The Need For Claim Auditing In Catastrophe Loss Situations Such As The Gulf Tragedy

By Marc Lanzkowsky – June 15, 2010

Claim auditing is an essential tool to ensure best practices and timely claim payouts

Obviously the tragedy caused by the Deepwater Horizon accident will be felt for years, if not decades to come. I have previously commented on claims issues surrounding this loss that have yet to hit the industry in my Commentary: Expect Gulf Oil Slick Claims To be Extensive And Impact Multiple Lines of Business. Recently there have been numerous reports about the speed and adequacy of claim payments being made by BP, including a statement by President Obama, that White House will be watching the claims process closely (see White House Statement of June 7, 2010).  On June 9, 2010 it was reported that Admiral Thad Allen met with BP to ensure “every legitimate claim is honored and paid in an efficient manner” (see UPI – Allen, BP Meet on Claims Process). And even more recently, the administration is seeking BP to establish a compensation fund so the Federal Government can manage the claims process (see White House: Obama poised to take claims processing away from BP unless it changes system).

Managing this enormous claims undertaking won’t be easy and will be criticized for years to come. Regardless, claims auditing is a way to ensure ongoing claims practices are fair and expeditious.

The enormity of the claims process

While changing daily, there are some reports, BP has processed over 51,000 claims and paid over $62 million (see BP Oil Spill Claims Reach $1.6 Billion). With over 25 claims offices and some 600 claims professionals working to resolve matters, this is one of the largest claims organizaitons operating in this country focused on one event.

From a claims management perspective, handling this many claims is an enormous task that is fraught with potential problems and criticisms.  It is a massive undertaking rivaling claims organizations for some of the largest insurance companies for all lines of business. Keep in mind that it all had to be established in a matter of a few short weeks.

While there is no easy way to manage such an onslaught, there are a few things that can be done to make sure best practices and timely compliance is occurring: Internal reviews and audits.

Audit to ensure compliance and look for waste

There are a variety of Audits that should be explored when faced with a large catastrophe situation. A proper audit can look for weaknesses in the operation, provide valuable feedback to improve those weaknesses and further protect against waste and mismanagement. In a large CAT loss situations, such as in the Gulf tragedy, audits should be an essential element of the process.

3 Claim audits that should be done, preferably by a third party not associated with those managing the claims, can include:

1. Best practices and procedural reviews to ensure there are no delays in payments, the claims staff is appropriately trained, and to identify inefficient processes.  When done correctly, and regularly, these reviews can save money and ensure appropriate payments are being processed timely and appropriately.
2. Anti-fraud assessments are needed to ensure fraud is identified and prevented. The reality is in any catastrophe situation the unscrupulous will come out of the wood works to claim all sorts of false damages. Fraud diverts resources away from legitimate claims and will only create further delays in the claims process. Ensuring fraud is properly detected, and ensuring law enforcement aggressively prosecutes those involved, is essential.
3. Vendor selection and compliance must be reviewed to ensure appropriate vendors are being hired and “kept honest” to help those who have been damaged. Many vendors will say they can handle certain types of losses or repairs when the reality is they are not staffed nor experienced in the areas they claim to be.  A proper vetting process and regular audits of those vendors, is the best way to ensure compliance and prevent waste (see How Do You Effectively Manage A TPA? Speak Up And Be Active!).

Audits performed periodically can ensure ongoing quality claims services, and help to see if claims are being handled consistently from office to office. Successes from one office can then be passed to others, and failures can be used as learning experiences to prevent future problems.

What other audits should be done in the Catastrophe loss situation?