid by homeowners.

He explains that McKinsey & Company was a “megaconsulting firm” who redesigned claims handling.

The focus of the claims process was no longer on paying a fair amount promptly but on paying – or not paying – in amounts, at times, and under conditions that increase the company’s profits. “Our [McKinsey’s] change goal is to redefine the game…to …question, improve and radically alter our whole approach to the business of claims.” The game would be radically altered by making the claim process a key to increasing Allstate’s profits and at every step the focus would be on reducing the amounts paid to policyholders and accident victims. Every element of the claims process would be transformed.

And, it seems that in the claims department of many insurance companies, every element of the claims process was, in fact, transformed. Today’s post addresses one of McKinsey’s ideas for saving the carrier money. The various evaluations conducted by McKinsey of the different aspects of claims handling at Allstate revealed an important factor: whether the claimant was represented by a lawyer. McKinsey’s studies showed that attorneys help injury victims recover higher amounts. One of the examples in Mr. Feinman’s book is that for some uninsured motorist claims, policyholders who were represented by a lawyer recovered ninety percent (90%) more than those without lawyers. For cases involving minor impact, soft tissue type injuries, unrepresented claimants recovered an average of $3,464, as compared to claimants who retained an attorney and recovered $7,450. The insurance company’s objective then became “keep attorney out” for those claims where the policyholder or victim did not initially have an attorney. Another related objective was to “focus on reducing the need for attorney representation.”

As an example the approach taken by at least one carrier, Allstate included in its Claims Manual a “Recommended Attorney Economics Script.” This was a script for claims representatives to follow when speaking with a policyholder or victim.

Quite often our customers ask if an attorney is necessary to settle a claim. Some people choose to hire an attorney, but we would really like the opportunity to work directly with you to settle the claim. Attorneys commonly take between 25-40% of the total settlement you receive from an insurance company plus the expenses incurred. If you settle directly with Allstate, however, the total amount of the settlement is yours. At any time in the process you may choose to hire an attorney. I would, however, like to make an offer to you first. This way, should you go to an attorney, you would be able to negotiate with the attorney so his/her fees would only apply to amounts over my offer to you.

Although the foregoing might sound like Allstate is willing and open to discussing with a policyholder or victim his/her option of hiring an attorney, it is important to consider this, as pointed out by Mr. Feinman:

The adjuster is not advised to tell the claimant that the attorney will not just take part of the recovery but will earn it, because claimants who are represented by an attorney receive two to five times more money from the company. The advantage of having Allstate make an offer with the suggestion that the claimant negotiate for an attorney fee only above that offer is that it makes it practically impossible for the claimant to get a lawyer, an example of McKinsey’s suggestion that Allstate “exploit the economics of the practice of law.”

These are very compelling issues that policyholders and victims should be aware of and strongly consider when pursuing a claim against an insurance company.

I like this topic and plan to write some more about it next week, so please tune in.