Tag Archives: Policy and Procedures

There Is No Such Thing As A Pro Forma Signature On A Document – If You Sign It You Own It

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Don’t let doing something for the sake of doing something come back to bite you

I have written a number of articles on the importance of avoiding processes that have no added value to an operation. For example, I spoke of how making a “check” in the process is no assurance that things are being done right in the posting In Claims Don’t Let The Process “Thing” Get In The Way Of Doing The “Right” Thing.  Making sure that a process is adding value is essential in claims to avoid the “we have to just say we did it” way of doing things. The putting a note in the file that adds nothing to the file just because it is part of the process does nothing to increase value to the claim process and should be scrutinized. In “What’s The Point” Claims Process And How To Avoid Them I raised the issues that to be truly successful in claims it is important to focus on what’s truly important.

Mortgage foreclosures all in doubt because of a process for the sake of process

Doing things for the sake of doing things can have significant adverse consequences for an organization. It is important to realize that one day you may have to answer for every action you take on a claim file. The concept of how doing a pro forma task can come back to bite you is being highlighted as a yet another fallout of the mortgage crisis. Thousands of foreclosures are in doubt because a mortgage bank executive did not verify the documents used to justify home seizures. Tens of thousands of foreclosures are being halted because of a process in place where an individual just signed hundreds of documents without ensuring the information contained on the documents were correct.

In one of those cases an executive at JP Morgan Chase & Co. testified that her review was more or less signing the documents unless it was questionable and someone else told her there was a problem. She was among 8 others who signed over 18,000 documents a month (see JPMorgan Based Foreclosures on Faulty Documents, Lawyers Claim, Bloomberg 9/27/2010). At another bank, Wells Fargo, it was reported in the New York Times that an executive only verified the dates on up to 150 foreclosure documents signed daily (see Bank Exec Checked Only Date on Foreclosure Docs, NYT 10/3/2010).  The complete fallout from these events is still being sorted out, however it will certainly expose the banks, their attorneys and title companies to possible liability.

Claims organizations are often subjected to a variety of sign offs and controls that are instituted to prevent fraud and protect company assets. Given the volume in a typical claims organization, signatures for the sake of signatures are a possibility. Regardless, as seen in the mortgage situation, such a process can have significant implications.

Suggestion to avoid the process trap

Clearly, doing something for the sake of doing something can really have negative consequences for the organization. How many signatures do you put on documents in a given day? Do you really know why your signature is needed? Are you taking the appropriate steps to verify what you are signing? If you do not have an answer to these questions then you should be asking one more – what will happen if something goes wrong with the document that I just signed?

I believe strongly in supporting process and controls that are adding value. For example, it is clearly a good idea to have a second set of eyes prior to settling claims over a certain dollar amount to ensure company assets are being spent wisely. As a claim handler you would not want a settlement of a million dollars to go out the door without a manager’s approval and as a manager you would never want that check sent unless you were fully aware of the circumstances of the loss and the reasons for the settlement. It is this type of clear common sense that needs to be used on all processes where you are being asked to sign something.

Prior to signing a document make sure to ask yourself the following:

  • Why am I being asked to sign this and for what purpose?
  • Is my signature needed to control something, or am I just putting it down because there is a signature line?
  • Do I understand what went into preparing the documents that are asking for my signature?
  • What are the consequences if the document turns out to be faulty?
  • Do I tend to sign everything put in front of me without review?

It cannot be an excuse that “it’s just a process and it has always been done that way”.  If you had to testify about signing the documents would saying you just “signed everything unless someone told you it was a problem” sound like a reasonable response? Don’t read me wrong, controls and signatures are required for good reasons on many documents. Nonetheless, if you are the one asked to sign – make sure there is a good reason for your signature and know what your signing before you put your name down. If not, stop and ask the questions and revisit the whole process.

7 Considerations When Drafting Claims Guidelines

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I recently wrote about bad faith concerns with reinsurance companies when a cedent company fails to have written procedures in my post Absence of procedures to notify reinsurance is a basis for bad faith. In the post I also raised issues around having written procedural guidelines. As expected, I received some comments and support from those who want to use those guidelines against the company. In addition, some pointed out claim guideline requirements of some state insurance departments for some lines of business. Before drafting guidelines there are a few things that should be considered. Our friend Phil Loree, Jr. of the Loree Insurance and Arbitration Law Forum suggested 7 things a company should consider when drafting claims guidelines.

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Absence of procedures to notify reinsurance is a basis for bad faith

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Recently I was discussing bad faith and notice procedures with attorney Phil Loree Jr., an expert on reinsurance and arbitration issues and author of the the Loree Reinsurance and Arbitration Forum blog.  I thought this was a timely conversation as it reinforced the concepts regarding procedures and the potential risks when they are not in place. As with my recent post regarding the breakdown of procedures in a insurance agent’s office, the cost of failing to have proper policies in place was at issue (see my article Failing to document files can be costly).

Phil reminded me of the seminal case of  Unigard Security Insurance Company Inc v. North River Insurance Company 4 F3d 1049 (1993). The case established the rule that an insurance company can be held to have committed bad faith for lack of notice to a reinsurer if there was a showing of recklessness or gross negligence. The court found that the failure to implement a policy to notify reinsurers could be an example of a willful disregard of the risk to the reinsurer and would be considered gross negligence.

Unigard and the proposition of bad faith

A high level of good faith is owed to reinsurers

The Court in Unigard first began by defining the level of good faith owed by an insurer to their reinsurer:

“…the duty of good faith requires the ceding insurer to place the reinsurer ” ‘in the same [situation] as himself [and] to give to him the same means and opportunity of judging … the value of the risks.’ ” [citation omitted] …Nevertheless, because information concerning the underlying risk lies virtually in the exclusive possession of the ceding insurer, a very high level of good faith–whether or not designated “utmost”–is required to ensure prompt and full disclosure of material information without causing reinsurers to engage in duplicative monitoring. [citation omitted]. The question, then, is what good faith requires of a ceding insurer in the notice context.”

The establishment of the bad faith standard

The court continued to establish a standard for bad faith that is differentiated from simple negligence:

“… we do not think simple negligence in not disclosing a material fact constitutes bad faith. … Virtually every material non-disclosure will be the result of at least negligence, and, if bad faith and negligence are equated, no showing of prejudice would ever be required.

We thus think that the proper minimum standard for bad faith should be gross negligence or recklessness. If a ceding insurer deliberately deceives a reinsurer, that deception is of course bad faith.”

Lack of procedures alone can be deemed reckless

With the standard established as gross negligence or recklessness, the court discussed how the failure of implementing proper notification procedures was essentially a reckless act:

“However, if a ceding insurer has implemented routine practices and controls to ensure notification to reinsurers but inadvertence causes a lapse, the insurer has not acted in bad faith. But if a ceding insurer does not implement such practices and controls, then it has willfully disregarded the risk to reinsurers and is guilty of gross negligence. A reinsurer, dependent on its ceding insurer for information, should be able to expect at least this level of protection, and, if a ceding insurer fails to provide it, the reinsurer’s late loss notice defense should succeed.”

To have procedures or not, that is the question

There is an ongoing debate in the insurance industry about maintaining claim policy manuals as a potential risk in a bad faith action. The view is that if you have specific written procedures, and your claims staff does not follow them, then that could be used against them in a bad faith action. Here a court specifically states that failing to have procedures could be considered bad faith in the reinsurance notice situation. Recently, Claims Magazine discussed the very topic in an article by Kevin Quinley, Putting Procedures In Writing (Claims Magazine, 1/5/2010).  I agree with the general proposition from the article:

In terms of bad-faith worries and claim manuals, it is often better to explain one miscue than to tell a judge or jury that the insurer has nothing in writing for claim personnel to use as their guide, and that there are no minimum performance requirements.

Whether in the Unigard example above, or in the recent award against the agent I previously commented on, failing to have procedures or follow them can have a costly outcome. Claim handlers need some kind of guidelines to understand expectations, and to establish a baseline to measure performance. When handlers are trained on good practices, and are measured on those practices for compliance through and internal review or audit program, risks are diminished.

Focusing on good claims practices will not only lower exposure to bad faith, but will help reduce leakage, lower expenses and improve customer service.

5 Claims issues cited for non-compliance on market conduct exams & 3 tools to avoid them

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Insurance Market Conduct examinations are a regular part of the insurance business. Besides the stress of the exam itself, being cited for violations can result in costly fines. Regardless, many citations can be avoided.

Every year, insurance compliance solutions provider Walters Kluwer releases its annual study of top ten reasons insurance companies are found to be out of compliance in state market conduct examinations. In the most recent 2008 study, five of the ten issues of non-compliance were claims related.

If you look at the Walters Kluwer studies performed in 2007 and 2006, you will see similar results around claims. As in the past, documentation and customer service issues are the primary culprit for claims non-compliance.

5 Claims issues found as non-compliant

  1. Failure to acknowledge, pay or deny claims within specified time frames
  2. Failure to pay claims properly (sales, tax, loss of use)
  3. Improper documentation of claim files
  4. Failure to communicate a delay in the settlement of claims in writing
  5. Use of unlicensed claims adjusters or appraisers

All of these findings could have been avoided with enforcement of best practices and an internal review process. With some basic actions, a company can  minimize or eliminate their risk of being out of compliance.

3 Simple tools to avoid costly fines

There are very simple tools that should be employed to help prevent negative claims findings on market conduct reviews. Here are some basic preventative steps to eliminate or mitigate against being cited in a review:

  1. Manage to best practices – Establish and manage claims departments to meet industry best practice standards. Set guidelines and educate staff as to the importance of proper file documentation and notification requirements.
  2. Self audit –  Regularly reinforce good handling practices and customer service expectations through internal audits. A self-audit program should be designed to look for deficiencies and establish plans of action to correct any issues promptly. These compliance audits of staff should be done at least annually.
  3. Vendor management program – Set up a standard vetting process to make sure vendors are appropriately licensed and will comply with company guidelines. Where appropriate, audit these vendors as well to ensure information originally supplied during the application process remains current.

So many of the 5 issues cited above are avoidable. Setting standards and monitoring for compliance will minimize your risks in a market conduct examination. As an added benefit your files will be in better shape and your customers will be happier for it.

Failing to properly document files can be costly – It cost one insurance agency $5.83 Million

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Put procedures back in place before the pieces come apart

Whether it’s a claim file, an underwriting file, or in this case, an agent’s file, the lesson is the same. Proper documentation is going be more persuasive evidence that something took place. A recent example of that has just been reported in National Underwriter. A California insurance agent failed to document the absence of Workers’ Compensation coverage pursuant to state law. The agency had guidelines in place to ensure files were properly documented, but court papers indicated that they failed to follow their own procedures. This small mistake cost this agency over $5 million. Yet another example of what happens when the file fails to speak for itself.

Sometimes cliches are the best way to state the obvious: If it wasn’t in writing, it didn’t exist.

A few additional lessons learned:

  • Evaluate procedures regularly, and make sure they are effective
  • Audit and review your files for procedural compliance
  • Files should tell a story that documents what transpired
  • Even good procedures are useless if you fail to follow them