The recent Wells Fargo calamity of opening customer accounts without permission underscores how financial incentives can promote unethical behavior by employees on the front line of servicing customers. I was asked by a reporter involved with stories of the recent Tennessee wildfire whether insurance companies offer incentive pay to their claims managers.

The short answer is yes many do, but not all. While some great insurance claims departments teach their adjusters to look for ways to pay a claim, many would never reward such behavior. Here is an example from an expert affidavit regarding Travelers use of the incentives to lower claims payments:1

Based on the documents I reviewed, loss costs and average paid claims remains a goal of Travelers’ performance pay scheme. While less blatant than ten years ago, these measures and initiatives continue to be focus. Management measures these metrics and drills down the message of expected performance and behavior to the claims staff, and is urged to do so face to face-verbally. The evidence I have seen shows that Travelers measures, demands, and rewards or punishes results relative to initiatives designed to lower loss payments. The customer service results (claims satisfaction) I have seen indicate that Travelers actually has poor customer service results (once being higher that the industry average since J.D. Powers began reporting on this). (Emphasis added)

The trial resulted in a punitive damage verdict of $2.75 million.

The practice is less blatant because they have been condemned in court opinions, books, and articles. Financial incentives to lower policyholder claims payments are a conflict if the good faith goal of adjustment is to promptly pay the insurance customer the full amount owed.

So, when public adjusters and policyholders tell me it seems like the insurance company adjuster is acting like the money is coming out of that adjuster’s pocket, the truth is that for some adjusters, their career and financial goals are often tied up with how much is being paid out.

These incentive paid programs are neither disclosed or advertised as existing for obvious reasons. Insurance company executives love the attention about why their stock price and income are rising, but do not want to admit that it comes as a result of tough claims payments. Insurance company lawyers try to hide these incentive programs from view by refusing to turn them over when requested in discovery or by requiring "confidentiality agreements."

Tomorrow, I will discuss a landmark case in Colorado requiring the turning over of internal insurance company claims management documents without secrecy.

Positive Thought of the Day

We operate under a jury system in this country, and as much as we complain about it, we have to admit that we know of no better system, except possibly flipping a coin. 
          —Dave Barry

1 Dziadek, V. The Charter Oak Fire Ins. Co., No. 4:11-CV-04134, 2014 WL 12278735 (D.S.D.).