This answers the question posed by yesterday’s post, Fifty Percent Chance Insurer Will Fight its Policyholder – Why?1

How many insurance companies have goals to "fully" or "as quickly as possible pay the full amount of benefits" as part of the job performance review for adjusters, claims managers and executives running the business? None.

If all adjusters and insurers have an ultimate ethical obligation to promptly pay their customers full covered benefits, everybody would expect these objectives to be reflected as primary goals throughout organization. In reality, most claims insurance claims organizations have goals that promote the exact opposite outcome.

The impact that goal setting has on creating unethical behavior has been studied. Here is a warning noted in a Harvard Business School White Paper:2

Unethical behavior. Another serious way in which goal setting can damage organizations is by promoting unethical behavior…In each of these cases, specific, challenging goals motivated employees to engage in unethical behavior.

Goal setting has been promoted as a powerful motivational tool, but substantial evidence demonstrates that in addition to motivating constructive effort, goal setting can induce unethical behavior. Surprisingly little research in the goal-setting literature has examined what people might do when they have the opportunity to misrepresent their performance or cheat to attain a goal. One of the few studies that looked for a direct link between goal setting and cheating found that participants were more likely to misrepresent their performance level when they had a specific, challenging goal than when they did not, especially when their actual performance level fell just short of reaching the goal….

Goal setting can promote two different types of cheating behavior. First, when motivated by a goal, people may choose to use unethical methods to reach it…Second, goal setting can motivate people to misrepresent their performance level—in other words, to report that they met a goal when in fact they fell short…when senior management gives lawyers specific, challenging goals for billable hours, they may bill clients for hours they never worked.

Goal setting, of course, is not the only cause of employee unethical behavior, but it is certainly an important, understudied ingredient. A number of factors serve as catalysts in the relationship between goal setting and cheating: lax oversight, financial incentives for meeting performance taking…and organizational cultures with a weak commitment to ethics.

The paper noted that all managers in a business must be warned about goals creating unethical behavior. It implored those running business to "use care when applying goals in your organization."

State Farm’s "Jewish Lawyer’s List" I posted about in, Hindin v. State Farm, the Landmark Claims Practice Case That Few Know About Finally Ends, is a great example about how claims cultures can run amok as a result of organizational claims goals. While State Farm denies any wrongdoing, the Utah Supreme Court3 noted the improper goal setting State Farm had in place at the time the list was created:

…State Farm repeatedly and deliberately deceived and cheated its customers via the PP & R scheme…For over two decades, State Farm set monthly payment caps and individually rewarded those insurance adjusters who paid less than the market value for claims…Agents changed the contents of files, lied to customers, and committed other dishonest and fraudulent acts in order to meet financial goals…State Farm’s fraudulent practices were consistently directed to persons-poor racial or ethnic minorities, women, and elderly individuals-who State Farm believed would be less likely to object or take legal action.

…State Farm engaged in deliberate concealment and destruction of all documents related to this profit scheme…State Farm’s own witnesses testified that documents were routinely destroyed so as to avoid their potential disclosure through discovery requests…Such destruction even occurred while this litigation was pending…Additionally, State Farm, as a matter of policy, keeps no corporate records related to lawsuits against it, thus shielding itself from having to disclose information related to the number and scope of bad faith actions in which it has been involved.

…State Farm has systematically harassed and intimidated opposing claimants, witnesses, and attorneys…For example, State Farm published an instruction manual for its attorneys mandating them to “ask personal questions” as part of the investigation and examination of claimant in order to deter litigation…There was also evidence that State Farm actually instructs its attorneys and claim superintendents to employ “mad dog defense tactics”-using the company’s large resources to “wear out” opposing attorneys by prolonging litigation, making meritless objections, claiming false privileges, destroying documents, and abusing the law and motion process. (emphasis added)

At the commencement ceremony yesterday at the University of Pennsylvania, the President of the University called upon graduates of the Wharton School of Business to use their leadership to make society better. Ethics, in arguably the best business school in the world, is being taught. A Wharton paper, "The Dark Side of Goal Setting: The Role of Goals in Motivating Unethical Decision Making," noted in its abstract:

This article demonstrates that goal setting motivates unethical behavior. This is true for goals both with and without economic incentives, and we find that the relationship between goal setting and unethical behavior is particularly strong when people are just short of reaching the goal. We explain our results in terms of the reference point adoption process and Prospect Theory (Heath, Larrick, & Wu, 1999; Kahneman & Tversky, 1979)

Goals and goal setting have a place in all businesses, including the insurance business. The property insurance business is involved with the public trust because its existence is based on large numbers of homogenous risks (many policyholders with similar properties facing similar perils) so that we mutually depend upon the insurers to perform after a loss. We need insurers to make profits. We also need for them to ethically perform the claims function regardless if their actuaries and underwriters correctly set coverages and rates long before the losses occurred.

You do not need to be a rocket scientist to figure out which way claims payments go when all the incentives and goals are to "save the company money," prevent claims "leakage," and control "claims severity." No wonder Consumer Reports found that fifty percent of all claimants have "a fight" with their insurer. No wonder "Jewish Lawyer Lists" are made. No wonder a Rutgers law professor wrote a book on wrongful claims delays and denials, which I noted in, Jay Feinman Interview at First Party Claims Conference. No wonder there is a need for policyholders to get professional help from others that are not hired by the insurance company.

Goals are great when they work. But, they are fraught with unethical behavior if not made correctly and managed even better.

Tomorrow, I will get back to my posts from last week, Public Adjuster Arrested For Intentionally Inflated Fire Claim Denies Allegations, and Public Adjuster Arrest, Umpire Ethics, and Good Faith Opinions–An Intriguing Story to discuss why "fraud" is a word the insurance industry loves to raise every time claims are publicly discussed.

Positive Thought for the Day, After Going to Commencement at Penn:

You’re off to great places.
Today is your day.
Your mountain is waiting.
So…get on your way!
   – Dr. Seuss

1 I would like to acknowledge that this is not my idea, although I agree with it. I would like to thank claims expert Gary Fye for continually providing proof and academic discussion of how improper goal setting is ruining ethical claims practices in many of our insurance companies.
2 Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting.
3 Campbell v. State Farm Mut. Auto. Ins. Co., 65 P.3d 1134 (Utah 2001).