Report: Improper Documentation a Frequent Reason for Claims Handling Citations

Claims errors continue to be the most frequent reason that property and casualty insurers are cited by regulators when responding to market conduct complaints or during routine examinations, according to a new report by Wolters Kluwer Compliance Solutions.

Kathy Donovan, lead researcher for Wolters Kluwer, said she found state regulators took 270 market-conduct enforcement actions against property and casualty insurers for claims violations in 2019. Those resulted in $4,675,000 in fines. Failure to meet deadlines for acknowledging, investigating, paying or denying claims was the No. 1 “criticism” by regulators, she said.

Failure to pay the correct amount or send complaint denial notices was No. 2, failure to provide correct claims processing notices and disclosures was No. 3 and failure to properly process total-loss claims was No. 4.

The full list of the top 10 market conduct criticisms, using Wolters Kluwers’ exact terminology, will follow at the end of this article.

Donovan said during a telephone interview on Friday that it should be no surprise that claims would be the most common reason that insurers get dinged by regulators, given the tight deadlines, numerous notices required and exacting standards established for the amounts that are paid on claims. She said most of the criticisms cited by regulators could have been resolved by more careful attention to proper documentation.

“A lot of it goes back to documentation that proves what they’ve done, when they’ve done it and how they’ve done it,” she said during a telephone interview on Friday.

For example, Donovan said many states require claims to be paid or denied within specific timeframes, often 30 or 45 days. Insurers can extend those deadlines but they are required to send notices to the policyholders explaining why they are taking longer to resolve the claim. Sometimes delay notices are sent with no explanation, and sometimes no delay notice is sent at all.

Donovan said auto claims are frequently delayed because the collision repair shop uncovers additional damage after beginning work, requiring a supplemental report. In a homeowner’s claim, the adjuster may hold up on a file because an inventory of damaged personal items has not been received.

Those are both valid reasons, but the adjuster needs to notify the claimant on the reason for the delay.

“The purpose of those requirements is to keep the claimant informed,” Donovan explained.

Documentation is especially important when insurers determine values in total loss cases. Donovan said many states require insurers to pay the cost of licensing and registration fees, but insurers write a check for the value of the car without documenting any extra money to cover those costs.

Similarly, when a policyholder chooses to hold on to a wrecked car, some states require that the owner be reimbursed for the cost of obtaining a salvage title. Donovan said she saw one instance where an insurer was cited for failing to add that $6 cost to its payout.

Sometimes insurers do a poor job of explaining how they arrived at a vehicle’s value. Donovan said California regulators cited one insurer that provided documentation of comparable sales prices for 16 vehicles, but only three of the vehicles were within a 100-mile radius of the policyholder’s residence in San Diego.

Other errors cited by regulators include:

• In Illinois, an insurer denied a claim and gave proper notice on time, but failed to give notice to the policyholder that he has a right to contact the state Department of Insurance.
• In California, an insurer improperly applied depreciation to overhead and profit when calculating the value of a property damage claim.
• In Connecticut, an insurer was cited for setting “unreasonable and arbitrary limits” on reimbursement for paint and materials for vehicle repairs.
• In West Virginia, an insurer recommended that a claimant file a claim against his own insurer instead of the insurer for the other vehicle involved in the crash, which is prohibited.

The Wolters Kluwer report said claims have consistently been the leading source of regulator citations against insurers during the 16 years that the company has been studying market conduct actions.

“Certainly, claims — with all of their moving parts in all of the lines of business — still present compliance challenges,” Donovan said.

Wolters Kluwer’s list of the top 10 market conduct criticisms of property and casualty insurers follows.

1. Failure to acknowledge, pay, investigate or deny claims within specified timeframes.
2. Failure to issue correct payments and/or compliant denial notices.
3. Failure to provide required compliant notices and disclosures in claims processing.
4. Failure to process total loss claims properly.
5. Improper/incomplete documentation of underwriting files.
6. Using unapproved/unfiled rates and rules or misapplying rating factors.
7. Failure to cancel, non-renew, decline policies in accordance with requirements.
8. Failure to adhere to producer appointment, termination, records, reporting and/or licensing requirements.
9. Improper/incomplete documentation of claim files.
10. Failure to provide required compliant notices and disclosures in underwriting process.

Donovan gives a detailed presentation on the findings in the report in a webinar posted on its website, available here.