From Good Hands to Boxing Gloves: The Dark Side of Insurance
By Richard H. Adler
July 16, 2008
We have been writing monthly articles for 18 consecutive years starting in 1990. Our articles have focused on developments in law and insurance and medical journal studies that impact today’s healthcare provider treating those with traumatic injuries, but we have not previously reviewed a book.
This article breaks with that tradition to discuss a landmark publication, From Good Hands to Boxing Gloves: The Dark Side of Insurance (2008) by David J. Berardinelli. It’s a great read in understanding how our insurance system is supposed to work to protect policy holder, but how the traditional rules of insurance are not followed by the insurers, particularly Allstate Insurance.
As noted in Mr. Berardinelli’s book, our insurance system is founded on two key rules: the indemnity principle and the fiduciary principle. Together these principles are intended to level the playing field between the insurance company and the policyholder (your patient). In short, these principles balance the insurer’s legitimate goal of being profitable while allowing the insured policyholders to get prompt and fair payment for covered losses.
Berardinelli notes in his book explains these principles in greater details:
Casualty insurance is a unique insurance product. It’s different from other kinds of insurance like life insurance. Life insurance pays a set benefit when you die regardless of the cause or consequences of your death.
Casualty insurance is indemnity coverage. It doesn’t pay a set benefit. It pays as much as the policyholder needs, up to the policy’s limit, “to restore an insured to the same financial position after the loss that he or she was in prior to the loss.” In the language of insurance, to indemnify someone means to make them whole again. That means the insured doesn’t get paid more than the actual loss. It also means the insured shouldn’t get paid less than what it takes to make the insured whole again. The insurer’s duty to pay the full amount the insured needs to be put back in the same position he or she was in before the loss is the indemnity principle.
An insurer violates the indemnity principle by paying less than the full value of the loss. That doesn’t make the insured whole. It leaves the insured worse off financially. You pay the insurance company to assume the financial burden of the loss. If you still have to pay for the part of loss yourself, you’re worse off. Your standard of living goes down because you have to borrow, take from savings, or do without, until you can afford to replace the loss. When that happens, you don’t get the benefits you paid for when you bought insurance.
The fiduciary principle was also developed to balance the relationship between insurer and policyholder. This principle is based on the idea that insurers act like banks. Like banks, insurers are entrusted with the public’s money (premiums) which they promise to pay when the public needs it. This idea – that insurers act like banks – has been around for a very long time in insurance law. As the United State Supreme Court stated in 1914:
The contracts of insurance may be said to be interdependent. They cannot be regarded singly, or isolatedly, and the effect of their relation is to create a fund of assurance and credit, the companies becoming the depositories of the money of the insured, possessing great power thereby, and charged with great responsibility…On the other hand, to the insured, insurance is an asset, a basis of credit…It is, therefore, essentially different from ordinary commercial transactions, and…is of the greatest public concern.
Like banks, insurers accept their policyholders’ money and keep it for them, promising to pay the full amount of their policyholders’ covered losses. Promising to keep somebody else’s money until they need it demands a high standard of conduct on the part of the person holding the money.
A person or entity that holds money or property for the benefit of others is called trustee. The trustee holds property or money belonging to someone else “but does not have the right to benefit personally” from that property or money.
Banks can’t tell you it’s too much trouble for them to honor your withdrawal slip, or ask you to withdraw less than you need. In the same way, insurance companies shouldn’t intentionally delay your claim or ask you to accept less than your claim is worth.
Making a claim is the same as withdrawing money from a joint bank account. That account has your name and thousands of other account owner’s names. You can’t withdraw all the money in the account, because not all the money belongs to you. You have to prove to the teller who you are and that your name is on the account. That’s like providing the insurer with proof that you’re covered until the policy for a loss you have suffered.
Most important, the bank can’t treat the money in this joint account as its own. The joint account holders own the money, not the bank. The bank can invest or loan the money while it’s in the account – that’s how the bank makes money. However, the bank can’t just dip into this joint account whenever it wants to boost its profits, or pay its shareholders extra dividends, or pay its executives large bonuses. That would be like embezzling from the account owners.
Like a bank, the insurer must be helpful and assist its policyholders to withdraw their fair share from the claims account as promptly as possible. The insurer can’t deliberately make it harder than it needs to be for the policyholders to get the full amount they need to put them back to where they were before the loss.
The insurer can’t deliberately delay paying legitimate claims by asking for useless information or demanding more proof than it really needs. It can’t delay payment or force policyholders to jump through needless hoops, in hopes they’ll give up or take less than the full and fair amount of the benefits they’re owed under the policy.
The insurer can’t pressure policyholders who are in a financial bind into accepting a quick payment that’s far less than what they need to make them whole. It can’t deliberately force policyholders to file needless, expensive, and time consuming lawsuits as the only way to get what they need to fully restore them to where they were before the loss.
Together, the indemnity principle and the fiduciary principle encompass the traditional insurance laws and rules that govern how insurers are supposed to treat their policyholders. They also govern how the casualty insurance industry is supposed to operate. Under these traditional rules, insurers, owe special duties to policyholder to pay their legitimate claims fairly (the indemnity principle) and promptly (the fiduciary principle).
It is when insurers put their own financial interests ahead of their insured’s needs, that the system is no longer fair. The playing field is no longer level and an insured either accepts less than they receive or seeks legal counsel to level the field.