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Developing what it takes to handle casualty claims.

Ernest A. Schmitt is vice president of casualty claims for Johnson & Higgins in New York.

Keeping watch on casualty losses is an inherent part of managing risk in any business or company. As such, the risk manager must find effective ways to manage casualty claims and should consider setting up claims teams, establishing proper reserves, finalizing claims and evaluating claims programs. Although risk managers take different approaches to their claims programs, there are shared elements in every successful casualty management program.

Professional sports managers know their players' strengths and weaknesses, as well as the situations in which those players perform at peak efficiency. Similarly, the risk manager must identify individuals who can best assist in managing the organization's claims. Generally, they consist of insurers, brokers and the company's local managers.

Insurers provide claims coordinators for national accounts, but their authority varies from carrier to carrier. Some insurers give their coordinators carte blanche to work with an account in managing its claims, others assign coordinators based on lines of business, and still others use one coordinator for procedures and another for settlement discussions. In each case it is up to the risk manager to determine the authority of a particular coordinator. He or she must inquire as to who will be involved in coverage questions and become familiar with the strengths and limitations of that individual. For example, risk managers must determine if the coordinator is better at handling workers' compensation, products or automobile claims.

Large brokers usually assign one casualty claims person to handle a particular account. As with insurers' claims coordinators, the risk manager should become familiar with the knowledge and ability of the broker's claims person and know if he or she will handle claims problems wherever they arise or whether claims personnel from other branch offices will be assigned the task.

When coverage questions arise the broker should be available to assist. Arguing over a coverage dispute without broker intervention usually benefits the claimant at the company's expense. Before a claim reaches the company, the broker's claims handler should screen all coverage questions raised by the carrier and step in immediately if the carrier's position is flawed.

While knowing the carrier's and broker's claims personnel is crucial to effective claims management, it is equally important for risk managers to understand their own corporate structure. Even though some risk managers are not responsible for loss control, they nevertheless must understand the objectives of the particular departments handling that function. In most large companies, workers' compensation programs are administered by the employee relations department, which interacts minimally, if at all, with the risk management department. To have an effective claims management program, the risk manager must step in and identify who is responsible for workers' compensation and automobile and general liability at the local level, then supply the insurer or claims service organization with a list of those names. In addition, he or she must make the local contacts for workers' compensation programs aware of their responsibilities in managing claims and notify the claims service organization or insurer when staff changes occur.

Designing a Program

After identifying the team at the local level, the risk manager should determine whether claims will be handled by the insurer or a claims service organization. As part of their service, insurers with offices across the United States offer national account notices to facilitate communication between the client and claims office. However, many managers rely on the broker's claim personnel to compile the account notice and follow up on compliance.

The procedures established between the insurer and/or claims service organization and the risk manager depend solely on the needs of the client. Even though the carrier's procedures are spelled out for handling most claims, problems are bound to arise. It is the risk manager's responsibility to assess the problem, contact the company's affected local unit and if necessary, meet with the local personnel and the local carrier or claims service organization. However, if the broker's claims person is capable, the risk manager does not have to be involved in the meeting. Ideally, claims procedures should be concise and well-written. However, since insurers' claims instructions are often verbose, the risk manager should approve the instructions before submitting them to the field offices.

What Is a Proper Reserve?

just as the cost of claims paid affects the loss ratio of a risk management program, the reserves established by an insurer or claims service organization affects the company's bottom line. Therefore, every risk manager should understand the components of a reserve. When it concerns workers' compensation, an indemnity reserve usually consists of temporary, temporary partial and permanent disability benefits, death benefits and funeral expenses. The workers' compensation medical reserve includes the cost of medical care and, if provided in the jurisdiction, rehabilitation. The expense of handling that claim, including the attorney's fees and medical examinations, are covered in the total reserve. To have a viable workers' compensation claims management program, risk managers should do everything possible to limit employees' temporary disability benefit costs. Assigning injured workers to less rigorous tasks is the best method for controlling workers' compensation claims costs. The light work program should have target dates showing when individuals will return to their regular jobs. Without proper monitoring, light work can result in a high percentage of employees falling behind production demands.

While most risk managers are familiar with the problems associated with high loss reserves, low reserves can have an equally adverse affect on a company's overall financial picture. One way to test the adequacy of such reserves is to conduct a reserve analysis, which in most cases can be performed by the broker's claims professionals. Insurers vary on how they handle reserve analysis. Some allow brokers' claims professionals and their clients to review the claims file, while others only answer questions pertaining to it. Insurers also differ on reserving practices. Some reserve on a full liability exposure; others on a percentage of full liability. Thus, with one insurer, a reserve on a death case valued at $400,000 could be $400,000; with another insurer, that reserve could be $40,000.

Risk managers should also be aware of the various reserve practices in their claims program. Insurers tend to reserve higher than claims service organizations. However, claims service organizations raise, or step up, their reserves more frequently. Self-insured and self-administered workers' compensation programs, if reserved, tend to be highly "stepped" in design, whereas local administrators tend to reserve very close to current expenditures.

Finalizing a Claim

Claims can be closed by denial of payment, settlement or judgment. However, many new approaches to settlements have evolved. With workers' compensation claims, jurisdictions are permitting more and more compromises and release settlements in which parties agree that a bonafide workers' compensation claim does not exist. In exchange for a specified sum, the claimant agrees to drop any future claims involving the incident. This particular approach is often used when the extent of medical injuries or whether they were sustained on or off the job is questioned.

Increasingly, structured settlements are used to dispose of all types of claims, including workers' compensation. No longer do structured settlements come into play only in million dollar settlements; insurers are using structured settlement annuities to settle claims of less than $20,000. For such a settlement to be effective, however, an annuity settlement should come only after the claimant's past, present and future costs have been thoroughly analyzed.

To dispose of case backlogs, insurers have also turned to intercompany or strict arbitration. This approach serves mainly to cut defense costs, which have become a major expense to insurers. The process costs disputing parties a small filing fee, and it reduces the amount of time company representatives and attorneys would otherwise have to spend in court. Risk managers also encounter products claims that give rise to property damage claims. These are best settled with a monetary payment plus, when necessary, a "donation" of raw material and/or unfinished product to the customer.

Evaluating the Program

An effective claims program must be continually evaluated as to how well claims are serviced at various locations. A typical claims program, particularly one for workers' compensation, provides a detailed survey of its claims service to each of its locations at least once every 18 months. Among other findings, the survey determines the extent of effective communication between the local unit and the servicing claims office.

Certain survey questions are basic to all risk management programs involving workers' compensation. Are workers' compensation payments made on a timely basis? Are medical bills paid on time? Is the insurer or claims service organization discussing pending cases at the various locations? Does a free flow of communication exist before the cases are settled? How can the risk manager assist the local units? As survey results are tabulated, problems should be separated into two areas: serious problems that can only be resolved with a meeting of local level claims personnel and those that can be handled on the telephone.

To manage casualty claims, the risk manager must become familiar with the abilities of the claims team, design an individualized claims program for each account, know what constitutes a proper reserve and find effective means to finalize claims. In other words, the risk manager must continually evaluate the entire claims program. This way, he or she is meaningfully contributing to corporate goals.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Schmitt, Ernest A.
Publication:Risk Management
Date:Apr 1, 1991
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