Our firm has a videotape somewhere in our library of a former State Farm adjuster that was known as a Claim Re-inspector.  He is now a public adjuster in Tennessee, still very religious, and a person I run into at conferences once in a while.  Every time I hear the term “claim leakage,” I think of him, the role he played at State Farm, why he left after being “pegged” for management, and his videotape.

In a recent March 2008 Claims magazine article, “Business Rules for Claim Processing,” the term “claims leakage” was defined as:

“[P]reventable” claim settlement expenses caused by such factors as inefficient processing, improper payment, bad decisionmaking, human error, or process breakdowns.  Avoiding these traps is the best way for carriers to drive down the claim delta between what it should cost to settle a claim and what it actually costs.

Nowhere in the article is there any mention of a problem caused by adjusters underpaying their customers’ claims. I first came across the term “leakage” in a McKinsey and Company analysis of the USAA claims organization done in the late 1980’s.  The analysis focused on various changes which needed to be made so that USAA could recover “opportunities” caused by “leakage” in the claims handling process.  Again, the study never discussed any problem with adjusters cheating customers by underpaying claims. In all the management metrics that I have ever read, I have never seen one where a claims manager received a bonus because the unit or group he supervised had the lower “underpayments” to customers.

Instead, claims management is for reducing claims severity or lowering the loss ratio to premiums.  Indeed, has anybody seen an industry article questioning that the claims industry should be concerned about underpaying claims?  The entire culture seems to be about driving down claims payments rather than getting the payment right. I am not picking only on State Farm.  Most major insurance carriers have some form of re-inspection.  The former re-inspector explained it to me in his videotape.

Typically, he would go out with less experienced adjusters or adjusters whose “severity payments” (the average amount paid on claims) was above levels acceptable to management.  He would critique the claims handler’s activities to show where claims payments could have been reduced so that new adjusters would learn and the higher paying adjusters would be brought back in line with the group. I asked him if State Farm ever returned money to a policyholder where he found a mistake that resulted in an underpayment.  He responded:

Chip, you don’t get it.  My job was not to make certain that the payments were right.  My job was to make certain that the problem of overpayments was stopped.

With such a one sided focus by claims management, it should come as no surprise why public adjuster and insurance coverage litigation business is booming.