In Good Hands with the Insurance Company? Until You File a Claim!

In the early 1990′s, a new economic model for defense of insurance claims was developed which has taken hold as the dominant paradigm for insurance defense of motor vehicle collisions. It was at that time that Allstate Insurance retained the McKinsey Co. to completely redesign its core claims practices in order to enhance profitability. McKinsey & Co.’s CEO, Jeffrey Skilling, later of Enron, made a number of recommendations to revamp Allstate’s core practices including eliminating the element of human choices in claims adjusting, using a computer program called “Colossus” to dictate what could be offered on any given case, thereby creating uniformity amongst adjusters on all cases.

In the highly competitive insurance industry environment, the traditional paradigm of making reasonable offers on injury claims where liability was clear, like the rear end impact-injury in this case, was replaced with a process whereby a claimant had to elect to either accept a standardized meager offer or face a “scorched earth” approach to litigation where the claimant would have to spend considerable sums to get their case to trial, and wait a considerable amount of time to get there. This idea first came to light in a 1994 article published in an industry magazine entitled “Risk Management Magazine”:

“When an insurance company denies a claim, most policyholders simply give up. Insurance companies win by default. Delay works in favor of insurance companies. Insurance handling and insurance coverage litigation . . . have four speeds: slow, very slow, stop and reverse . . . Thus, the entire litigation system – its enormous costs and lengthy delays – works to the advantage of the insurance company. The system is structured so that the insurance company, by denying a claim, gains the time value of the money and the likelihood that the claim will be settled for less than its full value.”

Anderson, Gordon and Liben, Insurance Nullification by Litigation, Risk Management Magazine, 46-50 (April 1994).

The judicial system became the unwitting participant in a process where the claimant and the court system would have to bear the principal expense of litigating a case to get a just verdict. McKinsey recommended that Allstate devote a minimal amount of resources to defending cases with a relatively low perceived value, because it knew that no lawyer would take the vast majority of these cases to trial.

Having served as an arbitrator of over 150 cases under the Mandatory Arbitration Rules adopted by King County for handling cases below $50,000, and having arbitrated and tried countless others, it is apparent that insurers will often use MAR as a discovery device, not putting forth substantial effort, routinely appealing matters thereafter, then attempting to drive up the expense of litigation, bringing in skilled expert witnesses, such that the plaintiff and plaintiff’s counsel face economic disaster if they have the temerity to take the case to trial and fail to improve their position. For this reason, insurers can defend modest cases with impunity, knowing that most lawyers would rarely take a bodily injury case through arbitration or trial, choosing instead to convince the claimant to give up and settle for a meager offer. Insurers will continue to pursue using the judicial system to defeat litigants by economic might, rather than adjudication on the merits, unless the courts award a lodestar amount to discourage these practices inimical to the judicial system. Because most plaintiffs and their lawyers cannot afford to try modest cases in a cost-effective manner, a new, lower “market value” is set based upon the “settlement value” of claims. This may have little to do with the “fair value.”

In From “Good Hands” to Boxing Gloves: How Allstate Changed Casualty Insurance in America, David Berardinelli et al., Trial Guides LLC (2006), David Berardinelli, following his detailed study of the 12,000+ pages of McKinsey materials outlining the Allstate program recommended by the McKinsey Corporation, summarizes Allstate’s approach as follows:

“McKinsey saw litigation as providing the best possible venue for “winning” its new Zero Sum Economic Game and achieving the goals of its new Enron paradigm for casualty insurance. Litigation is costly and time consuming. It thus allows an insurer to fully exploit its overwhelming financial superiority and the policy holders’ vulnerability to delay which is the natural consequence of the casualty loss.”

“Being adversarial by definition, litigation provides a perfect opportunity for maximum deployment of McKinsey’s “boxing gloves” litigation tactics-the perfect “kill box” for policy holders rebelling against McKinsey’s new Enron paradigm. See McKinsey, at 4964 (“aggressive litigation yields positive results”). Litigation would also provide a means for McKinsey to “send messages” to other policy holders about the futility of resistance to the Enron paradigm.” (See McKinsey, at 5117)

Id., at 148.

This “scorched earth” policy of extremely vigorous defense without regard for the merits, widely adopted throughout the industry, has a triple impact: burdening claimants with delay and costs; discouraging claimants and attorneys from pursuing and undertaking cases; shifting the expenses of reasonable claims settling practices to the public by flooding the judicial system with waves of cases, resulting in congestion, further delay, and enhanced profits associated with holding onto money properly paid out in claims and judgments even longer.

According to Berardinelli, supra, at 23, since being adopted by Allstate, this approach has been incredibly profitable. Quoting from BEST’S KEY RATING GUIDES from 1999-2005, he points out that since enacting the McKinsey recommendations in claims handling with Allstate, its profits soared to an average of 2.25 billion per year versus a mere 88 million per year prior to implementation. It is in this context that insurers, routinely appeal arbitrations and invest sums to retain expert witnesses for cases of modest value that would seem irrational outside of this broader context where they seek to burden the system and generate a “chilling” effect on claims and willingness of counsel to undertake them.

In this context, the only guarantor of “fair value” is the jury trial. Jurors provide a sense of community value for a loss that is largely independent of the “market place” established by settlement “values.” Not only does this provide hope for the recovery of fair value in the modest case, but combined with the fee-shifting provisions available under the rules governing mandatory arbitration, plaintiff’s costs and expenses can be awarded if the defendant appeals from an arbitration award and fails to improve upon it. [See April 2013, “Mandatory Arbitration in Washington”)

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>