Destroying a Claims Department: A Sixty-Second Seminar in Workers’ Compensation Claims Handling

How does an insurance company accidentally destroy its own claims department? It’s easy and we have seen it done three times. In all three instances, underwriters were to blame for destroying the claims department. Here is how they did it:

1. First of all, an underwriter’s goal should never be to focus on writing as much new business as possible. You do not want everyone as your client. There is a reason why no other company wants to insure certain employers, whether it’s because of a horrendous loss record, poor management, dangerous work environment or being just a plain bad risk. Poor underwriting practices, such as never declining an application for insurance, always result in increased claims costs, often resulting in the company going out of business.
2. Do not be foolish with reinsurance. An insurance company should never take on unlimited risk. Risk is intended to be spread around. That’s what reinsurance is all about. It is suicide for an underwriter to place reinsurance with a sister-company, where both entities are owned by the same parent corporation. Although the entire premium remains under the corporate umbrella, it defeats the purpose of reinsurance. All it takes is one huge, catastrophic loss to take down the entire company. We have actually seen it occur.
3. In California, when an insurance company is declared insolvent, CIGA steps in to handle their claims, while employers search the marketplace seeking replacement workers’ compensation coverage. When there are hundreds of employers shopping for replacement insurance, it becomes an underwriting feeding frenzy, especially for insurance companies desperate to write new business. Underwriters gladly offer coverage without realizing its consequences on the claims department.

Most underwriters are unaware that should an insurance company and CIGA share liability in a cumulative trauma workers’ compensation claim, the insurance company ends up paying the entire claim without contribution from CIGA. By law, when other insurance exists CIGA ends up paying absolutely nothing. Also, if a worker has two specific injuries to the same body part, one covered by CIGA and the other by an insurance company, CIGA once again pays nothing. Instead, both claims now belong to the insurance company, regardless of the date of injury in the CIGA claim. By accepting employers whose prior carrier went insolvent, underwriters end up giving away free insurance as they now assume CIGA’s liability without the benefit of collecting a premium. To make matters worse, CIGA seeks reimbursement of all sums paid under their file since liability now exclusively belongs to the insurance company. Lastly, CIGA deliberately creates companion CT claims, which allows them to close their file, transfer liability to an insurance company and seek reimbursement for all sums previously paid.

As you have just read, underwriters can destroy a good claims department due to careless business practices or unfamiliarity with claims law. The lesson to be learned is, “Never write insurance for an employer whose prior carrier went insolvent.” We suggest you show this article to your underwriters before they accidentally destroy your claims department.