By Jacob W. Gent, Attorney at Law
“Liability” insurance is different from other insurance coverages, such as life insurance. For example, life insurance pays a certain amount upon the death of the policyholder, regardless of the cause or consequence. But liability insurance pays the person presenting a claim in order to return them to the same financial position following the injury he/she was in prior to the loss. This concept is known as the “indemnity principle,” where the injured party is “made whole” following a loss. This principal of being made whole is reflected in the marketing taglines of nationally-known insurers: “Get you back where you belong” (Farmers); “You’re in good hands” (Allstate); “Like a good neighbor” (State Farm); “Get MetLife, it pays.”
However, a recent investigative report published by the Consumer Federation of America (CFA) indicates that insurers are undermining this cornerstone indemnity principal in order to maximize profits at the expense of those presenting a physical injury and/or economic loss claim. The report provides insight on how computer software programs can and have been intentionally manipulated by insurers to artificially lower settlements.
The most widely used injury evaluation software program that casualty insurers use is known as “Colossus” and is sold by Computer Sciences Corporation (CSC). Two similar programs also on the market are “Claims Outcome Advisor,” sold by Insurance Services Office, and “Claims IQ” sold by Mitchell International. Publicly, the programs are marketed as tools for insurers to achieve “consistency in evaluations of bodily injury claims.” But according to the report of the CFA, it is a different story when the presentation is pitched to insurers. Then it is all about saving millions of dollars by making across-the-board “low ball” settlement offers to those with traumatic injury.
Allstate was the first insurer in America to test the program and USF&G was the first U.S. carrier to use Colossus in claims evaluation. Many of the largest automobile and property casualty insurers in the United States either currently use, or have previously utilized Colossus in their claims operations.
Allstate converted its claim processes into “an institutionalized competition against its policyholders for a share of the claim fund” by implementing a “zero sum game theory.” In its proposal, Allstate business consultant McKinsey identified the intended winners and losers: “Improving Allstate’s casualty economics will have a negative economic impact on some medical providers, plaintiff’s attorneys, and claimants… Allstate gains, others must lose.”
How Colossus Works
When evaluating a bodily injury claim, insurance adjusters “enter” specific case information into Colossus to generate a consultation report. Colossus uses hundreds of injury codes which represent various types of injuries in its evaluation. Each injury code has a severity modifier attached to it and dollar amounts are assigned based on the injury type and severity. Colossus also uses a variety of other data in the evaluation, including the presence of pre-existing conditions, claims-related hospital admissions, treatment modalities, treatment frequency and duration, gaps in treatment, prognosis, future treatment recommendations, physical restrictions, medical bills, and income loss. Insurers assign dollar amounts for disfigurement and permanent physical impairment. Once the data has been entered and the consultation completed, Colossus generates a recommended settlement range. The high end of the range is considered the maximum amount to be paid on the claim. The low end of the range is usually 20% less than this amount. Insurance companies refer to this range as the “reserve” and any settlement authority extended on a claim is confined to the Colossus generated amounts. By requiring any final payout to be no greater than the high-end of the Colossus range, insurers force adjusters to settle below that amount. Quite often, the recommended settlement amount generated by Colossus is less than the actual losses to the person injured.
Manipulation of the data used by Colossus in claims evaluations can occur very easily and remain undetected by state insurance regulators without effective oversight measures. First, an insurer can reduce the Colossus recommended settlement by an arbitrary, predetermined percentage. The software program can be adjusted so that when new claims are entered into the system, Colossus generates settlement amounts that are, for example, 20 percent lower across-the-board than the valid recommended values generated in the benchmark tuning sessions. Second, insurers can remove or exclude higher cost injury-type of claims, such as traumatic brain injury, from the program, thereby producing decreased settlement offers overall. Third, insurers may implement procedures to provide no medical training for their claims adjusters. Insurers may also require adjusters to run medical bills through a re-pricing software program and enter the reduced bill amounts into Colossus. Finally, many carriers force their adjusters to argue that the injured party is responsible for the incident, and therefore responsible for paying part of the cost of their treatment, even with no evidence to support such an argument.
Consumer Protection and Prevention of Abusive Use of Colossus
In response to concerns raised by various consumer advocate groups and individuals, class action lawsuits were filed against Allstate and its use of Colossus. Allstate lost and ultimately signed an agreement with 47 state insurance agencies to change claims handling practices and inform policyholders and claimants when Colossus was used to evaluate their injury claims.
Unfortunately, CFA’s review of the agreement suggests it did very little to change Allstate’s Colossus practices. CFA recommended the NAIC (National Association of Insurance Commissioners) and state insurance regulators institute policy changes and operational procedures to protect consumers from unjustified low-ball settlement offers generated by Colossus and other similar programs. Some recommendations include:
- Comprehensive examinations of computerized claims evaluation systems and claims processes used by insurers to prevent unjustified settlement offers.
- Require insurers to notify consumers in writing when a computer program is used in the evaluation process and provide a copy of the evaluation report.
- Examine the data used in the software programs to ensure accuracy and thoroughness. Examiners should also determine whether an insurer is using any programs to unjustifiably reduce medical bills before entering the information into the claims evaluation system.
- Audit annual performance reviews of employees directly or indirectly involved with the computer evaluation program to determine if any component of the employee’s review or salary is contingent on claims evaluation practices intended to reduce payouts.
- Review claims files to determine if adjusters have been pressured by other claims personnel or procedures to keep the recommended settlement unreasonably low or to alter their original Colossus input order to obtain a lower recommended settlement value.
When insurance companies place their own financial interests ahead of their insured’s needs, the system is no longer fair as the indemnity principle, the rock that anchors the insurance system, is undermined and ignored. The playing field is no longer level and the injured person either accepts less than they deserve and is not made whole or seeks legal counsel to level the field. The attorneys at Adler Giersch, ps, stand ready to level the playing field when insurance companies veer from their purpose of making the injured person “whole.”
 The Consumer Federation of America is an association of non-profit consumer organizations established in 1968 to advance the consumer interest through research, advocacy and education. http://www.consumerfed.org/
 Low Ball: An Insider’s Look at How Some Insurers Can Manipulate Computerized Systems to Broadly Underpay Injury Claims, by Mark Romano, Dir. Of Insurance Claims Projects, and J. Robert Hunter, Director of Insurance; June 4, 2012.
 These companies include: Allstate, American Family, American National, Chubb, CNA, Erie, Farm Bureau of Indiana, Farmers Ins., Federated Mutual, General Casualty, Grange Mutual, Hartford, Horace Mann, MetLife Home and Auto, Motorist Ins., National Farmers Union, Nationwide Ins., Ohio Casualty, Perkin Insurance, Royal, Saint Paul, State Auto, Travelers, Twenty-first Century, United Farm Family Mutual, Unitrin, USAA, USF&G, Utica Mutual, Wausau, Westfield Group, and Zurich.