Don’t Forget to Consider the Severity of Your Claim

Many of you probably think that I am referring to the extent of damage of a claim or a claim involving a total loss. The word “severity” naturally conjures up the thought of something that is serious or grievous. But I’m actually writing about something many of you probably don’t know all that much about. In the arena of bad faith litigation, severity is a way that insurers measure claims employees’ performance. And, of course, it doesn’t stop there – you knew there was an angle, right? Yes, severity can affect whether your insured’s claim was properly handled by the insurance company. Severity is one of the many, important factors that you should consider in your bad faith case against a carrier. Let me tell you more…

In the world of insurance, some Safeco representatives will tell you the following:

Severity may be considered in the performance evaluation of an adjuster, unit manager and/or product manager… ’severity’ refers to the average paid claim.

Deposition of Michael Burton, a Large Loss Claims Property Unit Manager for Safeco in 2006; in the matter of Price v. Safeco Insurance Company of America, et al.

Another Safeco employee explains that:

Claim payment severity is used to monitor the performance of individual Safeco claims personnel.

Deposition of Sean Vizyak, a Product Line Manager for the Personal Lines Liability Department for Safeco in 2005; in the matter of Brown v. American States Preferred Insurance Company.

It doesn’t sound that bad, right? Kind of like when you first think about the reserves discussed a few weeks ago in Reserves Are Important in Insurance Coverage and Bad Faith Claim Disputes. At first blush, it might actually sound like a good idea: “reserves” – a safety net set up to make sure the carrier sets aside enough money to cover the claim; “severity” – a way for the carrier to monitor the performance of its claims adjusters. But why is the insurer monitoring severity? To make sure the adjusters are complying with applicable statutes and regulations? To make sure the insurance company is looking out for its insureds? Not really.

Unfortunately, severity does not evaluate whether the claims adjuster’s performance consisted of a timely and thorough investigation of a claim. Severity is not intended to make sure that the claims adjusters are looking out for the best interest of the insureds. A claims handling expert explains that some insurers have used severity to measure a claims employee’s performance based on his/her ability to reduce severity – in other words, a measure of how much a particular claims employee reduced the average amount paid on claims. You got it – the lower the average paid on claims by a particular employee means a greater performance by that employee. Now it doesn’t sound like such a good idea, right? Well, at least not for the insured…

A few weeks ago, in The Fantasy of "the Good Ole Days" When Insurance Companies Adjusted Claims Fairly and Paid on Time, I wrote about the way that insurers have extraordinarily diminished the human element in claims handling. Severity is another manner in which the human element of evaluating and investigating claims has been decreased. Claims handling experts explain that severity imposes artificial goals on an adjuster for the handling of claims. If severity is implemented, the claims handler is typically instructed to handle claims within a certain monetary range, and annual goals are set up raising the expectations for an adjuster to reduce severity year to year. Similar to performance based incentives and bonus plans that financially reward adjusters for paying less on claims, severity is also used by some insurers to improperly evaluate the performance of an adjuster.

So this concept of “severity” is probably not the first thing that came to mind when you read the title, right? Please tune in next week for a more on the severity of an insurance claim.

Happy Friday!