Yesterday’s blog, Insurance Company Internal Claims Management Documents Should Demonstrate Good Faith Claims Processes, lead to a number of private comments and questions by readers. As a follow up, I ask the question, Why Should Property Insurance Claims Handling Training Programs, Processes, and Incentives Be Secret?

Most wrongful behavior designed to cheat people out of money they owe is not done openly. It does not take a rocket scientist to see how insurance companies can make a lot more money promising full and fast payment and delivering the alternative when it comes time for performance. So why not require insurance companies to turn over their property insurance claims files, manuals, processes, and employee incentives as a matter of public policy?

The National Flood Program has its extensive claims manual on the Internet. Citizens Property Insurance Company used to put its claims manual on the internet. Allstate Insurance Company, by court Order, placed its entire Claims Core Process Redesign Manuals on the Internet. None of these manuals seemed to be “top secret,” although Allstate’s certainly had many McKinsey & Company-created claims processes. The funny thing is that McKinsey & Company has the same consultants doing very similar claims process reviews for many competing insurers. It is strange that these could be a “trade secret” when it is shared among competitors.

In a federal case out of Washington state, the court entered an Order1 discussing this concept of transparency of internal documents. The court made a ruling ordering the following as discoverable in a bad faith case:

  1. Drafts of a letter that an attorney wrote for the adjuster denying the claim
  2. Claims Training Classes and Seminars Conducted By Attorneys
  3. Depositions of Attorneys writing letters and conducting claims training.
  4. Claims File Documents Made After Denial and Commencement of Litigation
  5. Property Claims Training Materials
  6. Property Claims Handling Manuals
  7. Employee Compensation Program Materials
  8. Claims Personnel Files
  9. Loss Ratio, Severity and Profit Goals

The court specifically ruled that claims manuals are not “trade secrets:”

Exhibit A provides instructions for Defendant’s employees on how they should adjust claims….The Court notes that there is ‘a strong presumption of public access to the court’s files,’ …and that ‘[t]he business of insurance is one affected by the public interest.’ RCW 48.01.030.

Defendant argues that Exhibit A is ‘proprietary,’ that it contains ‘confidential information,’ and that it would ‘harm Travelers if its competitors had access to it.’…But the Court has inspected Exhibit A and finds that it is both highly general and contains little more than statements of pure common sense…. Indeed, it is entirely unclear what competitive advantage Defendant might lose if Exhibit A were unsealed. Defendant’s explanation of the harm that would occur should Exhibit A be disclosed is thus insufficiently ‘particularized.’

Defendant also seems to argue that Exhibit A involves trade secrets…But under Washington law, an insurance manual does not involve trade secrets if it ‘simply set[s] out good claims practices and philosophies that would be obvious to any insurance company.’ Woo v. Fireman’s Fund Ins. Co., 137 Wash. App. 480, 489 (2007). The Court finds that this describes Exhibit A exactly.

Regarding the insurance company’s financial and claims goals and the incentives for claims employees to reach those goals, the court noted:

Plaintiffs assert, with some evidence, that Defendant’s compensation program is established by its top-level employees to reward managers, and the adjustors they supervise, for their performance, and thus influence their behavior….Information about such a program, which, again, Plaintiffs allege is intended to reward low claim payouts, is highly relevant to their claims. Plaintiffs are entitled to discover all documents relevant to this compensation program, not merely those that relate to the payment of claim adjustors.

Thus, to the extent that Defendant has not already done so, it is ordered to produce all requested discovery regarding its employee compensation program.

Other courts have granted similar motions to compel. For example, in Kirschenman v. Auto-Owners Ins., the court ordered production of ‘[a]ll documents related to efforts to reduce loss ratios or claims severity costs,’ and explained that this request related to how ‘company goals for… keeping expenses down were arrived at, how they were communicated to employees, and what programs and incentives may have existed to encourage employees to help the company meet these goals.’ 280 F.R.D. 474, 483, 485 (D.S.D. 2012).

Plaintiffs allege that Defendant tracks information regarding the claim payouts of its offices nationwide and uses this data to encourage certain claim handling behavior….Documents that confirm the existence of such a program would be relevant to Plaintiffs’ claims.

The role of the adjuster is to get all the money owed to the policyholder from the treasury of the insurance company into the policyholder’s bank account. The incentives, processes, and actions to do otherwise are what is commonly known as “bad faith.” I am convinced if these bad faith incentives, process, and actions were expected to see the light of day in a public forum, there would be a lot less breach of the public trust.

Thought For The Day

Criticism in good faith is good. When it’s targeted solely to destruction, I’m not interested.
—Andrea Bocelli
1 Bagley v. Travelers Home & Marine Ins. Co., No. 16-706 (W.D. Wash. Aug. 25, 2016).